WASHINGTON—The World Bank is warning of the impact of stagflation in its latest Global Economic Prospects Report, which noted that the COVID-19 pandemic and the Russian invasion of Ukraine has compounded the effects of the global economic slowdown. As a result, the risk of stagflation has increased particularly among middle to low income economies. 

According to the report, global growth is expected to drop from 5.7 percent in 2021 to 2.0 percent in 2022. It is expected to remain at this pace through 2023 and 2024 as economies see a drop in “pent-up demand” and monetary policy accommodations are withdrawn. It’s believed this will trigger a drop in per capita income in developing countries falling below 5 percent pre-pandemic numbers. 

The report noted that growth in advanced economies is projected to fall from 5.1 percent in 2021 to 2.6 percent in 2022. Growth is expected to further moderate to 2.2 percent in 2023, largely due to the end of fiscal and monetary policy support provided during the pandemic.

“The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid,” said World Bank president David Malpass. “Markets look forward, so it is urgent to encourage production and avoid trade restrictions. Changes in fiscal, monetary, climate and debt policy are needed to counter capital misallocation and inequality.”

The report was the first look at how the current global economic crisis compares to the stagflation of the 1970s. The report emphasized the effects stagflation could have on emerging markets and developing economies. 

The report noted that stagflation in the 1970s resulted in a sharp increase in interest rates, a trend that is taking shape today as economies grapple with rising inflation. 

“Developing economies will have to balance the need to ensure fiscal sustainability with the need to mitigate the effects of today’s overlapping crises on their poorest citizens,” said Ayhan Kose, director of the World Bank’s Prospects Group. “Communicating monetary policy decisions clearly, leveraging credible monetary policy frameworks, and protecting central bank independence can effectively anchor inflation expectations and reduce the amount of policy tightening required to achieve the desired effects on inflation and activity.”  

The report noted current economic trends mirror those of the 1970s, particularly in the areas of persistent supply-side disturbances fueling inflation, preceded by a protracted period of highly accommodative monetary policy in major advanced economies, prospects for weakening growth, and vulnerabilities in emerging markets and developing economies. 

One key difference between the 1970s and today is the strong dollar and the smaller increase in commodity prices. It noted that financial institutions are also in a strong position and there has been a stronger focus on price stability over the past 30 years. 

The World Bank recommends policymakers refrain from distortionary policies such as price controls, subsidies, and export bans, which could worsen the recent increase in commodity prices.

Source: Global Economic Prospects: Sources: Consensus Economics; International Monetary Fund; World Bank