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.
Global growth is expected to decelerate to 4.1 per cent in 2022 and 3.2 per cent in 2023 from 5.5 per cent in 2021 as pent-up demand dissipates, fiscal and monetary support is unwound across the world and supply disruptions persist, the Washington-based lender said in its Global Economic Prospects report on Tuesday.
“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,” David Malpass, president of the World Bank Group, said.
“Putting more countries on a favourable growth path requires concerted international action and a comprehensive set of national policy responses.”
The damage from the Covid-19 pandemic — which unleashed the worst recession since the Great Depression in the 1930s — has been greater in middle-income and poor countries, reversing gains made in reducing poverty levels over the past two decades, a report by the World Bank in 2020 said.
The debt burden of the world’s low-income countries rose 12 per cent to a record $860 billion in 2020, according to a World Bank report last year. Even before the pandemic, many low- and middle-income countries were in a vulnerable position, with slowing economic growth and public and external debt at elevated levels, the report said.
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 could increase the risk of a hard landing in emerging markets and developing economies, the lender said.
The slowdown will coincide with a widening divergence in growth rates between advanced economies and emerging and developing economies, it added.
Growth in advanced economies is expected to decline from 5 per cent in 2021 to 3.8 per cent in 2022 and 2.3 per cent in 2023 — a pace that will be sufficient to restore output and investment to pre-pandemic levels.
However, growth in emerging and developing economies is expected to drop from 6.3 per cent in 2021 to 4.6 per cent in 2022 and 4.4 per cent in 2023 as the continuing withdrawal of macroeconomic support, together with Covid-19 flare-ups amid the spread of the Omicron variant and continued vaccination obstacles weigh on the recovery of domestic demand, the World Bank said.
Meanwhile, the Middle East and North Africa region experienced a strong economic recovery in the second half of 2021, bringing output back to pre-pandemic levels in some economies, the report found.
Growth in the Mena region is forecast to accelerate to 4.4 per cent in 2022, driven by a recovery in contact-intensive sectors, lower oil production cuts and a generally accommodative policy environment, according to the lender. However, growth in the region is expected to slow to 3.4 per cent in 2023, the World Bank said.
Further Covid-19 outbreaks, social unrest, high debt in some economies and conflict could undermine economic activity in Mena, it added. Changes to oil prices could also undermine activity in the region with gains and losses accruing differently for oil importers and exporters.
By 2023, all advanced economies are expected to have achieved a full output recovery. However, output in emerging and developing economies will remain 4 per cent below the pre-pandemic trend, the World Bank said. Output of fragile and conflict-affected economies will be 7.5 per cent below pre-pandemic levels and output of small island states will be 8.5 per cent below, it added.
“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. “In a time of high debt, global co-operation will be essential to help expand the financial resources of developing economies so they can achieve green, resilient and inclusive development.”
Mr Malpass emphasised the importance of debt transparency and sustainability to foster growth amid a growing debt burden among low-income countries.
Nearly 60 per cent of low-income countries are already in debt distress and many emerging markets are struggling as well, he added.
It presents “developing countries with immense challenges brought from exchange rates, inflation, debt sustainability and economic growth.
“In 2022 alone, IDA [International Development Association] countries will have to prepare around $35bn in debt service to their official bilateral and private sector creditors.”
“Deep debt relief is much needed for the poor countries” and if we wait too long, it will be too late, Mr Malpass said. He also urged to have a debt reconciliation process.
“We have to work towards rebalancing the creditor and debtor powers in sovereign debt restructuring. There's the possibility of including, for example, an aggregated collective action clause in all new official sector and private sector debt and debt equivalent instruments,” he added.
Emerging and developing economies will also need to carefully calibrate fiscal and monetary policies, as well as undertake reforms to erase the scars of the pandemic, according to Ayhan Kose, director of the World Bank’s prospects group.
“These reforms should be designed to improve investment and human capital, reverse income and gender inequality and cope with challenges of climate change,” Mr Kose said.