World Bank sees raised risk of stagflation

Compounding the damage from the Covid-19 pandemic, the Russian invasion of Ukraine has magnified the slowdown in the global economy, which is entering what could become a protracted period of feeble growth and elevated inflation, according to the World Bank’s June 2022 Global Economic Prospects report.

“This raises the risk of stagflation, with potentially harmful consequences for middle- and low-income economies alike,” the World Bank said.

Global growth is expected to slump from 5.7 per cent in 2021 to 2.9 per cent in 2022— significantly lower than 4.1 per cent that was anticipated in January.

It is expected to hover around that pace over 2023-24, as the war in Ukraine disrupts activity, investment, and trade in the near term, pent-up demand fades, and fiscal and monetary policy accommodation is withdrawn, the World Bank said.

“As a result of the damage from the pandemic and the war, the level of per capita income in developing economies this year will be nearly five per cent below its pre-pandemic trend,” it said.

In its section of Europe and Central Asia (ECA), the World Bank said that Russia’s invasion of Ukraine had triggered a humanitarian crisis, set back economic growth in ECA and beyond, and heightened global geopolitical instability.

“The invasion has devastated Ukraine’s economy, while international sanctions have caused output to plummet in Russia,” the World Bank said.

“The largest spillovers of the war are likely to be through higher commodity prices and weaker external demand from the euro area.”

It said that economic activity in Ukraine has been rendered impossible in some areas, with the war destroying productive infrastructure and halting Ukraine’s international goods trade.

“In Russia—the region’s largest economy—activity is contracting sharply,” the World Bank said.

Neighbouring economies were facing adverse spillovers from the war, including through fractures in critical trade and transit routes, sharp falls in remittances, and higher commodity prices and inflation.

“The war is dampening regional trade by weighing on external demand from the euro area—ECA’s largest trading partner—and Russia,” the World Bank said.

Inflationary pressures had intensified, with ECA’s median inflation accelerating to over 12 per cent in April—its fastest pace since 2008, despite tightening monetary conditions in most economies over the past year.

Higher energy prices had translated directly into larger import bills and wider current account deficits, particularly in countries highly dependent on imported energy.

They have also generated sizable fiscal costs in several countries because of remaining fossil fuel subsidies.

In its outlook for the area, the World Bank said that output in ECA is forecast to shrink by around three per cent in 2022, as the war in Ukraine and its repercussions reverberate through commodity and financial markets, trade and migration links, and business and consumer confidence.

The baseline projections assume that the war in Ukraine persists in the near term but becomes increasingly contained to the eastern part of the country.

They also assume that uncertainty remains elevated relative to historical norms and that sanctions on Russia and Belarus as a response of the invasion remain in place over the forecast horizon.

In Ukraine, GDP is projected to contract by about 45 per cent in 2022. Poverty rates below the $5.50 per day threshold is projected to increase from around two per cent to 20 per cent of the population in 2022.

Russian output is forecast to contract by 8.9 per cent in 2022, reflecting a sharp fall in domestic demand and declining exports.

Russian GDP is expected to continue to contract in 2023, by two per cent, as the impact of a partial oil embargo on Russia’s oil exports to the EU dampens net exports.

In addition to Russia and Ukraine, four other ECA economies are expected to shrink this year – Belarus, Kyrgyz Republic, Moldova, and Tajikistan – while most of the rest are projected to experience a sharp growth deceleration, the World Bank said.

Growth in Central Europe is forecast to weaken in 2022 alongside that in the euro area,

slipping to 3.7 per cent, as external demand slows and higher inflation, tighter monetary policies, and greater policy uncertainty dampen domestic demand.

In the June 2022 report, the World Bank forecast economic growth for Bulgaria of 2.6 per cent in 2022, down by 1.2 percentage points compared with its forecast for Bulgaria in January.

(Photo: Sanja Gjenero)

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