World economy reminiscent the stagflation of the 1970s

 By S R Ranjan: As global recession looms, the world economy continues to suffer from numerous crises. More than two years of Covid-19 pandemic and the spillovers from the Russia-Ukraine ‘geopolitical’ conflict are set to further steepen the slowdown in global growth, high global inflation accompanied by ‘stagnant’ low growth at the same time, reminiscent of the stagflation of the 1970s.

Stagflation was reportedly initially used during a period of high inflation, low growth rates and unemployment in the United Kingdom, by a British Conservative Party politician Iain Macleod to warn the House of Commons of the gravity of the situation in 1965. Macleod used the term again in 1970 and the media too began also to use it. At present, amidst a similar global economic outlook, the stagflation of the 1970s and its risks rise again to destabilise the world order, global growth and activity.

Today, the risk of stagflation – a combination of high inflation and slow economic growth rate ­– is considerable and could persist for several years. The World Bank Group’s latest report, Global Economic Prospects 2022, offers systematic assessment of how present economic conditions compare with the era of stagflation of the 1970s, with a particular emphasis on how stagflation could affect emerging markets and developing economies. “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 World Bank President David Malpass.

The current world scenario is leading to negative spillovers and shocks of high commodity prices, adding to supply disruptions, exacerbating inflation, financial stress, rising borrowing costs, increasing food insecurity, poverty, humanitarian catastrophe and renewed pandemic outbreaks. According to the World Bank’s latest Global Economic Prospects report, global growth is expected to slump from 5.7 per cent in 2021 to 2.9 per cent in 2022. This is significantly lower than that was anticipated in January at 4.1 per cent. Likely, in 2023-24, t is expected to hover around that pace, as the war in Ukraine disrupts activity, investment, and trade in the near term, demand fades, and fiscal and monetary policy accommodation is withdrawn. Moreover, as a result of the damage, the level of per capita income in developing economies this year will be nearly 5 per cent below its pre-pandemic trend. This prolonged period of growth deceleration and higher inflation raises the risk of stagflation.

Although the current state of the world economy resembles the 1970s, the present-day conditions differ, as the report also puts the positive side. In today’s time, the dollar is strong, the percentage increases in commodity prices are smaller and the balance sheets of major financial institutions are generally strong. Unlike the 1970s, central banks in advanced economies and many developing economies now have clear mandates for price stability and have established credible track record of achieving their inflation targets.

The Global Economic Prospects report highlights the need for decisive global policy action to put the world economy on the right path with efforts to limit the harm from surging prices, speed up debt relief, and to expand vaccinations in low-income countries. Nations and policymakers should refrain from policies such as price controls, subsidies, and export bans, which could worsen the recent increase in commodity prices. “Reducing the risk of stagflation will require targeted and impactful measure. Limit harm to people affected by war in Ukraine. Counter spike in oil and food prices. Step up debt relief efforts. Strengthen health preparedness and speed the transition to low-carbon energy sources,” said David Malpass.

Singh Rakesh Ranjan

Freelance Journalist

(Representational Images: Sources)