World Bank report speaks of stagflation and impact on the most fragile economies

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Text by Pyr Marcondes, journalist, publicist, consultant, publisher, author, investor, M&A Tech Advisor. He is a Senior Partner at Pipeline Capital.

Below is a summary I made from a series of analyzes by international experts on the latest World Bank report, the first after the pandemic, lockdown in China and war in Ukraine.

Compounding the negative economic repercussions of the pandemic, the Russian invasion of Ukraine has extended the slowdown in the global economy, which is entering what could become a prolonged period of weak growth and high inflation, according to the Bank’s latest Global Economic Outlook report. World. This increases the risk of stagflation, with potentially harmful consequences for low- and middle-income economies. Brazil is among them.

Global growth is expected to decline from 5.7% in 2021 to 2.9% in 2022 – significantly down from the 4.1% forecast in January. Expected to stay at that pace in 2023-24 as the war in Ukraine destabilizes international economic activity, investment and trade in the near term, while pent-up demand ebbs and accommodation of fiscal and monetary policy is similarly withdrawn .

As a result of the damage from the pandemic and war, the per capita income level in developing economies this year will be nearly 5% below its pre-pandemic trend.

“The war in Ukraine, lockdown in China, supply chain disruptions and the risk of stagflation are crushing growth. For many countries, recession will be difficult to avoid,” said World Bank President David Malpass. “The markets are anxious, so it is urgent to encourage production and avoid trade restrictions. Changes in fiscal, monetary, climate and debt policy are needed to tackle capital misallocation and inequality.”

The June Global Economic Outlook report offers the first systematic assessment of how current global economic conditions compare with the stagflation of the 1970s – with particular emphasis on how stagflation could affect emerging markets and developing economies. The recovery from the stagflation of the 1970s required sharp increases in interest rates in major advanced economies (and this is happening now), which played a prominent role in triggering a series of financial crises in emerging markets and developing economies.

“Developing economies will have to balance the need to ensure fiscal sustainability with the need to mitigate the effects of today’s overlapping crises on their poorest citizens,” said Ayhan Kose, director of the World Bank’s Outlook Group. “Clearly communicating monetary policy decisions, leveraging credible monetary policy frameworks, and protecting central bank independence can effectively anchor inflation expectations and reduce the amount of policy tightening needed to achieve the desired effects on inflation and inflation. activity.”

The current environment resembles the 1970s in three main respects: persistent supply-side disturbances fueling inflation, preceded by a prolonged period of highly leveraged monetary policy in major advanced economies, weakening growth prospects, and vulnerabilities that emerging markets face. and developing economies face the tightening of monetary policy, which will be inevitable to contain inflation.

However, the current episode also differs from the 1970s in multiple dimensions: the dollar is strong, a stark contrast to its strong weakness in the 1970s; percentage increases in commodity prices are smaller; and the balance sheets of major financial institutions are generally strong. More importantly, unlike in the 1970s, central banks in advanced economies and many developing economies now have clear mandates for price stability and, over the past three decades, have established a credible track record of meeting their inflation targets.

Global inflation is expected to moderate in the coming year, but is likely to remain above inflation targets in many economies. The report notes that if inflation remains high, a repeat of the previous stagflation resolution could translate into a sharp global slowdown, along with financial crises in some emerging markets and developing economies.

The report also offers new insights into how the war’s effects on energy markets are clouding global growth prospects. The war in Ukraine has led to an increase in the prices of a wide range of energy-related commodities. Higher energy prices will reduce real incomes, increase production costs, tighten financial conditions and constrain macroeconomic policy, especially in energy-importing countries.

Growth in advanced economies is expected to slow sharply from 5.1% in 2021 to 2.6% in 2022 – 1.2 percentage points below projections in January. Growth is expected to moderate further to 2.2% in 2023, largely reflecting the further reduction in fiscal and monetary policy support provided during the pandemic.

Among emerging markets and developing economies, growth is also expected to decline from 6.6% in 2021 to 3.4% in 2022 – well below the annual average of 4.8% in 2011-2019. The negative repercussions of the war will more than offset any short-term boost for some commodity exporters from higher energy prices. Forecasts for 2022 growth have been revised downwards by almost 70%.

Download the full World Bank report here.

Text by Pyr Marcondes, journalist, publicist, consultant, publisher, author, investor, M&A Tech Advisor. He is a Senior Partner at Pipeline Capital.

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