Risk Of Repeating 1970s Stagflation, Warns World Bank's Latest Report

World Bank (WB) released its Global Economic Prospects report on June 7, 2022, with the premonition of a repeat 1970s stagflation. Taking into account the Covid-19 pandemic lockdowns and waves and the Russian invasion of Ukraine, WB has decreased its previous expectation of global economic growth from 5.7 per cent to 2.9 per cent for Financial Year (FY) 2022-23.

"The war in Ukraine, lockdowns in China, supply-chain disruptions, and stagflation risk hampering growth. For many countries, the recession will be hard to avoid," remarked David Malpass, President of World Bank, in the latest report.

The Great Stagflation Of The 1970s

Stagflation occurs when inflation is very high, and the economic growth of a country is in slumps, alongside high unemployment. It combines the words 'stagnant' and 'inflation'. Stagnation can occur when the whole economy faces a supply deficit or shock, such as crude oil prices rising.

The United Kingdom (UK) faced a challenging economic decision in the 1960s and 70s. The government failed to control inflation through monetary policies and inaccurately assessed the 'degree of excess demand' in the economy. This fault was not limited to the UK and is noted to be prevalent in seven significant world economies from 1973 to 1982.

Are We Going Backwards In History?

The World Bank lists three primary similarities between the 1970s and the contemporary world. Firstly, continuous supply chain disruptions are causing high inflation. Secondly, when governments are looking out for their citizens through accommodating monetary policies, which leads to slow economic growth, developing and low-income nations might become vulnerable if they try to control inflation through non-monetary policies.

Indian Context

World Bank diminished the world's economic growth and slashed its previous economic growth prediction for India to 7.5 per cent in June from 8 per cent in April, as reported by The Hindu.

V Anantha Nageswaran, Chief Economic Adviser, mentioned on May 31, 2022, that the Indian economy is doing better than other nations. He said that the domestic sector would be able to support economic growth, the recovery would gather momentum, and the private sector would soon push the economy forward, as reported by Business Today.

However, he claimed "there may be the possible impact of summer heatwaves on vegetable prices in the coming months,' keeping inflation rates a bit high. Nevertheless, a good amount of monsoon in the upcoming months should be able to resurrect the agriculture sector and primary output with better government support policies. He further added that the key focus of the Indian economy would be to balance economic growth, inflation and current fiscal deficits, forex reserves and currency value globally.

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