The World Bank warned Tuesday that the global economy faces the risk of dreaded “stagflation,” with this combination of high inflation and low growth tipping some countries into recession.
“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.
In its updated Global Economic Prospects report, the World Bank slashed its forecast for global growth this year to 2.9%, down from the 4.1% forecast it published in January.
The World Bank said most of the downgrade is attributed to the Russian invasion of Ukraine, which it had not accounted for in its previous forecast. The international body said it expects “essentially no rebound” next year, projecting only 3% growth for the world in 2023.
The report pointed to the persistence of high energy and food prices — combined with higher interest rates from central banks around the world — for the gloomier outlook.
“The global outlook faces significant downside risks, including intensifying geopolitical tensions, an extended period of stagflation reminiscent of the 1970s, widespread financial stress caused by rising borrowing costs, and worsening food insecurity,” the report reads.
In the United States, the World Bank downgraded growth prospects for 2022 to 2.6% from the 3.8% it expected in its January forecast.
Although the downgrade does not imply a recession, Wall Street firms have already taken note of recessionary warnings from markets. And rapid price increases are already driving conversations about recession at American dinner tables.
But the World Bank report highlights the fact that recessionary concerns are not a uniquely American phenomenon.
‘Avert the worst consequences’
The World Bank called on governments around the world to “avert the worst consequences” of this economic slowdown.
The World Bank urged governments to “cushion the blow” from rising energy and food prices, ease financial burdens by expanding debt relief, and dampen the impact of the ongoing pandemic by increasing vaccinations in low-income countries.
The report specifically discouraged governments from imposing price controls, subsidies, or export bans amid high inflation.
The World Bank also said central banks like the Federal Reserve have a role to play as well.
The Fed, the Bank of England, and the Bank of Canada are among major central banks raising short-term borrowing costs to dampen demand that may be empowering businesses to lift prices.
“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,” said Ayhan Kose, Director of the World Bank’s Prospects Group.
The challenge: governments and central banks can only do so much to address supply chain disruptions.
With China’s zero-COVID policy and a war happening in Eastern Europe, the inability of trade to flow freely around the world risks keeping prices elevated as growth slows.
The World Bank report warned that if geopolitical conditions do not lighten up, “global growth could be substantially weaker.”
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.