FX.co ★ World Bank warns global economy risks repeating 1970s stagflation

Experts predict that the world economy will head back to the 1970s in the near future, which suggests record inflation rates and a further slowdown.

Analysts at the World Bank have slashed their recent forecasts for global economic expansion. They expect inflation to peak in mid-2022 and then gradually decline. Besides, the bank has warned of a high risk of stagflation. In this case, the global economy may face a protracted period of weak growth and high inflation reminiscent of the 1970s. The recovery from the stagflation of that time required steep interest rate hikes in major advanced economies, which caused a string of financial crises in emerging markets and developing economies. According to the latest data, global economic growth has already slowed down sharply and is likely to remain below the average of the 2010s. At the same time, there is a likelihood that elevated inflation will persist for longer than previously estimated.

World Bank experts believe that global economic growth will slump to 2.9% this year from 5.7% in 2021, which is 1.2 percentage points lower than the 4.1% predicted in January. “For many countries, recession will be hard to avoid,” World Bank President David Malpass said. To do this, policymakers need to stem a surge in oil and food prices and speed up debt relief for developing countries, the report highlights. “Overall, this amounts to the largest commodity shock we’ve experienced since the 1970s. As was the case then, the shock is being aggravated by a surge in restrictions in trade of food, fuel and fertilizers,” Indermit Gill, the World Bank’s Vice President for Equitable Growth, Finance, and Institutions, noted.