World Bank Cuts Economic Outlook and Warns of 1970’s-Style “Stagflation”

The World Bank on Tuesday slashed its global economic forecast and warned of a growing stagflation risk, The Washington Post reports.

The bank warned of 1970’s-style stagflation, when oil shocks cut global growth while raising prices on goods.

The bank slashed its global growth forecast from 4.1% to 2.9%.

The bank warned that “subdued growth will likely persist throughout the decade because of weak investment in most of the world.”

Ukraine invasion fallout:

Russia’s invasion of Ukraine has contributed to inflation, raising prices on energy and other commodities.

As a result, global growth is expected to be cut in half from last year’s rate and is not expected to show much improvement in 2023 and 2024.

The war could also disrupt global trade and financial networks and rising food prices could spark social unrest.

“The risk from stagflation is considerable with potentially destabilizing consequences for low- and middle-income economies,” said World Bank official David Malpass.. “ … There’s a severe risk of malnutrition and of deepening hunger and even of famine in some areas.”

Growth could plummet further:

Malpass warned that under the worst scenarios, global growth over the next two years could fall “close to zero.”

The bank warned countries to quickly help other nations pay for food and fuel and provide debt relief while cutting policies like price controls and export bans.

Persistent inflation also raises the odds of the Federal Reserve quickly hiking interest rates, which could further cut growth and even spark financial crises in some countries.

While the trend echoes the 70s, the bank noted that the spike in commodity prices still pales in comparison to what happened in the 70s, when oil prices quadrupled.

Adjusted for inflation, oil prices are still about 33% below what they were in 1980.

 

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