In a report that slashed global economic outlook, World Bank President David Malpass warns of danger ahead. With high inflation and sluggish growth, stagflation reminiscent of the 1970’s could be on the horizon.

Fox Business/Megan Henney
World Bank slashes global economic outlook, warning of 1970s-style stagflation risk

The global economy is in an increasingly precarious position, with the odds of a recession growing as large and small nations alike confront the dangerous combination of high inflation and slow growth, the World Bank warned Tuesday.

Fallout from the Russian war in Ukraine, ongoing supply chain disruptions, pandemic-related lockdowns in China and the soaring price of food and energy is dealing a major setback to economic growth across the world, the Washington-based institution said in its latest edition of the Global Economic Prospects report.

“The world economy is again in danger,” World Bank President David Malpass wrote in the report. “It is facing high inflation and slow growth at the same time. Even if a global recession is averted, the pain of stagflation could persist for several years – unless major supply increases are set in motion.” 

The World Bank cut its estimate for global growth this year to 2.9% – a sharp drop from its January projection of 4.1% and its April forecast of 3.25% – in its grim new outlook, citing the surge in energy and food prices, supply disruptions from the Russian invasion of Ukraine and a push by central banks globally to aggressively tighten monetary policy.

Growth is expected to remain sluggish in 2023, below the average recorded in the previous decade. Few countries are immune to the inflation shock: In the U.S., growth is forecast to slow to 2.5% this year. China’s growth is also expected to slow to 4.3%, down from 8.1% in 2021.

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CNBC/Jeff Cox
Fed GDP tracker shows the economy could be on the brink of a recession

A widely followed Federal Reserve gauge is indicating that the U.S. economy could be headed for a second consecutive quarter of negative growth, meeting a rule-of-thumb definition for a recession.

In an update posted Tuesday, the Atlanta Fed’s GDPNow tracker is now pointing to an annualized gain of just 0.9% for the second quarter.

Following a 1.5% drop in the first three months of the year, the indicator is showing the economy doesn’t have much further to go before it slides into what many consider a recession.

GDPNow follows economic data in real time and uses it to project the way the economy is heading. Tuesday’s data, combined with other recent releases, resulted in the model downgrading what had been an estimate of 1.3% growth as of June 1 to the new outlook for a 0.9% gain.

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Yahoo Finance/Yaseen Shah
Inflation: ‘I don’t think the Fed can solve it alone,’ strategist says

At next week’s Federal Open Market Committee (FOMC) meeting, investors are anticipating the Fed to hike interest rates by an additional 50 basis points. In May, the Fed upped rates by a full half-percentage point — the biggest hike since 2000 — in an effort to cool soaring inflation.

But the Fed hiking rates or tapering its balance sheet is “likely to have [a] minimal impact” on macroeconomic headwinds, PNC Asset Management Chief Information Officer Amanda Agati told Yahoo Finance Live.

“At this point, we have to be really realistic about what the Fed’s policy tools in the toolkit can actually do, given the perfect storm of macro headwinds that this global economy is facing. The Fed is very much used to tightening policy in response to an overheating economy. But I think what’s interesting this time around is, we’re already in a slowing expansion phase of the cycle,” she said.

The Russian invasion of Ukraine pressuring global commodities, coupled with China’s lockdowns and zero-Covid policy are part of the story for rising consumer prices, Agati said. “Until we start to see some of these other forces take some of the inflationary fire out of the backdrop, I don’t think the Fed can solve it alone,” she added.

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