Global economy risks "stagflation" triggered by Ukraine's invasion, says the World Bank

Global economy risks “stagflation” triggered by Ukraine’s invasion, says the World Bank

THE GLOBAL ECONOMY risks ending up in a damaging period of 1970s-like “stagflation”, mainly triggered by Russia’s invasion of Ukraine, the World Bank warned on Tuesday when it lowered its annual growth forecast.

The toxic combination of weak growth and rising prices could trigger widespread suffering in dozens of poorer countries that are still struggling to recover from the upheaval of the Covid-19 pandemic.

The sharp forecast came when the international development lender lowered its global growth estimate to 2.9 percent, 1.2 percentage points below the January forecast, due to the severe downturn caused by the war.

“The risk of stagflation is significant with potentially destabilizing consequences for low- and middle-income economies,” World Bank President David Malpass told reporters.

“For many countries, the recession will be difficult to avoid.”

And if the risks to the outlook materialize, global growth could slow down even more sharply – triggering a worldwide recession, Malpass warned.

The bank’s Global Economic Prospects report said the Ukraine war was exacerbating the damage of the pandemic and exacerbating the downturn in the global economy, “which is entering what could be a protracted period of weak growth and rising inflation.”

The decline comes after growth recovered to 5.7 percent in 2021 after the pandemic – marking the “sharpest slowdown following an initial recovery from the global recession of more than 80 years.”

The report notes similarities with the 1970s when growth stalled and inflation soared with supply factors that fueled price increases and after a long period of low interest rates.

But in contrast to that period, the US dollar is strong and large financial institutions have a solid position.

– Global recession risk –
The Russian invasion and Western sanctions against Moscow have pushed up grain and oil prices, threatened to exacerbate hunger in poor countries and caused drivers around the world to face conspicuous prices at the pump.

The World Bank’s chief stressed the need to increase production to combat rising prices, especially for energy, as short stocks of natural gas and fertilizers are hurting food production.

Malpass also said it was “important” to avoid export restrictions and subsidies that “exacerbate price increases and distort markets.”

The bank also warned against trying to solve the inflation increase with price controls or export restrictions that would only aggravate the damage.

Given the widespread uncertainty, the situation may deteriorate further due to a range of “interconnected” risks, including the possibility of further geopolitical tensions, steep interest rate hikes to contain inflation and rising wages, and the potential for Covid-19 to recover, according to the forecast. .

The US Federal Reserve has launched an aggressive attempt to raise lending rates to cool demand and fight rising prices, and the World Bank notes that higher interest rates have played a prominent role in previous financial crises in emerging markets and developing economies (EMDE), straining resources and causing outflows of cash from these countries.

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The realization of these risks at the same time can result in a much stronger and more protracted global slowdown.

If faster US rate hikes would cause “acute financial stress” in EMDE, the European Union would face a sudden ban on energy imports and China would experience renewed pandemic-related deadlocks, “global growth could fall sharply in 2022 and almost halve in 2023 – down to 2.1 percent respectively 1.5 percent ”, the report states.

Malpass said it would bring per capita income growth to zero, and “it would definitely qualify as a global recession.”

Even without the terrible results, per capita income in developing economies this year will be almost five percent below its pre-pandemic trend.

The report lowered the US growth estimate by 1.2 points to 2.5 percent, and the forecast for China was lowered 0.8 points to an unusually low 4.3 percent.

At the same time, the forecast for the euro area was lowered to 2.5 per cent and Japan to 1.7 per cent.

Russia’s economy is expected to shrink this year by 11.3 percent.


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