The World Bank warns of the risk of stagflation as a result of the war in Ukraine | Economy

The global recession is an increasingly real possibility, the World Bank warned on Tuesday. The Russian invasion of Ukraine, added to the effects of the pandemic, has accentuated the slowdown in the world economy, which is on the threshold of a new period of low growth and high inflation —what is known as stagflation—, points out the latest report World Economic Outlook of the institution, which has cut its global growth forecast for 2022 to 2.9%, compared to the 4.1% anticipated in January. The uncertainty, and the fear of a worsening of the situation, affects young and old alike.

The variable that has modified the forecasts formulated five months ago is the war in Ukraine, which since the end of February has shaken the global economy, causing an increase in the price of raw materials, a greater incidence of the blockage in the supply chain that was dragging since last year and greater general uncertainty, among other factors. The most direct consequence is inflation at record highs, especially in advanced economies.

A perfect storm, from the total crisis in Sri Lanka to inflation in the US, passing through the threat of famine in Africa if Ukraine’s cereals seized by Russia do not have a quick outlet or because of the high price of energy, hangs over the world by a combination of factors. Among them, the impact of the European war, with special incidence on global trade, a contraction in demand and stricter monetary and fiscal policies. The decision of the US Federal Reserve (Fed) to raise interest rates to curb inflation is just a sample, similar to the solutions adopted by the Bank of England or those prepared by the European Central Bank.

For advanced economies, the World Bank forecasts expansion of 2.6% this year and 2.2% next, compared to previous estimates of 3.8% and 2%, respectively. By 2024, it expects GDP growth of 1.9%. In the reduction, the largest economy in the world, the US, stands out, for which the institution forecasts growth of 2.5% this year and 2.4% in 2023, one point less than the forecasts published in January ( 3.7% and 2.6%, respectively). By 2024, the World Bank expects a 2% increase in US GDP.

The forecast for emerging and developing economies is slightly more optimistic, although they will also see their growth slow this year to 3.4% (from the previous calculation of 4.6%) and an expansion of 4.2% and 4, 4% in 2023 and 2024, respectively. For the countries of Latin America and the Caribbean, the outlook hardly changes this year, with a forecast of 2.5%, one tenth less than in January. The outlook for next year is indeed more somber, from the initial 2.7% projected at the beginning of the year to 1.9%. The slowdown in exports of raw materials to China and the United States is the main risk that, together with a more discreet internal demand, hangs over the Latin American economy.

By country, the World Bank forecasts growth of 1.5% for the largest economy in the region, Brazil; 4.5% for Argentina (after the crisis experienced in 2020); 1.7% for Mexico and 5.4% for Colombia.

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The euro zone is more affected in 2022, with a slowdown of 1.7 points over the initial growth forecast for this year, which now stands at 2.5%. For the next two years, the Bank forecasts an expansion of 1.9%, just 0.2 percentage points below the January estimates.

“The war in Ukraine, lockdowns in China, supply chain disruptions and the risk of stagflation affect growth. For many countries, it will be difficult to avoid recession,” said World Bank President David Malpass on Tuesday, who has advocated changes in fiscal, monetary, climate and debt policies to deal with the eventuality.

The inflation dilemma

Regarding inflation, the main headache in the US and in the euro zone, among others, the World Bank expects it to be moderate next year, although above the target in many countries. If the upward pressure on prices continues its trend, the entity underlines, the risk of a slowdown in the world economy will grow, along with episodes of acute, multi-systemic crises such as the one suffered by Sri Lanka, in emerging and developing markets.

The precedent of the 1970s grimly falls on forecasts. The current environment resembles that of then, with continued supply disruptions, which feed inflation, preceded by a prolonged period of highly accommodative monetary policy in the main advanced economies. In less powerful economies, a tighter monetary policy to tackle inflation will reveal the structural vulnerability of the market and slow down growth.

“Most importantly, unlike in the 1970s, central banks in advanced economies and many developing economies now have clear mandates for price stability and, over the past three decades, have established a credible track record of meeting its inflation targets”, explains the entity.

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