World Bank warns that global growth is slowing more than ever and may continue

World Bank Headquarters in Washington, January 19, 2022
January 19, 2022, World Bank Headquarters in Washington (Daniel SLIM / AFP)

The World Bank warned on Tuesday that the war in Ukraine has significantly lowered its global growth forecast for the year, warning of the risk of “stagflation,” or “long-term growth of low and high inflation.”

Washington agencies now forecast a 2.9% increase in global gross domestic product, compared to an estimated 4.1% in January.

“The world economy is expected to experience the sharpest slowdown, following a recovery (…) of more than 80 years,” the World Bank said in a report on the outlook for the world economy on Tuesday. ..

As a result, “there is a considerable risk of stagflation, which can have volatile consequences for low- and middle-income countries,” its chairman, David Malpass, told reporters.

This sharp slowdown will follow last year’s sustained economic recovery (+ 5.7%), following the severe recession caused by the Covid-19 pandemic.

“In addition to the damage caused by the Covid-19 pandemic, Russia’s invasion of Ukraine emphasizes a slowdown in the global economy,” the World Bank, which had already lowered its forecasts for Omicron variants in January, summarizes. ..

Russia’s February 24 invasion of Ukraine and western sanctions on Moscow could push up grain and oil prices and deepen hunger in poor countries.

World Bank economists expect this pace of growth to continue until 2023-2024, and the war in Ukraine has significantly disrupted activity, investment and trade in the short term.

“The combined damage of the pandemic and the war will bring the level of per capita income in developing countries almost 5% lower than previously predicted this year,” the agency laments.

Recession on the horizon

“For many countries, it will be difficult to escape the recession,” said the World Bank president.

Malpas encourages changes in fiscal, financial, climate and debt policies “to address improper allocation of capital” while encouraging trade restrictions to be circumvented.

The World Bank has revised its downward growth forecasts for many economies, starting with two major economies: the United States (+ 2.5%), 1.2 percentage points and China (+ 4.3%) -0.8 points.

For the euro area, the fix is ​​even more powerful. -1.7 points to 2.5%.

Meanwhile, growth in the Middle East and North Africa has been revised upwards (+ 0.9 points, 5.3%), while the latter has benefited from rising oil prices (+ 42% expected this year).

In its report, the agency also provides the first comparison of current global economic conditions with stagflation in the 1970s.

Economists specifically evaluated how stagflation affects emerging markets and developing economies.

They state that the current situation is comparable to that of the 1970s in three respects. The need for stricter monetary policy to curb inflation. “

However, while the dollar was very weak at the time, the dollar is strong, so there is a big difference. In addition, the magnitude of commodity price increases has been more curtailed, and the balance sheets of major financial institutions are “generally strong.”

“More importantly, unlike the 1970s, central banks in developed and many developing countries now have a clear obligation to stabilize prices,” said economists.

The World Bank is finally forecasting a slowdown in inflation next year.

“If inflation remains high, repeating the solution adopted in the previous stagflation could lead to a severe global recession and a financial crisis in some emerging and developing countries. There is, “warns the World Bank.

We also predicted the worst-case scenario in which accelerated rate hikes in the United States would lead to “serious financial stress” in emerging markets and a new blockade in China. After that, global growth could “decrease even more sharply in 2022, almost halve in 2023, to 2.1% and 1.5%, respectively.”