World Bank’s Malpass sees risk of stagflation, likely recession in Europe

WASHINGTON: World Bank President David Malpass warned Wednesday (Sept. 28) that it could take years for global energy production to diversify away from Russia after its invasion of Ukraine, prolonging the risk of stagflation or a period of low growth and high inflation.

In a speech at Stanford University, Malpass said there was an increased likelihood of a recession in Europe, as Chinese growth slowed sharply and US economic output contracted in the first half.

These developments would have serious consequences for developing countries, Malpass said, citing what he called “consequential” and “aggravating” challenges facing development.

Dealing with the current “perfect storm” of rising interest rates, high inflation and slowing growth has required new macro and microeconomic approaches, including better targeted spending and clearly communicated efforts to increase supply, Malpass said.

Malpass said the bank’s upcoming ‘Poverty and Shared Prosperity’ report showed that decades of progress in reducing poverty slowed in 2015, even before the COVID-19 pandemic plunged an additional 70 million people. in extreme poverty.

The report, due out next week, also showed a 4% drop in global median income, the first drop since the bank started measuring the metric in 1990, he said.

“The developing world faces an extremely challenging near-term outlook, characterized by sharply rising food fertilizer and energy prices, rising interest rates and credit spreads, currency depreciation and capital outflows,” Malpass said.

“A pressing danger for the developing world is that the sharp slowdown in global growth will deepen into the global recession,” he said, noting that many of these countries were still struggling to return to per capita income levels. from before the pandemic at a time of climate intensification. change risks.

Malpass said it was unclear if there would be enough global capital to meet the needs of advanced economies – which had adopted fiscal policies that favored higher debt levels – and if there was still any left. enough to finance the investment needs of developing countries.

He urged countries to look for ways to reduce inflation beyond the highly synchronized interest rate hikes currently underway, including increasing fiscal efficiency to target spending more on the poor and vulnerable.

Such adjustments would improve the allocation of global capital, providing a pathway to reduce inflation while reviving median income growth, he said.

More funding for education, health preparedness and adaptation to climate change are urgently needed, he said, along with measures to reduce the staggering levels of debt that plague many developing countries. development.

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