InvestorQ : What is the stagflation risk that the World Bank is talking about?
rhea Babu made post

What is the stagflation risk that the World Bank is talking about?

Riya Dwivedi answered.
4 weeks ago

On 07th June, World Bank downsized the GDP growth estimates of the world economy for 2022 from 4.1% to 2.9%. In 2021, global growth was 5.7%. World Bank also given a clear and unequivocal warning about risk of stagflation, which is a fairly pernicious combination of economic stagnation and high inflation. In fact, the World Bank has gone one step ahead and warned of several years of high inflation and tepid growth. The last time the world had this kind of a problem was in the 1970s.

Why is there a risk of stagflation now? It is a mix of the COVID aftermath and the war in Ukraine. COVID saw investments slowing down, impacting long term growth. On the other hand, the war in Ukraine has created supply chain problems resulting in inflation across oil and other industrial commodities. On the growth side, the World Bank expects global growth to slump to 2.9% in 2022 from 5.7% in 2021. India growth will fall to 7.5%.

The warning from the World Bank is that there could several years of above-average inflation and below-average growth. Recession will be hard to avoid for most large economies as growth is hit by the war in Ukraine and the lockdowns in China are only serving to worsen the supply-chain disruptions. Remember that stagflation also reflects a policy challenge. It is likely to damage living standards of people around the world.

Even for India, the real challenge of stagflation will be on the policy front. The government will have to do a tightrope walk; that is they need to contain inflation without allowing growth to slip too fast. The next few monetary policies could be critical?