The World Bank cut its global growth forecast for 2022 to 2.9 percent and warned of the potential for stagflation

The World Bank cut its global growth forecast for 2022 to 2.9 percent and warned of the potential for stagflation

The world economy will grow by 2.9 percent in 2022, down 1.2 percentage points from January’s forecast, according to the World Bank Group’s new Global Economic Prospects, which warns of stagflation danger. In addition to the effects of the COVID-19 pandemic, the Russia-Ukraine conflict has exacerbated the global economic slump, which is now entering what might be a long era of poor growth and high inflation. This increases the possibility of stagflation, which might be devastating to both middle- and low-income economies. Global growth is predicted to slow from 5.7 percent in 2021 to 2.9 percent in 2022, then remain stable between 2023 and 2024.

As a result of the damage from the pandemic and the war, the level of per capita income in developing economies this year will be nearly 5 per cent below its pre-pandemic trend. World Bank President David Malpass said that for many countries, the recession will be hard to avoid, adding that it is urgent to encourage production and avoid trade restrictions.

Growth in advanced economies is projected to sharply decelerate from 5.1 per cent in 2021 to 2.6 per cent in 2022. Among emerging market and developing economies, growth is also projected to fall from 6.6 per cent in 2021 to 3.4 per cent in 2022 — well below the annual average of 4.8 per cent from 2011 to 2019.

“Changes in fiscal, monetary, climate and debt policy are needed to counter capital misallocation and inequality,” Malpass said. Global inflation has risen sharply from its lows in mid-2020 on rebounding global demand, supply bottlenecks, and soaring food and energy prices, according to the report. Markets expect inflation to peak in mid-2022 and then decline but remain elevated.

If inflation remains elevated, a repeat of the resolution of the earlier stagflation episode could translate into a sharp global downturn along with financial crises in some emerging markets and developing economies. “Developing economies will have to balance the need to ensure fiscal sustainability with the need to mitigate the effects of today’s overlapping crises on their poorest citizens,” said Ayhan Kose.

The report also offers the first systematic assessment of how current global economic conditions compare with the stagflation of the 1970s with a particular emphasis on how stagflation could affect the emerging market and developing economies. It noted that ending the stagflation of the 1970s required “steep increases” in interest rates, which triggered a global recession and a string of financial crises in emerging markets and developing economies.

Director of the World Bank’s Prospects Group. “Communicating monetary policy decisions clearly, leveraging credible monetary policy frameworks, and protecting central bank independence can effectively anchor inflation expectations and reduce the amount of policy tightening required to achieve the desired effects on inflation and activity,” Kose said.

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