The World Bank is warning that the global economy is about to experience a prolonged period of stagflation due to continual shocks to global infrastructure.
In its flagship report, “Global Economic Prospects,” for the month of June, the international financial conglomerate warned that global inflation is continuing to climb to multi-decade highs, which it blamed on supply chain shocks, elevated demand from opening up economies post-COVID, and the Russian invasion of Ukraine. The World Bank notes that monetary policies needed to control inflation, including hiking national interest rates, would likely trigger a global recession, which in turn would cause a period of stagflation — economic stagnation combined with soaring inflation — not seen since the 1970s.
“The global economy is in the midst of a sharp growth slowdown following the extraordinarily strong rebound last year,” the World Bank said in its report. “This slowdown coincides with a steep runup in global inflation to multi-decade highs. Looking ahead, growth over the next decade is expected to be considerably weaker than over the past two decades.
Although global inflation is for now projected to return close to its 2019 average by 2024, there is a growing risk that it may remain elevated as global supply disruptions persist and some structural drivers that depressed inflation over the past three decades dissipate. These developments raise concerns about stagflation — a period of both weak growth and elevated inflation similar to what happened during the 1970s. The experience of the 1970s is a reminder of the damage this could cause to the global economy and, especially, to emerging market and developing economies (EMDEs).”
According to the report, global markets expected inflation to peak sometime around the middle of this year, before declining to about 3% by mid-2023. Those numbers would still be above the global pre-pandemic average, but slowing global growth, tightening monetary policies, the withdrawal of government assistance, prices leveling off, and easing supply bottlenecks would allow inflation to slow down. And, the report notes, most market commentators believe that global monetary policymakers have the tools to bring inflation under control.
“However, if inflation expectations deanchor, as they did in the 1970s, as a result of persistently elevated inflation and repeated inflationary shocks, the interest rate increases required to bring inflation back to target will be greater than those currently anticipated by financial markets,” the report said. “This raises the specter of the steep increases in interest rates that brought inflation under control but also triggered a global recession in 1982. That global recession also coincided with a string of financial crises and marked the beginning of a protracted period of weak growth in many EMDEs.”
JPMorgan Chase CEO Jamie Dimon echoed similar concerns, warning investors at a financial conference in New York last week that his firm is bracing for an economic “hurricane,” adding that while the current consensus is that monetary policy can control inflation, investors must brace for rough times ahead. “You know, I said there’s storm clouds but I’m going to change it … it’s a hurricane,” Dimon said of current economic trends. “Right now, it’s kind of sunny, things are doing fine, everyone thinks the Fed can handle this,” he added. “That hurricane is right out there, down the road, coming our way.”