Bulletin
Investor Alert

New York Markets Close in:

Project Syndicate Archives | Email alerts

June 8, 2022, 11:14 a.m. EDT

The antidote to stagflation is to boost supplies by investing in economies and people around the world

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    Natural Gas Continuous Contract (NG00)
  • X
    WSJ Dollar Index (BUXX)
  • X
    Crude Oil Continuous Contract (CL00)

or Cancel Already have a watchlist? Log In

By David Malpass

WASHINGTON ( Project Syndicate )—Just over two years after COVID-19 caused the deepest  global recession  since World War II, the world economy is again in danger. This time, it is facing high inflation and slow growth simultaneously. Even if a global recession is averted, the pain of stagflation could persist for several years, with potentially destabilizing consequences for low- and middle-income economies—unless major supply increases are achieved.

Amid the war in Ukraine, surging inflation, and rising interest rates, global economic growth is expected to slump in 2022. The World Bank’s latest forecasts,  published today , reflect a sizable downgrade to the outlook: global growth is expected to slow sharply this year, to 2.9%, from 5.7% in 2021.

Breaking news from the AP: World Bank dims outlook for global economy amid Russia war

This also reflects a nearly one-third cut to the  January 2022 forecast , which projected 4.1% this year. 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 under way, account for most of the downgrade.

Double whammy

COVID-19 already dealt a  major setback  to income growth and poverty reduction in developing economies. The fallout from the war in Ukraine  compounds the challenges  for many of them. They are expected to eke out 3.4% growth in 2022—barely half the rate in 2021 and well below the average between 2011 and 2019. Similarly, the growth forecast for middle-income countries in 2022 has been downgraded sharply, losing 1.3 percentage points relative to the January forecast.

Real income per capita in 2023 will remain below pre-COVID-19 levels in about 40% of developing economies. For many countries,  recession  will be hard to avoid. With the  supply of natural gas   /zigman2/quotes/210189548/delayed NG00 -0.43% constrained, especially for use in fertilizer and electricity grids in poorer countries, announcements of major production increases world-wide will be essential to restoring noninflationary growth.

The danger that above-average inflation and below-average growth will persist for several years—a phenomenon not seen since the 1970s—is  considerable . Between 2021 and 2024, global growth is projected to slow by 2.7 percentage points—more than twice the deceleration between 1976 and 1979. Subdued growth will likely persist throughout the decade because of weak investment in most of the world. With  inflation  now running at multidecade highs in many countries, and supply expected to expand slowly, there is a risk that the rate of price growth will remain higher for longer than currently anticipated.

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

Monetary and fiscal headwinds

The removal of monetary accommodation in the United States and other advanced economies, along with the ensuing increase in global borrowing costs, represents another significant headwind for the developing world. In addition, over the next two years, most of the  fiscal support  provided in 2020 to fight the pandemic will have been unwound, though debt levels will remain elevated.

As policy accommodation is removed, it will be important to reduce inequality and seek higher incomes for all by using fiscal and monetary tools that strengthen supply chains, small businesses, and the capital-allocation process.

But current conditions also  differ from the 1970s  in several important ways. The dollar /zigman2/quotes/210673925/realtime XX:BUXX +0.65% , extremely weak in the 1970s, is  strong . Oil prices /zigman2/quotes/209723049/delayed CL00 -2.93%   quadrupled  in 1973-74 and  doubled  in 1979-80; today, in inflation-adjusted terms,  oil prices  are only two-thirds their level in 1980. And the balance sheets of major financial institutions are generally strong, whereas they were a risk in the 1970s.

Economies around the world are also more flexible than they were in the 1970s, with fewer structural rigidities involving wages and labor markets, and policy makers are in a better position today to stave off stagflationary headwinds. Monetary-policy frameworks are more credible: central banks in advanced and many developing economies alike operate under clear  price-stability mandates . This, together with the fact that existing technology and capital have the capacity to provide massive increases in supply, has helped anchor long-term inflation expectations.

Reducing the risk of stagflation will require targeted measures by policy makers world-wide. In an extraordinary era of overlapping global crises, policy makers everywhere will need to focus their efforts in five key areas.

Five areas of focus

First, they must  limit the harm to people affected by the war in Ukraine . This will require coordinating the crisis response, including delivery of emergency food, medical, and financial aid to war-torn areas, and sharing the burden of housing, supporting, and possibly relocating refugees and internally displaced people.

/zigman2/quotes/210189548/delayed
US : U.S.: Nymex
$ 8.73
-0.04 -0.43%
Volume: 67,079
Aug. 15, 2022 2:28p
loading...
/zigman2/quotes/210673925/realtime
XX : WSJ Index
97.97
+0.63 +0.65%
Volume: 0.00
Aug. 15, 2022 2:38p
loading...
/zigman2/quotes/209723049/delayed
US : U.S.: Nymex
$ 89.39
-2.70 -2.93%
Volume: 234,199
Aug. 15, 2022 2:28p
loading...
1 2
This Story has 0 Comments
Be the first to comment
More News In
Economy & Politics

Story Conversation

Commenting FAQs »

Partner Center

Link to MarketWatch's Slice.