World Bank Warns of Stagflation... Global Growth Rate Revised Down to 2.9%

[Asia Economy New York=Special Correspondent Joselgina] The World Bank (WB) has downgraded its global economic growth forecast for this year and warned of the possibility of 'stagflation,' where growth slows amid high inflation.

In the 'Global Economic Prospects' report released on the 7th (local time), WB predicted that the global economy will grow by 2.9% this year. This is a slowdown from last year's 5.7% to the 2% range this year. It is also a significant downward revision from the 4.1% growth forecast for 2022 presented in January this year.

David Malpass, President of the WB, said, "The war in Ukraine, China's lockdowns, supply chain disruptions, and the risk of stagflation are harming growth," and added, "It will be difficult for many countries to avoid a recession." Growth rates for next year and 2024 are forecasted at 3.0% each.

The WB diagnosed that Russia's invasion of Ukraine and the resulting surge in oil and commodity prices have further worsened the global economy following the impact of the COVID-19 pandemic. Accordingly, it expressed concern that the global economy is entering a period of prolonged high inflation amid low growth.

By region, the growth rate of advanced economies is expected to sharply decline from 5.1% last year to 2.6% this year. It is expected to slow further to 2.2% growth in 2023. By major countries, the United States is forecasted to grow 2.5%, down 1.2 percentage points, and the Eurozone is expected to grow 2.5%, down 1.7 percentage points this year.

Emerging markets and developing economies (EMDE) are estimated to slow from 6.6% in 2021 to 3.4% in 2022. This is far below the average annual growth rate of 4.8% from 2011 to 2019.

China is forecasted to grow 4.3%, down 0.8 percentage points, and India 7.5%, down 1.2 percentage points. The Russian economy is expected to contract by 8.9%, which is 11.3 percentage points worse than initially expected.

In particular, the WB expressed concern that the risk of stagflation has increased. It pointed out that, similar to the 1970s oil shock, prolonged high inflation amid low growth could trigger a series of financial crises in emerging markets and developing economies.

The WB noted clear similarities between the 1970s and the present, citing supply-side disruptions, weakening growth prospects, monetary tightening by central banks to curb inflation, and vulnerabilities faced by emerging markets. On the other hand, the strength of the US dollar and the sound balance sheets of major financial institutions were cited as differences from that period.

The WB warned that if inflation continues, it could lead to financial crises in some emerging and developing countries and a sharp downturn in the international economy. It also emphasized the urgency of encouraging production and removing investment restrictions to avoid a recession. Furthermore, it urged governments to implement policies to mitigate the damage from the Ukraine war, respond to the surge in oil and food prices, and provide debt relief.