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The Supply Solution to Stagflation

According to the World Bank’s latest forecast, global growth is projected to slow by 2.7 percentage points between 2021 and 2024 – more than twice the deceleration between 1976 and 1979. To avoid a prolonged period of stagflation, policymakers worldwide must focus on five key areas.

WASHINGTON, DC – 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 forecast, published today, reflect a sizeable downgrade to the outlook: global growth is expected to slow sharply this year, to 2.9%, from 5.7% in 2021. 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 underway, account for most of the downgrade.

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.