One in the middle of the world economy Sudden slowness Accompanied by a steep run-up Global inflation At the height of many decades. These developments are similar to what the world suffered in the 1970s – the coincidence of weak growth and high inflation – raising concerns about stagnation. This experience should be wary of losses in emerging markets and developing economies (EMDEs). The Inflation That era ended with a global recession and a series of financial crises at EMDE. In light of the lessons of that stagnation episode, these economies need to quickly rethink policies to deal with the consequences of rapidly tightening the global financing situation.
Inflation and growth: moving in the opposite direction
In May 2022, Global inflation (8.1 percent) and EMDE inflation (9.4 percent) were at their highest level since 2008. Inflation in developed economies has reached record highs in the last four decades. As the recent push for fuel and food prices eased, supply disruptions eased and financial conditions tightened, global inflation is expected to fall to around 3 percent next year. But it will still be about 1 percentage point higher than its average in 2019, before the epidemic reverses the world.
After the collapse 2020 is the time of world recession, Global growth is projected at 5.7 percent in 2021, supported by unprecedented fiscal and monetary policy accommodation. However, now growth is expected to slow 2.9 percent in 2022, with slight changes in 2023-24 Because of the war in Ukraine, the fading of paint-up demand, and the withdrawal of policy support in the face of high inflation. Outside of the near future, global growth is expected to slow in the 2020s, which reflects The trend is weak The basic driver of growth.
The slower the growth, the worse the inflation (still)
The current juncture is similar to that of the early 1970s in three important respects:
- High inflation and weak growth. The world economy has emerged from the epidemic-related global recession of 2020, just as it did during the post-recession stagnation of 1975. In 1973-83, global inflation averaged 11.3 percent a year, more than tripling. Between 1962-72 an average of 3.6 percent per year. Since the global recession of 2020 caused by the Covid-19 epidemic, while inflation has eased less since the recession of 1975, the expected growth slowdown is much greater. Between 2021 and 2024, global growth is projected to decline by 2.7 percentage points, more than doubling between 1976 and 1979 (Figure 1).
- Prolonged monetary policy shocks supply after accommodation. Disruption of supply driven by epidemics and recent Supply shock Dealing with global fuel and food prices as a result of Russia’s aggression in Ukraine is like the 1973 and 1979-80 oil shocks. The rise in energy prices in the 1970s and 2020-22 has formed the biggest change in prices in the last 50 years. Then and now, Monetary policy In general these pushes were extremely useful in the race, with interest rates being negative in the real sense for several years.
- Significant weaknesses in emerging markets and developing economies (EMDEs). In the 1970s and early 1980s, as at present, high debt, high inflation and weak revenue positions weakened the EMDE to tighten financial conditions. The stagnation of the 1970s coincided with the first The global wave of debt The low global real interest rates accumulated over the past half century and the rapid development of the syndicated debt market have encouraged the growth of EMDE debt, especially in Latin America and many low-income countries. The decade of 2010 showed the fourth (and current) wave of global debt savings, involving the largest, fastest, and most broad-based increase in government debt by EMDE in the last 50 years. Many LICs are already in or near the debt crisis The sheer scale and speed of debt formation increases the associated risk.
Figure 1. Development in the 1970s and 2020s: Mill
A. Growth slows after global recession
B. CPI inflation
C. Actual interest rate
D. Changes in food and energy prices
Sources: Federal Reserve Economic Data; Haver Analytics; World Bank.
Note: CPI = Consumer Price Index; EMDEs = emerging markets and developing economies. A. Figure shows the change (in percentage points) of global growth between 2021-24 and 1976-79; Across three years after returning from a global recession; B. Annual average (average 66 countries) of headline and core CPI inflation in the United States and worldwide. 2022 based on the average of January to May 2022; C. The figure shows nominal and real (CPI-adjusted) short-term interest rates (Treasury bill rates or money market rates, with maturities of three months or less). Global interest rates are weighed by GDP in US dollars. There are 113 countries in the sample, although the sample size varies from year to year; D. Percentage change in monthly energy and food price index over a period of 24 months. Due to data constraints, prior to 1979, energy price changes were proxy using oil price changes.
Critical differences from the 1970s
Although the similarities described above are worrying, there are significant cyclical and structural differences between the 1970s and the current situation. This means that the world economy can still avoid a repeat of that stagnation.
- Small push. At least so far, the level of commodity inflation is lower than in the 1970s. For now, global inflation in 2022 is still less broad-based than in 1970, and core inflation has remained moderate in many countries, although it has recently increased.
- More credible monetary policy framework. Monetary policy structure There has been a growing focus on price stability over time. In the 1970s, central banks often faced competitive objectives — objectives for high output and employment as well as price stability. In contrast, the central banks of developed economies and many EMDEs now have clear orders for price stability, usually expressed as a clear inflation target (Figure 2). As policy policies have improved and inflation expectations have improved, inflation – especially core inflation – has become much less sensitive to inflation surprises.
- More flexible economy. The 1970s were a time of considerable structural economic rigidity, many of which have evolved since then. With today’s greater economic flexibility, less centralized wage fixing and less financial repression, allowing prices to respond particularly quickly to faster supply and demand and reducing the likelihood of price-wage spirals. In addition, the energy intensity of GDP has declined significantly since the 1970s, making the economy more resilient to pushing energy prices (World Bank 2022a)
- Less financial accommodation. The 1960s and 1970s were marked by expansionary revenue policy. In contrast, fiscal policy is expected to tighten in the coming years as governments withdraw unprecedented financial assistance provided during the epidemic.
Figure 2. Development in the 1970s and 2020s: Differences
A. Number of countries with inflation targets
B. Flexibility of the labor market
C. Expectations of US inflation
D. Intensity of global power
Note: TOE = ton of oil equivalent. A. Based on the clarification of the IMF annual report on exchange arrangements and exchange restrictions and country-specific sources; B. Collective bargaining rate indicates the percentage of employees with bargaining power. The concentration rate of a trade union indicates the number of union members as a percentage of total employees. The sum is based on the medium across a balanced set of 25 economies; CUS Consumer Inflation Expectations Based on April 2022 University of Michigan Survey; D. Energy includes coal, natural gas and oil. TOE means ton (metric ton) is equivalent to oil. The sum calculated using GDP weight at the average 2010-19 price and market exchange rate.
A slow response to serious risk
Concerns about persistent inflation have already led central banks in most developed economies and many EMDEs to tighten monetary policy in the midst of a sharp growth recession. Despite this austerity, as of May 2022, the actual policy rate (adjusted by actual inflation) remains deeply negative in the average developed economy (-5.2 percent) and the average EMDE (-3.2 percent).
If inflation expectations are de-anchored, as they did in the 1970s, due to persistently higher inflation and repeated inflationary pressures, the interest rate hikes needed to target inflation in developed economies will be higher than currently expected by financial markets. This suggests a sharp rise in interest rates, which brought inflation under control but also triggered a global recession in 1982. The financial crisis And many have marked a long period of weak growth in EMDE.
If the current stagnant pressure intensifies, EMDEs may again face economic crisis because of their less weakly anchored inflation expectations, improved fiscal weakness and the prospect of declining growth. This makes it imperative for their governments to implement structural policies to prevent potential contagion to their financial and external buffers, strengthen their monetary policy framework to reduce policy uncertainty, and revive growth.