The topic of stagflation has been on the financial markets for a long time, but no major institution has spoken about it as openly as the World Bank has now done. It warned of a dangerous phenomenon that combines weak economic growth and high inflation.
The World Bank lowered its global growth forecast in a report released Tuesday and warned that many countries could slip into recession as the global economy enters a period of stagflation. The Bank expects global GDP growth rate to be 2.9 percent, down from 5.7 percent in 2021. Previously, the Bank expected growth of 4.1 percent, according to the Global Economic Prospects report. It now expects growth to remain at 2.9 percent in 2023-2024, while inflation in most economies will exceed the target, the report said, pointing to risks of stagflation.
Russia's invasion of Ukraine and the resulting surge in commodity prices have compounded the damage done by the Covid virus pandemic to the global economy, which the World Bank says is now entering a prolonged period of weak growth and elevated inflation. The war in Ukraine, blockades in China, supply chain disruptions and the risk of stagflation are hitting economic growth. Recession will be hard to avoid in many countries, World Bank President David Malpass said.
The current environment of high inflation and weak growth draws parallels to the 1970s, a period of severe stagflation that required interest rates to rise sharply in advanced economies and triggered a series of financial crises in emerging and developing economies. The report found that there are clear similarities between the situation then and today. These include supply-side distortions, the prospects for lower growth rates, and the weakness of emerging economies to tighten monetary policy, which will be necessary to curb inflation. However, there are also a number of differences: the strength of the U.S. dollar, generally lower oil prices, and generally strong balance sheets of major financial institutions that provide room for maneuver.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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