Causes of depression? “The war in Ukraine, shutdowns in China, supply chain disruptions and the threat of stagflation are undermining growth,” Malpass said in the World Bank’s latest forecast on Tuesday.
Investors are concerned about the fact that the Federal Reserve is aggressively raising interest rates in an attempt to curb rising prices. But the problem is that some fear the Fed is too late to start its anti-inflation campaign. As a result, the central bank could cause a recession as it rushes to catch up with interest rate hikes.
The prospect of higher short-term interest rates from the Fed has already led to a significant rise in long-term Treasury yields this year. Mortgage rates have also jumped, leading to fears that the housing market will slow significantly.
Companies are also grappling with rising costs of goods and wages, and they now have to contend with higher interest rates that are likely to hurt their bottom line as well.
Add all that and it will be easy to see why the World Bank is increasingly nervous. The International Lending Organization now expects the global economy to grow at an annualized pace of just 2.9% this year. This is a sharp drop from last year’s 5.7% growth rate as well as the World Bank’s January 2022 forecast of 4.1%.
“Recovering from stagflation of the 1970s required sharp interest rate increases in major advanced economies, which played a prominent role in triggering a series of financial crises in emerging market and developing economies,” the World Bank said in its new forecast.
The World Bank does not expect a major recovery anytime soon. She said global growth should “hover around” the 2.9% level for the next two years and 2024, describing the next few years as a “prolonged period of weak growth and high inflation.”