World Bank predicts slower global economic growth
On Tuesday, 7th June 2022, the World Bank cut its global economic growth estimate from 4.1% predicted in January to 2.9%, a 1.2 percentage cut that can be mainly accredited to the Russia-Ukraine war. This comes after a 5.9% growth recorded in 2021.
According to the bank’s Global Economic Prospects report for June, the compounding effects of the Covid-19 pandemic and the currently ongoing war in Ukraine have significantly slowed global growth whilst elevating inflation, continuously raising the chances of global stagflation.
During the report’s release, World Bank President David Malpass said “The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hampering growth. For many countries, the recession will be hard to avoid.”
Both middle-income and low-income countries are expected to tighten their national monetary policies to curb inflation and tough economic times are expected to continue.
Global inflation is expected to peak in mid-2022, after rising sharply from its lows in mid-2020. This is credited to rebounding global demand following the Covid-19 pandemic, compounded by supply bottlenecks and soaring food and energy prices as a result of the war in Ukraine.
World Bank’s report indicates that inflation is set to remain high even when the current unfavorable conditions subside, and monetary policies are tightened further. Global growth on the other hand has been sharply declining since the beginning of the year, with expectations that the global average growth for this decade will remain lower than in the 2010s. In light of these developments, the risk of stagflation—a combination of high inflation and sluggish growth—has risen.
The June Global Economic Prospects report tries to compare current economic conditions to the stagflation in the 1970s, with a particular emphasis on how stagflation could affect emerging markets and developing economies. The recovery from the stagflation of the 1970s required steep increases in interest rates in major advanced economies, which played a prominent role in triggering a string of financial crises in emerging markets and developing economies.
However, the ongoing episode also differs from the 1970s in multiple dimensions: the dollar is strong, a sharp contrast with its severe weakness in the 1970s; the percentage increases in commodity prices are smaller, and the balance sheets of major financial institutions are generally strong.
The war in Ukraine is leading to high commodity prices, adding to supply disruptions, increasing food insecurity and poverty, exacerbating inflation, contributing to tighter financial conditions, magnifying financial vulnerability, and heightening policy uncertainty.
The report also indicated a rebound is not expected in 2023, with a forecast of 3% global growth in 2023 – mainly because factors including high commodity prices and continued monetary tightening—are expected to persist.
Moreover, the outlook is subject to various downside risks, including intensifying geopolitical tensions, growing stagflation headwinds, rising financial instability, continuing supply strains, and worsening food insecurity (World Bank).
Growth in emerging market and developing economies (EMDEs) this year has been downgraded to 3.4%, down from 6.6%, as negative spillovers from the invasion of Ukraine more than offset any near-term boost to some commodity exporters from higher energy prices. This is 1.4% lower than the average recorded growth between 2011 and 2019.
Europe and Central Asia
The adverse spillovers from the war will be most severe for Europe and Central Asia, where output is forecast to sharply contract this year. Countries in this region are highly reliant on Russia for energy needs. The war adversely disrupted the global supply chain for both energy and wheat, leading to inflation in fuel and food prices in this region.
The Middle East and North Africa
In this region, the benefits of higher energy prices for energy exporters are expected to outweigh those prices’ negative impacts on other economies in the region. However, Risks for all EMDE regions are tilted to the downside and include intensifying geopolitical tensions, rising inflation, and food shortages, financial stress and rising borrowing costs, renewed outbreaks of COVID-19, and disruptions from disasters.
Growth in advanced economies is projected to sharply decelerate from 5.1 percent in 2021 to 2.6 percent in 2022—1.2 percentage points below projections in January. Growth is expected to further moderate to 2.2 percent in 2023, largely reflecting the further unwinding of the fiscal and monetary policy support provided during the pandemic.
What does the World Bank advice moving forward?
The World Bank in its report highlights the urgent need for decisive policy action globally and nationally. This will involve global efforts to limit the harm to those affected by the war, cushion the blow from surging oil and food prices, speed up debt relief, and expand vaccinations in low-income countries. It will also involve vigorous supply responses at the national level while keeping global commodity markets functioning well.
Policymakers are further advised to refrain from policies that could worsen the increasing commodity prices. These policies include price controls, subsidies, and the banning of exports. Governments will also need to reprioritize spending toward targeted relief for vulnerable populations while being careful of the current economic conditions.