World Bank Cuts Global Growth Forecast, Warns of Stagflation

June 7, 2022

The World Bank has sharply cut its growth forecast for the global economy, warning that the coming years may see high inflation and weak growth reminiscent of the stagflation period of the 1970s.

The latest Global Economic Prospects report warns that the compounding damage from the war and the pandemic could bring the global economy to a “protracted period of feeble growth and elevated inflation,” and that the risk of stagflation is high.

The bank expects global growth to fall to 2.9% in 2022, down from 5.7% in 2021. The current projection is much lower than the 4.1% forecast made in January. The decline is due primarily to the supply-chain disruptions caused by the war in Ukraine and the continued pandemic lockdowns in China. 

They also expect growth the hover at the reduced pace for 2023 and 2024 as the war’s consequences disrupt human activity, investment, and global trade, while governments tighten monetary and fiscal conditions to combat surging inflation.

The bank warned that combatting stagflation in the 1970s required steep interest rate increases in the world’s advanced economies, which weighed heavily on emerging markets.

World Bank data shows that, as a result of the war and the pandemic, per capita income in developing economies this year will be roughly 5% lower than pre-pandemic trends.

The report does note, however, that the current situation differs from the 1970s in key ways. First, the dollar is much stronger today than in the 1970s, the percentage increases in commodity prices are smaller today, and the balance sheets of major financial institutions are generally strong. Most importantly, in the World Bank’s estimation, “unlike the 1970s, central banks in advanced economies and many developing economies now have clear mandates for price stability, and, over the past three decades, they have established a credible track record of achieving their inflation targets.” 

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