World Bank Forecasts Global Economy Will Grow by 2.9% in 2022- It's Half as Compared to 2021

The World Bank has downgraded its outlook on the global economy for 2022 and highlighted reasons like the Russia-Ukraine war, potential food shortages, and the return of stagflation. For those unaware, stagflation refers to a toxic mix of high inflation and sluggish growth that has not been seen for over four decades.

The World Bank has predicted that the world economy will only increase by 2.9% this year. It's nearly half of the global growth attained in 2021, 5.7%. It is also considerably lower than the 4.1% predicted for 2022 in January.

David Malpass, the World Bank's president, stated, "For many countries, the recession will be hard to avoid." The agency also shared that in 2023 and 2024 also, there will be just 3% growth.

The situation in the US is grim as the World Bank has reduced the growth forecast to 2.5% in 2022. It was 5.7% in 2021. It is also lower than the 3.7% predicted in January this year. The World Bank also downgraded the growth outlook for 19 European countries that share the euro currency. It has been reduced to 2.5% this year from 5.4% last year, and 4.2% predicted in January this year.

The growth in China is also expected to lower to 4.3% from 8.1% last year. Emerging markets and developing economies are collectively forecast to grow just 3.4% in 2022. It was 6.6% last year.

The War Impact

The ongoing war between Russia and Ukraine has severely disrupted global trade in wheat and energy. The commodity prices are higher than before, and it threatens the availability of affordable food in developing countries.

The oil prices are expected to increase 42% this year, and non-energy commodity prices can also rise nearly 18%.

The Dilemma

The prospect of stagflation poses a dilemma for the Federal Reserve and other central banks. If they continue to raise interest rates to combat inflation, they will risk causing a recession. In contrast, if they try to stimulate their economies, they might risk driving prices higher and making inflation an even more intractable problem.

During the previous period of stagflation, in the 1970s, the rate increases were so steep that they tipped the world into recession. It further led to a series of financial crises in the developing countries present in the developing world.

Drawing Parallels with the 1970s

The high inflation and weak growth environment that we are seeing today has drawn parallels with the situation in the 1970s. It was a period of intense stagflation that required sharp increases in interest rates in advanced economies and led to financial crises in emerging markets and developing economies.

The World Bank's June report offers the "first systematic" comparison between the situation now and 1970s. Clear parallels are there between then and now. Examples include prospects for weak growth, supply-side disturbances, and vulnerabilities faced by emerging economies concerning the monetary policy tightening, which will be essential to control inflation.



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