WASHINGTON - Following a strong rebound in 2021, the global economy is
entering a pronounced slowdown amid fresh threats from COVID-19 variants and a
rise in inflation, debt, and income inequality that could endanger the recovery
in emerging and developing economies, according to the World Bank’s
latest Global Economic Prospects report. Global growth is expected to
decelerate markedly from 5.5 percent in 2021 to 4.1 percent in 2022 and 3.2
percent in 2023 as pent-up demand dissipates and as fiscal and monetary support
is unwound across the world.
The rapid
spread of the Omicron variant indicates that the pandemic will likely continue
to disrupt economic activity in the near term. In addition, a notable
deceleration in major economies—including the United States and China—will
weigh on external demand in emerging and developing economies. At a time when
governments in many developing economies lack the policy space to support
activity if needed, new COVID-19 outbreaks, persistent supply-chain bottlenecks
and inflationary pressures, and
elevated financial vulnerabilities in large swaths of the world could increase
the risk of a hard landing.
“The world economy is simultaneously
facing COVID-19, inflation, and policy uncertainty, with government spending
and monetary policies in uncharted territory. Rising inequality and security
challenges are particularly harmful for developing countries,” said World
Bank Group President David Malpass. “Putting more countries on a favorable
growth path requires concerted
international action and a comprehensive set of national policy responses.”
The slowdown
will coincide with a widening divergence in growth rates between advanced
economies and emerging and developing economies. Growth in advanced economies
is expected to decline from 5 percent in 2021 to 3.8 percent in 2022 and 2.3
percent in 2023—a pace that, while moderating, will be sufficient to restore output
and investment to their pre-pandemic trend in these economies. In emerging and
developing economies, however, growth is expected to drop from 6.3 percent in
2021 to 4.6 percent in 2022 and 4.4 percent in 2023. By 2023, all advanced
economies will have achieved a full output recovery; yet output in emerging and
developing economies will remain 4 percent below its pre-pandemic trend. For
many vulnerable economies, the setback is even larger: output of fragile and
conflict-affected economies will be 7.5 percent below its pre-pandemic trend,
and output of small island states will be 8.5 percent below.
Meanwhile,
rising inflation—which hits low-income workers particularly hard—is
constraining monetary policy. Globally and in advanced economies, inflation is
running at the highest rates since 2008. In emerging market and developing
economies, it has reached its highest rate since 2011. Many emerging and
developing economies are withdrawing policy support to contain inflationary
pressures—well before the recovery is complete.
The
latest Global Economic Prospects report features analytical sections
that provide fresh insights into three emerging obstacles to a durable recovery
in developing economies. The first, on debt, compares the latest international
initiative to tackle unsustainable debt in developing economies—the G20 Common
Framework—with previous coordinated initiatives to facilitate debt relief.
Noting that COVID-19 pushed total global debt to the highest level in half a
century even as the creditors’ landscape became increasingly complex, it finds
that future coordinated debt relief initiatives will face higher hurdles to
success. Applying lessons from the past restructurings to the G20 Common
Framework can increase its effectiveness and avoid the shortcomings faced by
earlier initiatives.
“The choices
policymakers make in the next few years will decide the course of the next
decade,” said Mari Pangestu, the
World Bank’s Managing Director for Development Policy and Partnerships. “The
immediate priority should be to ensure that vaccines are deployed more widely
and equitably so the pandemic can be brought under control. But tackling
reversals in development progress such as rising inequality will require
sustained support. In a time of high debt, global cooperation will be essential
to help expand the financial resources of developing economies so they can
achieve green, resilient, and inclusive development.”
The
second analytical section examines the implications of boom-and-bust cycles of
commodity prices for emerging market and developing economies, most of which
are heavily dependent on commodity exports. It finds that these cycles were
particularly intense in the past two years, when commodity prices collapsed
with the arrival of COVID-19 and then surged, in some cases to all time-highs
last year. Global macroeconomic developments and commodity supply factors will
likely cause boom-bust cycles to continue in commodity markets. For many
commodities, these cycles may be amplified by the forces of climate change and
the energy transition away from fossil fuels. The analysis also shows that
commodity-price booms since the 1970s have tended to be larger than busts,
creating significant opportunities for stronger and more sustainable growth in
commodity-exporting countries—if they employ disciplined policies during booms
to take advantage of windfalls.
The third
analytical section explores COVID-19’s impact on global inequality. It finds
that the pandemic has raised global income inequality, partly reversing the
decline that was achieved over the previous two decades. It has also increased
inequality in many other spheres of human activity—in the availability of
vaccines; in economic growth; in access to education and health care; and in
the scale of job and income losses, which have been higher for women and
low-skilled and informal workers. This trend has the potential to leave lasting
scars: for example, losses to human capital caused by disruptions in education
can spill over across generations.
Ayhan Kose, Director of the World Bank’s Prospects Group, said: “In light of the projected slowdown in output and investment growth, limited policy space, and substantial risks clouding the outlook, emerging and developing economies will need to carefully calibrate fiscal and monetary policies. They also need to undertake reforms to erase the scars of the pandemic. These reforms should be designed to improve investment and human capital, reverse income and gender inequality, and cope with challenges of climate change.”
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