Global growth slowing further and this could last, warns World Bank

The Washington-based institution now forecasts global gross domestic product (GDP) growth of 2.9%, down from 4.1% forecast in January.

“The world economy is expected to experience its sharpest slowdown after an initial recovery from the global recession in more than 80 years,” the bank said in its World Economic Outlook report.

“The result is a growing risk of stagflation,” it added, referring to the combination of high inflation and economic stagnation.

This slowdown comes after a sustained rebound in 2021 (+5.7%) following the deep recession caused by the covid-19 pandemic.

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“In addition to the damage caused by the covid-19 pandemic, the Russian invasion of Ukraine has accentuated the slowdown in the global economy,” the Bank summarizes in a press release.

And the “growing” risk of stagflation would have “harmful consequences” for both low-income and middle-income countries.

World Bank economists expect this pace of growth to continue through 2023-2024, with the war in Ukraine severely affecting activity, investment and trade in the near term.

This is in addition to weakening demand and the gradual lifting of government support measures.

“Due to the combined damage from the pandemic and the war, the level of per capita income in developing countries will be almost 5% lower this year than the trend that had been projected before covid-19,” the institution also notes in a statement.

“For many countries, it will be difficult to escape the recession,” said World Bank president David Malpass.

The institution warned against trying to solve rising inflation with price controls or export restrictions.

Malpass considered it “urgent to encourage production and avoid trade restrictions”.

It also recommended changes in fiscal, monetary, climate and debt policies “to address the misallocation of capital” and tackle inequality.

The World Bank revised downward the growth forecasts for many economies, starting with the two big ones: the United States (+2.5%, -1.2 percentage points) and China (+4.3%, -0.8 points).

For the euro zone, the revision is even stronger: -1.7 points, to 2.5%.

For Latin America and the Caribbean, growth is projected to be 2.5% in 2022, after the 6.7% rebound in 2021.

On the other hand, growth in the Middle East and North Africa region was revised upwards (+0.9 points, to 5.3%), which benefited from higher oil prices (+42% expected this year).

In its report, the World Bank also provides the first comparison of current global economic conditions with the stagflation of the 1970s.

The economists assessed in particular how stagflation could affect emerging market and developing economies.

The experts note that the current situation is comparable to that of the 1970s in three respects: “Persistent supply disruptions fueling inflation, preceded by a prolonged period of very accommodative monetary policy in major advanced economies; projections of slowing growth; emerging and developing economies vulnerable to the need for tighter monetary policy to control inflation.”

However, there are important differences as the dollar is strong while the 1970s was very weak, they point out. In addition, the rise in commodity prices is more moderate and the balance sheets of major financial institutions “are generally strong.”

“More importantly, and unlike in the 1970s, central banks in advanced economies and many developing economies now have clear mandates toward price stability,” the report states.

The World Bank anticipates a slowdown in inflation next year while remaining “likely” above target in many countries.

“If inflation remains high, a repeat of the solutions adopted during the previous stagflation could result in a sharp global recession, as well as financial crises in some emerging and developing economies,” the Bank warns.