World Bank slashed global growth forecast, warns of 1970s-style stagflation

The World Bank slashed its global economic growth for 2022 to 2.9% from 5.7% last year – 1.2 percentage points lower than it forecast in January. Russia’s invasion of Ukraine and the resultant surge in commodity prices have compounded existing pandemic-induced damage to the global economy, which the World Bank said is now entering what may be “a protracted period of feeble growth and elevated inflation.” World Bank President David Malpass warned, “The war in Ukraine, lockdowns in China, supply-chain disruptions and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid.”

Economic growth in advanced economies is projected to decelerate sharply to 2.6% in 2022 from 5.1% in 2021. Expansion in emerging market and developing economies, meanwhile, is projected to fall to 3.4% in 2022 from 6.6% in 2021, well below the annual average of 4.8% from 2011 to 2019.

The World Bank expects economic growth to hover around its forecast level for this year through 2023 and into 2024, while inflation is expected to remain elevated.

An extended period of high inflation and weak growth has drawn parallels with the 1970s, a period of intense stagflation. The World Bank’s June report offers what it calls the “first systematic” comparison between the situation now and that of 50 years ago. Clear parallels exist between the situation then and now, it said. Those include supply-side disturbances, prospects for weakening growth, and the vulnerabilities emerging economies face with respect to the monetary policy tightening that will be needed to rein in inflation.

However, there are now also a number of differences, such as the strength of the U.S. dollar and broadly strong balance sheets at major financial institutions, which present room for maneuver. To reduce the risks of a repeat of the 1970s, the World Bank urged policymakers to coordinate aid for Ukraine, counter the spike in oil and food prices, and set up debt relief for developing economies.