World Bank slashes growth forecast, warns of stagflation

The World Bank slashed its forecast for global economic growth Tuesday and warned the world could face “a protracted period of feeble growth and elevated inflation” due largely to the fallout from the war in Ukraine.

Economists at the World Bank expect global gross domestic product (GDP) to rise 2.9 percent in 2022, down from the 4.1 percent growth rate the bank projected in January and a 5.7 percent jump in GDP last year. Ongoing interest rate hikes in the U.S. and other major nations would also weigh on developing nations and those with high debt loads as they see borrowing costs rise and economic activity slow.

“Amid the war in Ukraine, surging inflation and rising interest rates, global economic growth is expected to slump in 2022. Several years of above-average inflation and below-average growth are now likely, with potentially destabilizing consequences for low- and middle-income economies,” wrote World Bank Group President David Malpass.

“It’s a phenomenon — stagflation — that the world has not seen since the 1970s.”

The U.S. and many other nations have enjoyed a rapid economic rebound from the depths of the coronavirus recession. But policymakers are now scrambling to avoid another damaging downturn as prices climb at the highest rates seen since the early 1980s.

The Federal Reserve and central banks around the world are attempting to avoid a repeat of the late 1970s and early 80s: years of sluggish growth and high inflation followed by a deep recession. Back then, the Fed waited far too long to begin raising interest rates as inflation rose and triggered a deep downturn when it shocked the economy through steep and sudden rate hikes.

The Fed is now amid a series of interest rate hikes meant to bring inflation down without derailing the U.S. economy, which has still gained jobs at a rapid rate in the face of rising prices. While Fed Chair Jerome Powell has expressed optimism the bank can strike the right balance, a growing number of economists fear it could be difficult to avoid another period of 70’s-style stagflation.

The war in Ukraine has shocked the global economy, causing food, energy and commodity prices to spiral higher while growth slows. Economists fear that the persistence of the war could cause serious food shortages in developing countries and punishing price increases across the world.

“Subdued growth will likely persist throughout the decade because of weak investment in most of the world. With inflation now running at multi decade highs in many countries and supply expected to grow slowly, there is a risk that inflation will remain higher for longer than currently anticipated,” Malpass said.

Even so, Malpass noted three major differences between the stagflation of the late 1970s and the current moment—all of which break in favor of a softer landing: The value of the U.S. dollar compared to other currencies is far higher, oil prices are much lower, and and central banks are far more serious about fighting inflation now than during the run-up to the 1980s meltdown.

“Reducing the risk of stagflation will require targeted and impactful measures by policy makers across the world,” he wrote.