World Bank warns global economy may suffer 1970s-style stagflation

The global economy may be headed for years of weak growth and rising prices, a toxic combination that will test the stability of dozens of countries still struggling to rebound from the pandemic, the World Bank warned Tuesday.

Not since the 1970s – when twin oil shocks sapped growth and lifted prices, giving rise to the malady known as “stagflation” – has the global economy faced such a challenge.

The bank slashed its annual global growth forecast to 2.9% from January’s 4.1% and said that “subdued growth will likely persist throughout the decade because of weak investment in most of the world.”

Fallout from Russia’s invasion of Ukraine has aggravated the global slowdown by driving up prices for a range of commodities, fueling inflation.

Global growth this year will be roughly half of last year’s annualized rate and is expected to show little improvement in 2023 and 2024.

This will be the sharpest slump after an initial post-recession rebound that the global economy has suffered in more than 80 years, the bank said.

And the situation could get even worse if the Ukraine war fractures global trade and financial networks or soaring food prices spark social unrest in importing countries.

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

If the worst outcomes materialize, global growth over the next two years could fall “close to zero,” he added.

With few exceptions, the economic outlook is troubled.

In the third year of pandemic, the global economy this year has been hit by what the World Bank labels “overlapping crises” – fallout from the war in Ukraine, recurring coronavirus lockdowns affecting Chinese factories and the highest inflation rates in decades.

For now, the greatest areas of concern lie beyond U.S. borders.

A recession in Europe is a real possibility, as the continent struggles to accommodate nearly 7 million Ukrainian refugees and deal with upheavals in energy markets.

Elsewhere, the interruption of grain exports via the Black Sea is hurting countries such as Lebanon, Egypt and Somalia.

China is suffering from its rigid zero-COVID policies and battling costly property market weakness.

Though the U.S. economy shrank in the first three months of the year during the omicron variant surge, growth is expected to rebound in the current quarter, according to economists’ estimates.

Financial market gauges of future inflation rates have declined since late April, easing – though not eliminating – fears of a prolonged price spiral.

Nathan Sheets, global chief economist for Citigroup, called the chance of a significant stagflation outbreak in the U.S. “remote,” in a recent client note.

Policymakers must act quickly to mitigate the Ukraine war’s consequences, help countries pay for food and fuel, and accelerate promised debt relief, while avoiding “distortionary policies” such as price controls and export bans, the bank said.

The World Bank’s Malpass said the global economy is being hampered by inadequate production capacity for key goods.

“It’s very important to increase supply massively to really try to get at inflation directly by more production. Unfortunately, there aren’t signs of that very much yet,” he said.