World Bank warns of global ‘stagflation’

STORY: The World Bank on Tuesday slashed its global growth forecast by nearly a third for 2022, warning that Russia's invasion of Ukraine has compounded the damage from the COVID-19 pandemic, raising the risk of global "stagflation."

In its Global Economic Prospects report, the World Bank said the war in Ukraine has magnified the slowdown in the global economy, which could soon be facing the painful combination of feeble growth and rising prices - known as stagflation - last seen in the 1970s.

The World Bank said global growth could fall to 2.1% in 2022 and 1.5% in 2023, driving per capita growth close to zero, if downside risks materialized.

"And when you have a growth rate at the global level around one-and-a-half percent, that means you are in a very serious, severe downturn."

Ayhan Kose, Director of World Bank's Prospects Group, warns global economic weakness could lead to geopolitical risks.

"We still see supply disruptions. Because of the war, those supply disruptions are of course magnified. There are risks associated with an even larger food crisis down the road. And when you have these types of challenges, the risk of social tensions of course, increases.”

World Bank President David Malpass said subdued growth will likely persist "throughout the decade," forecasting that between 2021 and 2024, the pace of global growth could slow by 2.7 percentage points, more than twice the deceleration seen between 1976 and 1979.

The report noted that interest rate increases required to control inflation at the end of the 1970s were so steep that they touched off a global recession in 1982, and a string of financial crises in emerging market and developing economies.

But while there are similarities to conditions back then, economists point out there are also important differences, including the strength of the U.S. dollar and generally strong balance sheets at major financial institutions.