Many countries will find it hard to avoid a recession in the coming months as Russia’s invasion of Ukraine, lockdowns in China and ongoing supply-chain issues disrupt activity and trade and accommodative monetary policy is withdrawn, the World Bank has warned.
The Washington-based institution said war in Ukraine had compounded the damage from the pandemic and “magnified” a global slowdown. It warned the global economy could be entering “a protracted period of feeble growth and elevated inflation” similar to the stagflation era of the 1970s.
In its latest Global Economic Prospects report, the bank delivered one of its bleakest assessments of the global economy in years.
Global growth is expected to slump from 5.7 per cent in 2021 to 2.9 per cent in 2022 – significantly lower than 4.1 per cent the World Bank anticipated in January. It is expected “to hover around that pace over 2023-24″, as the war in Ukraine disrupts activity, investment, and trade in the near term, pent-up demand fades, and fiscal and monetary policy accommodation is withdrawn. The bank noted that the level of per capita income in developing economies this year would be nearly 5 per cent below its pre-pandemic trend.
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“The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries recession will be hard to avoid,” World Bank group president David Malpass said. “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,” he said.
In its report the bank offers the first systematic assessment of how current global economic conditions compare with the stagflation of the 1970s.
It said the current juncture resembles the 1970s in three key aspects: “persistent supply-side disturbances fuelling inflation, preceded by a protracted period of highly accommodative monetary policy in major advanced economies, prospects for weakening growth, and vulnerabilities that emerging market and developing economies face with respect to the monetary policy tightening that will be needed to rein in inflation.”
The current period also differs from the 1970s in several aspects: the dollar is strong, the jump in commodity prices smaller, and the balance sheets of major financial institutions are generally strong.
“More importantly, unlike the 1970s, central banks in advanced economies and many developing economies now have clear mandates for price stability, and, over the past three decades, they have established a credible track record of achieving their inflation targets,” it said.
Nonetheless it warned that interest rate increases required to control inflation at the end of the 1970s were so steep that they triggered a global recession in 1982, and a string of financial crises in emerging market and developing economies.
The bank said war in Ukraine had led to a surge in prices across a wide range of energy-related commodities. Higher energy prices will lower real incomes, raise production costs, tighten financial conditions, and constrain macroeconomic policy especially in energy-importing countries, it said.
Decisive global and national policy action was required to avert the worst consequences of the war in Ukraine for the global economy.
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“This will involve global efforts to limit the harm to those affected by the war, to cushion the blow from surging oil and food prices, to speed up debt relief, and to expand vaccinations in low-income countries. It will also involve vigorous supply responses at the national level while keeping global commodity markets functioning well,” it said. While global inflation is expected to moderate next year it will likely remain above inflation targets in many economies
