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The Global Economy Is Facing Danger Again, says World Bank President

David Malpass says the global economy “is facing high inflation and slow growth at the same time.” He adds that even if a global recession is averted, the pain of stagflation could persist for several years

Central banks are battling a worse-than-anticipated inflation surge spurred by disruptions in the supply of goods.
By Ana Monteiro and Eric Martin
June 07, 2022 | 09:36 am

Bloomberg — The World Bank cut its forecast for global economic expansion in 2022 further, warning that several years of above-average inflation and below-average growth lie ahead with potentially destabilizing consequences for low- and middle-income economies.

“The world economy is again in danger,” President David Malpass said in the foreword of the latest edition of the lender’s Global Economic Prospects report released Tuesday. “It is facing high inflation and slow growth at the same time. Even if a global recession is averted, the pain of stagflation could persist for several years -- unless major supply increases are set in motion.”

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The Washington-based lender reduced its estimate for global growth this year to 2.9% from a January prediction of 4.1% and April’s 3.2% estimate due to a surge in energy and food prices, supply disruptions triggered by Russia’s invasion of Ukraine and a drive by central banks globally to increase interest rates from rock-bottom levels.

The world economy expanded 5.7% in 2021 after the Covid-19 pandemic triggered the deepest global recession since World War II.

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“For many countries, recession will be hard to avoid,” Malpass said, adding that the adverse shocks of the past two years mean real income per capita will remain below pre-Covid-19 levels in about 40% of developing economies in 2023.

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Central banks are battling a worse-than-anticipated inflation surge spurred by disruptions in the supply of goods, energy and food amid lockdowns in key production hubs in China and the war in Ukraine. More than 60 monetary authorities -- including the Bank of England and the Federal Reserve -- have raised interest rates this year, and the European Central Bank may start within months.

Accelerating inflation and slowing growth have raised World Bank officials’ concerns that the global economy is entering a period of stagflation reminiscent of the 1970s. As a result, a steeper-than-anticipated policy tightening may now again be required to return inflation to target -- and this might trigger a hard landing.

With emerging and developing economies’ debt at multi-decade highs, “the associated rise in global borrowing costs and exchange-rate depreciations may trigger financial crises, as it did in the early 1980s,” the World Bank said.

Here are some highlights from the report:

  • The US economy will likely expand 2.5% in 2022, 1.2 percentage points below the prior projection due to higher energy prices, tighter financial conditions, and additional supply disruptions caused by the invasion of Ukraine.
  • The bank cut the outlook for China’s economic expansion to 4.3% this year due to larger-than-expected damage from Covid-19 and related lockdowns.
  • Euro-area growth is projected to slow to 2.5%, 1.7 percentage points less than seen in January.
  • Ukraine’s economy is set to shrink 45.1% this year, while Russia’s may drop 8.9%. The lender had forecast expansion for both previously.