An Increasingly Bleak Outlook – For the World Bank, the World Is Heading Straight for Stagflation.
Not much to be optimistic about in the coming months.
The head of the World Bank had already prepared the ground for this announcement of bad figures for the rest of 2022 by indicating that he saw at least 5 reasons why the world would not escape from recession in the coming months.
The numbers came out yesterday and the outlook is far from rosy.
In its new forecasts published on June 7, 2022, the World Bank evokes an era of low growth and inflation (with probable stagflation), or even recession for some countries.
Here is the first thing that strikes you in its report on the world economic outlook:
“Global growth is expected to fall from 5.7% in 2021 to 2.9% in 2022, significantly lower than the 4.1% forecast in January.”
That's more than double the deceleration recorded between 1976 and 1979 following the first oil shock!
Crude oil prices rose 350% between April 2020 and April 2022
For rich countries, growth is expected to decelerate sharply from 5.1% in 2021 to 2.6% in 2022. The World Bank expects only 2.2% in 2023 due to the decline in fiscal and monetary support during the Covid-19 pandemic.
For emerging and developing countries, growth is expected to fall from 6.6% in 2021 to 3.4% in 2022. This is well below the average annual growth rate of 4.8% over the 2011-2019 period.
David Malpass states:
“Soaring energy and food prices, as well as supply and trade disruptions caused by the war in Ukraine and the necessary normalization of interest rates now underway, account for most of the deterioration in the forecast. Even if a global recession is avoided, the pangs of stagflation could persist for several years unless a large increase in supply is achieved.”
For most countries, stagflation is a real threat in light of soaring energy prices. In nominal terms, crude oil prices rose 350% between April 2020 and April 2022, making it the largest increase over an equivalent two-year period since 1973.
Coal and gas prices have all reached historic highs, leaving little room for the use of cheaper fossil fuels, as was possible in the 1970s. For the institution, this surge in energy prices could reduce global production by about 0.5% in 2022 and 0.8% by 2023.
The advanced economies would experience a reduction in the production of 0.9% by 2023. Production in oil-importing emerging and developing countries would fall by 0.6%.
There is a real risk that higher inflation will persist for longer than expected. Although retail price inflation is expected to moderate next year, it is likely to remain above the targets set by policymakers. But it is likely to remain above central bank targets in many countries.
The specter of 1970s stagflation hangs over the world
For the multilateral institution, the current economic situation resembles the 1970s in three key respects:
Persistent supply-side disruptions fuel inflation, preceded by a long period of highly accommodative monetary policy in the major industrialized countries.
Weakening growth prospects.
Emerging and developing countries struggling with the tightening of monetary policy to contain inflation.
The recovery from stagflation required large increases in interest rates in industrialized countries, “which played a major role in triggering a series of financial crises in emerging and developing countries,” the World Bank warns.