World Bank warns of stagflation risk, warns of recession

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World Bank warns of stagflation risk, warns of recession

This photo shows the headquarters of the World Bank in Washington DC on January 19, 2022. The World Bank Group warned of stagflation risk in its latest Global Economic Prospects released on Tuesday, and the global economy is on track to grow by 2.9 percent in 2022, down 1.2 percentage points from the January projection.

The conflict in Ukraine has compounded the slowdown in the global economy, which is entering a period of feeble growth and elevated inflation, which could cause a longer period of worsening as a result of the COVID-19 epidemic, the report said.

The report said that this raises the risk of stagflation, with potentially harmful consequences for middle and low-income economies alike.

The report shows that global growth is expected to drop from 5.7 percent in 2021 to 2.9 percent in 2022 and hover around that pace over 2023 -- 2024.

Growth in advanced economies is projected to be decelerated from 5.1 percent in 2021 to 2.6 percent in 2022.

Growth is also projected to fall from 6.6 percent in 2021 to 3.4 percent in 2022 - well below the annual average of 4.8 percent over 2011-2019.

This AFP graphic from June 7, 2022 shows World Bank growth forecasts for 2022 and 2023 for the world's major economies.

The level of per capita income in developing economies this year is nearly 5 percent less than its pre-pandemic trend due to the damage caused by the pandemic and the conflict.

According to World Bank President David Malpass, recession will be hard to avoid for many countries, and it is urgent to encourage production and avoid trade restrictions.

Malpass said that changes in fiscal, monetary, climate and debt policy are needed to counter capital misallocation and inequality.

On April 12, 2022, people shop at a grocery store in Monterey Park, California. 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 to remain elevated.

The report also provides the first systematic assessment of how current global economic conditions compare with the 1970 stagflation, with emphasis on how stagflation could affect 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 market and developing economies.

The report warned that if inflation remains elevated, a repeat of the resolution of the earlier stagflation episode could lead to a global downturn and financial crises in some emerging market and developing economies.

Ayhan Kose, director of the World Bank's Prospects Group, said that developing economies will have to balance the need for fiscal sustainability with the need to mitigate the effects of today's overlapping crises on their poorest citizens.

Using credible monetary policy frameworks, and protecting central bank independence can anchor inflation expectations and reduce the amount of policy tightening required to achieve the desired effects on inflation and activity, according to Kose.