July 6, 2022
  • July 6, 2022

World Bank lowers global growth forecast

By on June 7, 2022 0
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The global economy could be heading for years of weak growth and rising prices, a toxic combination that will test the stability of dozens of countries still struggling to recover from the pandemic, the World Bank warned on Tuesday. .

Not since the 1970s – when the twin oil shocks sapped growth and drove up prices, causing the disease known as “stagflation” – has the global economy faced such a challenge.

The bank cut its forecast for annual global growth to 2.9% from 4.1% in January and said “moderate growth will likely persist through the decade due to weak investment across much of the world.” world”.

The fallout from Russia’s invasion of Ukraine has deepened the global slowdown by pushing up prices for a range of commodities, fueling inflation. Global growth this year will be around half of last year’s annualized rate and is expected to show little improvement in 2023 and 2024.

It will be the biggest drop after a first post-recession rebound the global economy has seen in more than 80 years, the bank said. And the situation could get even worse: the war in Ukraine could fracture global trade and financial networks, and soaring food prices could trigger social unrest in importing countries.

“The risk of stagflation is considerable with potentially destabilizing consequences for low- and middle-income economies,” said David Malpass, president of the Washington-based multilateral development institution. “…There is a serious risk of malnutrition and worsening hunger and even starvation in some areas.

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

Policymakers must act quickly to mitigate the consequences of the war in Ukraine, help countries pay for food and fuel, and accelerate promised debt relief, while avoiding “distortive policies” such as controlling prices and export bans, the bank said.

The global threat of stagflation could have particularly dire effects in the developing world, where income per person this year remains nearly 5% below pre-pandemic levels, the bank said.

Persistent inflation increases the chance that the Federal Reserve and other central banks will raise interest rates sharply to calm demand, as happened in the late 1970s. This could lead to a more punitive global crisis and financial crises in some emerging markets, the bank said.

Developing countries as a group owe a record amount to foreign banks and other financial institutions. A quarter of a typical poor country’s debt burden now bears variable interest rates, up from 11% in 2010. So as anti-inflationary central banks tighten credit, repayment costs will rise for cash-strapped borrowing countries, the bank said.

Last month, Sri Lanka defaulted on its external debts for the first time, and Malpass said he expects other highly indebted countries to do the same.

But the world’s major economies will not escape damage. Bank economists now expect the United States to grow just 2.5% this year, down from the 3.7% rate they forecast in January.

China, the world’s second largest economy, will miss the government’s annual growth target of 4.3%. It would be Beijing’s worst annual figure since 1990, excluding 2020 when the pandemic depressed activity.

The global economy was expected to struggle this year as it adjusted to the loss of pandemic-era government spending and ultra-low interest rates. But Russia’s invasion of Ukraine – and continued coronavirus outbreaks – have made the situation more difficult.

The price of Brent crude oil has jumped to nearly $120 a barrel, up nearly 50% this year. And wheat staged a similar rally, leading the bank to call for urgent action to ease “global food shortages”.

The bank’s pessimistic outlook heightens concerns about global weakness. Most major stock markets, including those in the United States, have been in the red since the start of the year. And the bank’s sister institution, the International Monetary Fund, lowered its global forecast in April.

Yet today’s global economy differs from that of the 1970s in important ways, the bank said. The spike in commodity prices, while painful, has nothing to do with what happened nearly five decades ago. Oil prices quadrupled in 1973-74 before doubling again in 1979-80 amid the overthrow of the Shah of Iran.

Adjusted for inflation, current oil prices are a third below their 1980 level, the bank said.