Page 42 - bne magazine July 2022_20220704

42 I Special Report bne July 2022
Real interest rates around the world are turning negative, a flashing red light that warns stagflation could be upon us. Wiki
Global red warning lights are flashing as stagflation looms
Ben Aris in Berlin
The conflict in Ukraine and high inflation are threatening the global economy with stagflation similar to that experienced in the 1970s, according to a new World Bank forecast.
The World Bank slashed its global growth outlook for the third time this year to 2.9% from 4.1% at the start of the year, pointing to a perfect storm of the ongoing coronavirus (COVID-19) pandemic and more recently the
war in Ukraine that have combined to send inflation rates soaring.
“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 on
his Facebook page after the bank issued a new update. “The risk of stagflation is very high.”
Global growth is expected to slump from 5.7% in 2021 to 2.9% in 2022
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– significantly lower than 4.1% 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activity, investment and trade in the near term, pent-up demand fades, and fiscal and monetary policy accommodation is withdrawn. 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 5% below its pre- pandemic trend, the World Bank said.
The peak of inflation, as analysts expect, will be in the middle of this year, while high prices for fuel and food will persist further. Under these conditions, central banks will have to tighten their monetary policies, which, in turn, may lead to a slowdown in economic growth, warns the World Bank. The upshot is a destructive cycle of high inflation but low growth that
is hard to break out of once it starts. “The current juncture resembles the
1970s in three key aspects: persistent supply-side disturbances fuelling inflation, preceded by a protracted period of highly accommodative monetary policy in major advanced economies, prospects for weakening growth, and vulnerabilities that emerging market and developing economies face with respect to
the monetary policy tightening that will be needed to rein in inflation,” the World Bank said.
Inflation targeting
The current stagflation differs from the 1970s in many ways too, the World Bank said: the dollar is strong, in sharp contrast to its severe weakness in the 1970s; the percentage increases in commodity prices are smaller; and
the balance sheets of major financial institutions are generally strong.
“More importantly, unlike the 1970s, central banks in advanced economies and many developing economies now have clear mandates for price stability,