World Bank says world could experience stagflation like in the 1970s

The World Bank also cut its global growth forecast to 2.9% in a new forecast released on Tuesday.

O world Bank cut this Tuesday, 7, the projection of growth of the global economy this year. According to a new report by the institution, forecast for gross domestic product (GDP) dropped to 2.9% from 4.1% that had been designed in January, before the start of the war in Ukraine.

For 2023, the estimate fell from a high of 3.2% to 3%. For 2024, the projection is the same 3%. All in all, just The escalation in energy prices with the war could cause GDP growth to be reduced by 0.8 percentage point in the accumulated between 2022 and 2023.

With the war proving to be more lasting (the conflict has already lasted more than three months), the World Bank points out that the risk of a stagflation scenario like the one that occurred in the 1970s is not ruled out.

“The war in Ukraine, the lockdowns in China, supply chain disruptions and the risk of stagflation are holding back growth. For many countries, recession will be difficult to avoid,” said World Bank Group President David Malpass.

The stagflation of the 1970s

In the 1970s, global stagflation was triggered mainly by oil supply shocks. The period had wars in the Middle East with conflicts between Arab countries and Israel, in addition to the resulting clash between the US and the newly created OPEC, an organization of oil exporting countries.

The reduction in supply due to wars and OPEC decisions led the US to record double-digit inflation, in a period that would become known as “great inflation”. The US Central Bank, the Fed, had to raise interest rates and the result was a combination of stagnation, unemployment and still high inflation.

The World Bank pointed out in its report that there are similar traits between the two scenarios, that of the 1970s and the current one. With the beginning of the war, the price of oil in the international market exceeded US$ 100 and led to widespread inflation throughout the world.

In the report, the World Bank points out that the price of oil should remain at US$ 100 for some time and fall from 2023, but slowly. Prices, for the institution “will remain much higher than previously expected, and well above the average of the last five years.”

Central banks against inflation and recession

On the other hand, the international entity considers that the advance of commodity prices is more contained today than at that time, that financial institutions are more solid and central banks have a clearer mandate for price stability.

The Fed, for example, has already started a process of raising interest rates, until then almost zero. (US inflation is at 8%, high for US levels.) In the 1970s, monetary institutions were criticized for being slow to act to contain inflation.

The World Bank believes that inflation should moderate next year, but still above the central bank’s targets.

At the same time, the document warns that the inflationary scenario could cause a sharp slowdown in the global economy and, as a consequence, trigger financial crises in emerging markets, such as Brazil.

The current expectation from banks and analysis houses is that Brazil will end the year with a Selic rate close to 14% and inflation just below 10% amid the global crisis. The scenario of high interest rates and inflation should put a brake on the post-covid-19 recovery in Brazil and in the world, and could lead to recession in some countries, as the World Bank warns, in addition to advancing poverty.

The World Bank said it defends the importance of global and national measures to mitigate the economic consequences of war.

for the institution, action will be needed to limit the impact of the crisis on the most vulnerable groups, mitigate the effects of soaring oil and food prices, increase debt relief and expand global vaccination against the coronavirus, which is still suboptimal in poorer countries.

“Against the challenging backdrop of higher inflation, weaker growth, tighter financial conditions and limited space for fiscal policy, governments will need to prioritize spending on relief targeted at vulnerable populations,” he argues.

Despite this, the World Bank wrote in the document that countries, even with the price crisis, should avoid policies that cause distortions – such as price controls, subsidies and restrictions on exports.

(With information from Estadão Content)