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World Bank's warning: 'recession will be hard to avoid,' 1970s stagflation is 'likely'

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(Kitco News) The latest sharp downgrade to the global economic outlook comes from the World Bank, which paints a gloomy picture as it cites Russia's war against Ukraine, stagflation risks, and potential widespread food shortages.

The World Bank slashed its global growth outlook to 2.9% for 2022. Its January forecast for 2022 projected global growth to be at 4.1%.

One major takeaway from the World Bank's Global Economic Prospects report published Tuesday was that Russia's invasion of Ukraine had multiplied the damage done by the COVID-19 pandemic.

"The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid," said David Malpass, the World Bank's president. "Several years of above-average inflation and below-average growth are now likely, with potentially destabilising consequences for low- and middle-income economies. It's a phenomenon – stagflation – that the world has not seen since the 1970s."

The global economy is now kicking off a period that could become "a protracted period of feeble growth and elevated inflation," the World Bank said.

The World Bank is not ruling out a return to the 1970s as global growth faces the wide-reaching consequences of Russia's war in Ukraine, COVID-19 lockdowns in China, continued supply-chain disruptions, and stagflation risks.

"The danger of stagflation is considerable today," Malpass wrote. "Subdued growth will likely persist throughout the decade because of weak investment in most of the world. With inflation now running at multi-decade highs in many countries and supply expected to grow slowly, there is a risk that inflation will remain higher for longer."

Stagflation is an environment defined by high inflation mixed in with sluggish growth.

"Even if a global recession is averted, the pain of stagflation could persist for several years – unless major supply increases are set in motion," Malpass said.

The World Bank doesn't see things improving in the next two years either, projecting 3% global growth for 2023 and 2024. Global growth is estimated to slow by 2.7 percentage points between 2021 and 2024, which would be twice the deceleration between 1976 and 1979, Malpass pointed out.

The similarity between now and the end of the 1970s is the need to significantly raise interest rates to get inflation under control. And that is exactly what contributed to the global recession in the early 1980s. However, some of the key differences are the strong U.S. dollar and solid balance sheets of major financial institutions.

To manage these risks, there needs to be coordinated aid to Ukraine, efforts to lower oil and food prices, debt relief efforts, and attempts to accelerate the transition to a low-carbon economy, according to Malpass.

In the U.S., the growth forecast was cut to 2.5% for 2022 from 3.7% projected by the World Bank in January. The euro area's growth was downgraded to 2.5% from January's projections of 4.2%.

In China, growth is estimated to slow to 4.3% in 2022, and Russia's economy is projected to contract by 8.9 % this year.

Another significant risk facing the world is widespread food shortages due to disruptions to global trade following Russia's invasion of Ukraine.

"There's a severe risk of malnutrition and of deepening hunger and even of famine," according to the report. "Continued disruptions to Russian and Ukrainian wheat exports would worsen food insecurity and increase malnutrition in some countries, including many low-income countries."

Gold rose following the report's release, with the precious metal seeing double-digit gains. August Comex gold futures were last trading at $1,854.50, up $10.80 on the day.

Live 24 hours gold chart [Kitco Inc.]

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