The World Bank on Tuesday sharply lowered its global growth forecast for this year, due to the war in Ukraine, and it warns of the risks of “stagflation”, that is to say a “prolonged period of growth low and high inflation.
The Washington institution now forecasts an increase in global GDP of 2.9%, against 4.1% estimated in January. “The global economy is expected to experience its sharpest deceleration following a recovery […] in more than 80 years,” the World Bank said on Tuesday in its report on the global economic outlook. The result is a “considerable risk of stagflation with potentially destabilizing consequences for low- and middle-income economies,” said David Malpass, its chairman.
This sharp slowdown comes after a sustained economic recovery last year (+5.7%), following the deep recession caused by the COVID-19 pandemic. “In addition to the damage caused by the COVID-19 pandemic, the Russian invasion of Ukraine has accentuated the slowdown in the world economy”, summarizes the Bank, which in January had already lowered its forecasts due to of the Omicron variant. Russia’s invasion of Ukraine launched on February 24 and Western sanctions against Moscow have driven up grain and oil prices, threatening to deepen hunger in poor countries.
Recession in sight
World Bank economists expect this pace of growth to continue until 2023-2024, with the war in Ukraine severely disrupting activity, investment and trade in the short term. “Due to the combined damage of the pandemic and the war, the level of per capita income in developing countries will this year be almost 5% lower than the trend that was projected before the COVID”, deplores also the l ‘institution.
“For many countries, it will be difficult to escape the recession,” said the president of the World Bank.
In its report, the institution provides the first comparison of current global economic conditions with the stagflation of the 1970s. Economists note that the current situation is comparable to that of the 1970s in three respects: “persistent supply disruptions that fuel inflation, preceded by a prolonged period of very accommodative monetary policy in the main advanced economies; growth slowdown projections; emerging and developing economies vulnerable to the need for tighter monetary policy to control inflation.
However, there are major distinctions, since the dollar is strong, whereas it was very weak at the time. Moreover, the magnitude of commodity price increases is more subdued, and the balance sheets of major financial institutions “are generally strong”. More importantly, and unlike in the 1970s, central banks in advanced economies and many developing economies now have clear mandates for price stability.
The World Bank predicts a slowdown in inflation next year.