The World Bank Sounds The Stagflation Alarm Bell: What You Need To Know

Current economic conditions most closely resemble the stagflation era of the 1970s, and the risk of a global recession as a result is growing larger every day, according to the World Bank in the latest edition of its semiannual Global Economic Prospects report.

The World Bank issued the dire warning Tuesday morning, citing the toll on the economy of ongoing war in Ukraine, crippling supply chain hitches, Chinese coronavirus-related lockdowns, and the spiking prices of gas and food.

A cascade of problems is “hammering growth,” David Malpass, president of the 189-member-country institution that attempts to set policy and add financial stability to developing and emerging nations, said in a statement. “For many countries, recession will be hard to avoid.”

What does the World Bank project for the global economy in the near future?

The international finance agency predicts global economic growth to be nearly halved compared to last year, a drop from 5.7% growth in 2021 to a projected 2.9% for 2022. That represents a dramatic downturn in the World Bank’s forecast compared to the 4.1% growth figure it estimated at the start of the year. For 2023, the agency predicts “essentially no rebound,” projecting a flat 3% growth rate for the global economy.

Is inflation still getting worse?

Inflation appears to have either peaked recently or will peak in the coming weeks, the World Bank reports. Monetary policy decisions in the coming few months may be viewed through the prism of how quickly inflation recedes from its peak.

What is stagflation?

Stagflation was coined as a term in the 1970s to describe the environment wherein an upward spiral on consumer price inflation, especially for energy, collided with economic stagnation. It presents a seemingly intractable challenge in monetary policy, which generally responds to inflation by attempting to slow economic growth and risks inflation when it attempts to boost economic growth. 

Why is stagflation potentially happening now?

For much of the developed world, the economy recovered remarkably quickly from the pandemic-induced recession of 2020. Loose monetary policy succeeded in keeping financial markets liquid, but recovering consumer demand was met by a global supply chain still riddled with delays and bottlenecks, causing inflation to begin accelerating at a worrying rate late in 2021. But just as the Federal Reserve stepped in to begin raising interest rates, Russian military forces launched an invasion of Ukraine that was more brutal and more impactful globally than virtually any economic projections had accounted for.

From the World Bank report: “The invasion of Ukraine represents an additional supply shock to a global economy still recovering from the pandemic. The associated physical and logistical disruptions and the ensuing sharp rise in commodity prices are driving inflation higher and weighing on activity, exacerbating the pre-existing strains from the pandemic on the global economy. The war has also eroded confidence and heightened risk aversion, contributing to weaker trade and investment as firms seek to hedge against adverse outcomes.” 

What happened to CRE the last time there was stagflation?

The 1970s, especially the latter half of the decade, saw the creation of the modern commercial real estate industry as we know it, with unprecedented booms in nonresidential construction, especially among office and retail buildings. Commercial property outperformed the broader economy in the late 1970s, causing financial institutions to dole out loans to the industry at high velocity and with looser loan terms. 

According to some economic studies of the period, the elevated availability and low cost of capital led to overbuilding, and the resultant drop in property values helped cause the implosion of many banks in the 1980s and into the 1990s. Seen through a commercial real estate lens, it was the hawkish economic policy of the Federal Reserve and other central banks in the 1980s that sent the industry into decline, CBRE Global Chief Economist Richard Barkham told Bisnow.

“It’s not inflation, but the cure for inflation that kills real estate,” Barkham said.

Is a recession around the corner?

Very possibly, though even under the label of a recession, a wide range of outcomes is possible. If the price of energy products and food continues to rise because of a continuation or escalation of the Russia-Ukraine war or Covid-19 shutdowns in China, inflation could worsen again even as the global economy slows down. Should developing countries that produce and export key resources, such as the rare earth minerals needed for much modern technology and mined in Central Africa, impose price controls or export caps, that could cause another supply shock that adds to upward pressure on inflation.

If any of those situations come to pass, the Federal Reserve and its analogs across the developed world might feel forced to raise interest rates even more than is currently expected. That would likely trigger a deep recession, the World Bank reports.

If the Fed holds to current expectations that interest rates will top out around 3%, the commercial real estate industry can absorb that kind of a hit, even if it does create a period of stagflation, Barkham said.

“If the Fed pushes [interest rates] up to 5%, that will be very bad for real estate,” he said. “The Fed doesn’t think it’ll have to do that, and we don’t think that either, but we’ve been a bit poor as an industry in the past 18 months in projecting inflation.”