Caution signals are flashing on the global economy amid growing concerns of stagflation — slowing growth combined with high inflation.
The World Bank slashed its global growth forecast to 2.9% for 2022 from 5.7% in 2021, warning that Russia’s invasion of Ukraine has compounded the economic impact from the COVID-19 pandemic, and many countries now face the possibility of a recession. The bank also warned that the world economy could slip into a period of stagflation similar to the 1970s.
Meanwhile, a key gauge of economic growth is suggesting the U.S. economy could be on the brink of a recession. The Atlanta Federal Reserve’s GDPNow tracker is now pointing to an annualized gain of just 0.9% for the second quarter, down from an estimated 1.3% increase less than a week ago. With first quarter GDP having contracted 1.5%, a second quarter of negative growth would meet the definition of a recession.
Treasury Secretary Janet Yellen warned that the U.S. could be facing a long period of inflation. Yellen told U.S. lawmakers that the White House would likely revise upward its inflation forecast to 4.7% for this year. Last month, Yellen also warned that higher food and energy prices amid the war in Ukraine are leading to “stagflationary effects.”
“Stagflation, which is the rare combination of high inflation with economic stagnation, is no friend to the stock market, and the 1970’s in the U.S. is clear example of that. Investment strategists are already warning that a “worst case” stagflation scenario in the U.S. could lead to another 10-20% drop in the S&P 500 from current levels,” stated Caleb Silver, Editor-in-Chief of Investopedia.