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Stagflation Very Real Economic Threat, Global Forecast Downgrade From World Bank Suggests

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The World Bank has significantly slashed its global growth forecast, arguing that following the damage done via the COVID-19 pandemic, the Russia-Ukraine war has magnified the slowdown in the global economy — an economy which is entering what could become a protracted period of feeble growth and elevated inflation (stagflation).

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The World Bank’s latest Global Economic Prospects report indicates that global growth is expected to decrease to 2.9% in 2022, a staggering drop from 5.7% growth in 2021 and significantly lower than the 4.1% growth that was anticipated in January. It is expected to hover around that pace over 2023-24.

“The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid,” World Bank president David Malpass said in a press release. “Markets look forward, so it is urgent to encourage production and avoid trade restrictions. Changes in fiscal, monetary, climate and debt policy are needed to counter capital misallocation and inequality.”

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The surge in energy and food prices, along with the supply and trade disruptions triggered by the war in Ukraine (and the necessary interest rate normalization now underway) account for most of the downgrade, according to the report.

“One key risk to the outlook is the possibility of high global inflation accompanied by tepid growth, reminiscent of the stagflation of the 1970s,” a preface to the World Bank report indicates. “This could eventually result in a sharp tightening of monetary policy in advanced economies, which could lead to financial stress in some emerging markets and developing economies. A forceful and wide-ranging policy response is required to boost growth, bolster macroeconomic frameworks, reduce financial vulnerabilities, and support vulnerable groups,” the preface continues.

Maya Adly, CEO and founder of ROAR, told GOBankingRates that the June report displays sharp parallels to the economic crisis experienced in the 1970s, as decelerating rates of emerging market expansion and economic development — as well as a decline in the job market — are clear indicators the environment is set for a potential recession.

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“The first signs of systematic comparison between the situation today and that of 50 years ago is apparent in this month’s report,” Adly said. “What remains to be known, is the role in which technological advancement will play in potentially mitigating partial effects of the emerging recession. Technology, due to its ability to lower operating costs and increase efficiency, has the ability to slow or even counter some inflationary reactions and did not play a significant part in economic history; however, debt relief for developing economies will be likely.”

Other experts are a bit more optimistic, at least when it comes to the outlook for the U.S., including Rusty Vanneman, chief investment strategist at Orion Advisor Solutions. Vanneman told GOBankingRates that as a result of the hawkish stance of the Federal Reserve (two rate hikes of 25 and 50 basis points in March and May), along with negative GDP growth in the first quarter of 2022, it’s no surprise that concerns around global stagflation are on the rise.

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“Despite continued rate hikes in 2022 being priced into the US market, U.S. equities are holding their heads as of late compared to expectations coming off early 2022 weakness,” Vanneman said, adding that looking to the U.S. jobs market, May unemployment remained at a very low 3.6%. “[This jobs market] gives us optimism regarding the economy’s ability to continue its growth despite high CPI [consumer price index] readings.”

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“Though the impact of the Fed’s rate hikes could damper growth compared to what we’ve seen in the second half of 2020 and in 2021, a steepened yield curve, corporate earnings in line with five-year averages, and a strong U.S. labor market give us reluctance to be waving the flag for fears of global stagflation at this time,” he added.

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