World Bank warns of a greater risk of stagflation, how will it impact bitcoin?

  • The World Bank projects a 2.9% slump in world growth in 2022.
  • The price of bitcoin could be impacted by this context, according to analysts.

The World Bank released this week a harsh prospectus on the current global economy and what the future holds. In his extensive report, the bank states that the risk of stagflation increases amid a sharp slowdown in economic growth. A discouraging projection that fills investors with uncertainty about how it will impact the stock market and the price of bitcoin.

Stagflation is known as a situation of economic stagnation with rising unemployment and inflation. According to the World Bank, this scenario is increasingly likely, with potentially damaging consequences for low- and middle-income economies.

“The war in Ukraine, lockdowns in China, supply chain disruptions, and the risk of stagflation (added to the covid-19 pandemic) are hitting growth. For many countries, the recession will be hard to avoid,” said World Bank President David Malpass.

The entity expects world growth to plummet from 5.7% to 2.9% in 2022 and continue that pace in 2023 and 2024. This is as the war in Ukraine disrupts activity, investment, and trade in the short term and pent-up demand fades and fiscal and monetary policy accommodation is withdrawn.

In addition, it indicates that, as a result of the damage caused by the pandemic and the war, the level of income per capita in developing economies will be almost 5% lower this year than its trend before the Covid-19 contingency.

“Markets look forward, so it is urgent to encourage production and avoid trade restrictions. Changes in fiscal, monetary, climate, and debt policy are needed to counter capital misallocation and inequality.

David Malpass, President of the World Bank.

Operation: save the economy from probable global stagflation

The report compares current world economic conditions with the stagflation of the 1970s. In this way, it considers that both conjunctures are similar in three key aspects.

  • First, persistent supply shortages fueling inflation, preceded by a prolonged period of highly accommodative monetary policy in major advanced economies. 
  • Second, prospects for weakening growth. 
  • And third, vulnerabilities in emerging markets and developing economies due to tightening of monetary policy to control inflation.

The World Bank recalls that the recovery from the stagflation of 1970 required strong increases in interest rates in the main advanced economies. It argues that such decisions played a prominent role in triggering a series of financial crises in emerging markets and developing economies.

As the entity wants, the European Central Bank (BCE) announced today that it plans to increase interest rates, while the United States is already doing so. This action is what different specialists indicate is generating a bearish trend in the markets in general, including bitcoin.

In this way, the entity emphasizes that stagflation could affect emerging markets and developing economies. For this reason, Ayhan Kose, the director of the World Bank’s outlook group, estimates that these countries will have to balance the need to guarantee fiscal sustainability with the need to mitigate the effects on their poorest citizens.

“Clearly communicating monetary policy decisions, leveraging credible monetary policy frameworks, and protecting central bank independence can effectively anchor inflation expectations and reduce the amount of policy tightening needed to achieve the desired effects on inflation and activity” .

Ayhan Kose, director of the World Bank’s outlook group.

World Bank projects global inflation will moderate in 2023

Regarding its comparative study, the organization makes a reservation that there are multiple dimensions that differ from the 1970s. It emphasizes that in contrast, now the dollar is strong, the percentage increases in the prices of commodities are lower and the balances of major financial institutions are generally solid.

Furthermore, what he sees as even more important is that, unlike in 1970, central banks in advanced and many developing economies now have clear mandates for price stability. And he perceives that, over the past three decades, they have established a credible track record of achieving their inflation targets.

It is for this reason that World Bank expects world inflation to moderate next year, although it warns that it is likely to be above targets in many economies. Therefore, the entity highlights the need for decisive global and national political action to avoid the worst consequences of the war in Ukraine and the rest of the contextual factors for the global economy.     

“Policymakers should refrain from distorting policies such as price controls, subsidies and export bans, which could worsen the recent surge in commodity prices,” the report states.

In this regard, it points out that, if inflation remains high, a repetition of the resolution of the previous stagflation episode could translate into a severe global recession along with financial crises in some emerging markets and developing economies.

What happens to bitcoin amid likely stagflation?

It should be noted that another differential factor of the 1970 stagflation, which the World Bank does not distinguish in its report, is the existence of bitcoin (BTC). The adoption of this decentralized cryptocurrency is growing globally, as is the interest of governments to regulate its use, thus becoming another player in the dismal economy.

That is why we will have to see how this asset works in the midst of the complex scenario projected by the World Bank. Analysts, such as Zoltan Poznar, believe that the demand for bitcoin could grow in the face of the projected recession and economic crisis, which would cause its price to rise accordingly. Probably driven by the decline in other assets, bullish speculation, the self-custody it allows, and the ease of making transfers.

Bitcoin price during 2022

Although, from a pessimistic perspective, it can be thought that, in times of economic instability, people seek refuge in non-risky assets. A scenario that could affect the adoption and price of bitcoin, which is characterized by its volatility.

In fact, several specialists have expressed that this situation is what is generating the current bearish trend in bitcoin. Although such a direction could reverse as it did during the pandemic when Bitcoin hit its all-time high. Therefore, it only remains to evaluate how the market develops little by little if the stagflation projected by the World Bank is triggered.

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