[Comprehensive] WB Warns of 1970s-Style Stagflation, Yellen Acknowledges Inflation Concerns

David Malpass, President of the World Bank
[Photo by Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Seulgina Jo] "The risk of stagflation is harming growth. It will be difficult for many countries to avoid a recession." (David Malpass, President of the World Bank) "Inflation is at an unacceptable level." (Janet Yellen, U.S. Secretary of the Treasury)

Warnings are spreading again that the global economy may experience a so-called 'stagflation'?a period of stagnant growth and soaring prices?similar to the aftermath of the 1970s oil shock. The World Bank (WB) has sharply lowered its global economic growth forecast to the 2% range for this year, and Janet Yellen has acknowledged market concerns that high inflation may persist for a long time.

On the 7th (local time), the WB released its "Global Economic Prospects Report," predicting that the world economy will grow by only 2.9% this year. This is a slowdown from last year's 5.7% to the 2% range this year. This forecast is 1.2 percentage points lower than the 2022 projection (4.1%) presented just five months ago in January.

The WB diagnosed that U.S. monetary tightening is rapidly increasing the financial burden on emerging and developing countries. Furthermore, if Europe’s energy imports are cut off and China continues large-scale lockdowns, the growth rate could plunge to as low as 2.1% this year. President Malpass stated, "The Ukraine war, China’s lockdowns, supply chain disruptions, and stagflation risks are harming growth," adding, "It will be difficult for many countries to avoid a recession."

The most notable part of this report is the mention of stagflation. The WB pointed out that the surge in energy and food prices due to the Ukraine war, supply chain disruptions, and strong monetary tightening by major central banks are causing stagflation. It also warned that the situation could repeat the 1970s scenario when major countries simultaneously raised interest rates, triggering financial crises in emerging and developing countries. Aihaan Kose, WB Director, emphasized, "If monetary tightening is implemented faster than expected, it poses a real threat of pushing some countries into debt crises similar to those in the 1980s."

The WB particularly noted three similarities between the 1970s and the current situation. First, supply-side disruptions that fuel inflation are ongoing. Second, growth forecasts for various countries are deteriorating. Third, emerging and developing countries remain vulnerable due to monetary tightening by major countries. On the other hand, differences include the strength of the U.S. dollar and the sound balance sheets of major financial institutions indicating fiscal health.

The WB stated, "If high inflation persists, it could lead to financial crises in some emerging and developing countries and a sharp global economic downturn," adding, "The surge in energy prices due to the Ukraine war will also reduce real incomes, increase production costs, tighten fiscal conditions, and constrain macroeconomic policies in energy-importing countries."

Janet Yellen, U.S. Secretary of the Treasury
Photo by Reuters

Janet Yellen, former Chair of the Federal Reserve (Fed), also acknowledged concerns about inflation, stating on the same day that "high inflation could persist for a long time." Appearing before the U.S. Senate Finance Committee, she said, "We are currently facing macroeconomic challenges," diagnosing that "inflation is at an unacceptable level, and supply chains are disrupted due to the pandemic, while oil and food markets are disturbed by Russia’s invasion of Ukraine."

However, she distanced herself from blaming President Joe Biden for inflation. Regarding criticism that large-scale fiscal policies implemented during the pandemic triggered inflation, she countered, "They helped to recover the economy." She also denied the possibility of a recession in the U.S. economy, stating, "We are moving toward a sustained growth phase."

Recently, the Fed’s economic growth forecast tracking site has indicated an increased possibility of a U.S. recession. According to the Federal Reserve Bank of Atlanta, the ‘GDP Now’ model, which aggregates U.S. Gross Domestic Product (GDP) forecasts, lowered the second-quarter growth forecast from 1.3% on the 1st to 0.9% on the day of the report. If it falls further, there is speculation that two consecutive quarters of negative growth, the conventional definition of a recession, could become a reality.