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World Bank warns of stagflation risks

World Bank warns of stagflation risks
Written by madishthestylebar

War in Ukraine, galloping inflation, supply problems due to Covid-19, partial withdrawal of public aid put in place during the pandemic… The World Bank describes an economic storm on all fronts in its biannual report on the state of the economy, published on Tuesday 7 June. It is therefore revising its global growth forecast for 2022 very sharply downwards, from 4.1% expected in January to 2.9%.

Above all, it fears that this violent brake will be long-lasting, with a possible return of stagflation, or a period of economic stagnation combined with high inflation. “Even if a global recession is averted, the pain of stagflation could linger for several years unless a major improvement on the supply side issues takes hold. (…) Several years of above-trend inflation and below-trend growth are now likely, with potentially destabilizing consequences for low- and middle-income countries. It’s a phenomenon [la stagflation] the world hasn’t seen since the 1970s.”

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The current shock, a sort of perfect storm, is major, underlines the Washington institution. In 2021, global growth was exceptional, at 5.7%, following the artificial rebound caused by the (almost) end of the health crisis. In 2022, it should be halved, to 2.9%. In the short term, the euro zone and the United States should experience a similar increase in their gross domestic product this year (2.6% and 2.5%), but the former should fall in 2023 compared to the latter (1. 9% versus 2.4%).

The war in Ukraine makes the euro zone more fragile, insofar as it depends much more on Russian gas. In addition, it is more affected by supply problems in logistics chains. Ukraine, for example, produces certain auto parts, the production of which is greatly reduced, which has caused the shutdown of certain factories within the European Union. However, the most fragile economies remain the emerging countries. Thus, according to the World Bank, growth should reach 3.4% in 2022, against 6.6% in 2021.

Avoid oil and energy subsidies

The parallels with the 1970s are striking. The increase in the price of oil observed for two years is the strongest since the shock of 1973. In addition, all energies are affected: oil, gas, coal, as well as all oil products, which was not the case fifty years ago. “There is less leeway to substitute [à l’or noir] another alternative fossil fuel », is it stated in the report. The consequence is world inflation which, in April, rose to 7.8%, unseen since 2008. For developed countries, it is the highest since 1982. The impact will be almost mechanical, with a reduction of global growth by 0.8 points, solely because of soaring prices.

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