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Global monetary policy
OpinionComment
David Malpass
David Malpass

Opinion | Five steps global policymakers can take to provide supply solutions to stagflation

  • The World Bank’s latest forecast shows global growth is projected to keep slowing into 2024, with low- and middle-income countries the hardest hit
  • Averting disaster and restoring growth requires focusing on helping Ukraine, debt relief, countering rising prices, fighting Covid-19 and green energy

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A worker pulls a cart full of vegetables and potatoes at the Azadpur wholesale market in New Delhi. Rising food and energy prices are further weakening the economic outlook in developing countries that were already under stress even before the Covid-19 pandemic. Photo: Bloomberg
David Malpass

More than two years after Covid-19 caused the deepest global recession since World War II, the world economy is again in danger. This time, it faces high inflation and slow growth simultaneously. Even if a global recession is averted, the pain of stagflation could persist for several years with potentially destabilising consequences for low- and middle-income economies.

The World Bank’s latest forecast reflects a sizeable downgrade – global economic growth is expected to slow to 2.9 per cent this year, down from 5.7 per cent in 2021. The surge in energy and food prices, as well as supply and trade disruptions caused by the war in Ukraine and interest rate normalisation, account for most of the downgrade.

Covid-19 already dealt a major setback to income growth and poverty reduction in developing economies. They are expected to eke out 3.4 per cent growth in 2022 – barely half the rate in 2021 and well below the average between 2011 and 2019. The growth forecast for middle-income countries in 2022 was also downgraded sharply.

For many countries, recession will be hard to avoid. With the supply of natural gas constrained, especially for use in fertiliser and electricity grids in poorer countries, major production increases worldwide are essential to restoring non-inflationary growth.

There is considerable danger that above-average inflation and below-average growth will persist for several years. Between 2021 and 2024, global growth is projected to slow by 2.7 percentage points. With inflation at multi-decade highs in many countries and supply expected to expand slowly, there is a risk the rate of price growth will remain higher for longer than anticipated.

Moreover, developing economies’ external public debt is at record levels. Most of it involves variable interest rates that could spike suddenly. As global financing conditions tighten and currencies depreciate, debt distress is spreading to middle-income countries.
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