World Bank Report: Global Economic Prospects, June 2022

For this episode I'm reading selections of two reports -- The World Bank's June 2022 Economic Prospects Report and David Wilcox's "The case for a cautiously optimistic outlook for US inflation." Links to both reports are at the end of the show notes.

Economic Prospects Report

The global economy is in the midst of a sharp growth slowdown following the extraordinarily strong rebound last year. This slowdown coincides with a steep run-up 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). The stagflation of the 1970s ended with a global recession and a series of financial crises in EMDEs.

There has been considerable debate about current stagflation risks. Some researchers have warned that the recent surge in inflation around the world could mark a permanent ratcheting up of price pressures after two decades of low and stable inflation. Some have also noted parallels between the current episode and the stagflation of the 1970s, including similarly negative real interest rates in both periods and the possibility of a wage/price spiral set off by rapid wage growth (Blanchard 2022; Summers 2022). However, others have pointed to material differences from the 1970s, especially in the conduct of monetary policy, which may help prevent another bout of stagflation: the inflation-fighting credentials accumulated since the 1980s and recent evidence of broadly stable long-term inflation expectations (Wilcox 2022).

This edition of the Global Economic Prospects report offers the first systematic assessment of how current global economic conditions compare with the era of stagflation of the 1970s—with a particular emphasis on how stagflation could affect developing economies. The insights are sobering: the interest rate increases that were required to control inflation at the end of the 1970s were so steep that they touched off a global recession, along with a string of debt crises in developing economies, ushering in a “last decade” in some of them.

The danger of stagflation is considerable today. Between 2021 and 2024, global growth is projected to have slowed 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.

Links:

World Bank Global Economic Prospects Report:

https://openknowledge.worldbank.org/bitstream/handle/10986/37224/9781464818431.pdf

David Wilcox's Report (Peterson Institute for International Economics), "The case for a cautiously optimistic outlook for US inflation"

https://www.piie.com/publications/policy-briefs/case-cautiously-optimistic-outlook-us-inflation

Cleveland Fed Inflation Expectations:

https://www.clevelandfed.org/our-research/indicators-and-data/inflation-expectations.aspx

My Twitter Thread with questions for David Wilcox:

https://twitter.com/InflationPod/status/1536072114742124545?s=20&t=G5-WlEU0xGYPQqXb9RqWKQ