…Coincide with a widening divergence in growth rates between advanced economies and emerging/developing economies

The World Bank is reporting that 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.

The World Bank said that, following a strong rebound in 2021, global growth is expected to decelerate markedly from 5.5 per cent in 2021 to 4.1 per cent in 2022 and 3.2 per cent in 2023. This is happening as pent-up demand dissipates and as fiscal and monetary support is unwound across the world.

In its latest Global Economic Prospects report, the multilateral funding agency says 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, the World Bank has assessed that 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.

Widening difference in growth rates expected

It says the slowdown will coincide with a widening divergence in growth rates between advanced economies and emerging and developing economies. Growth in advanced economies, the World Bank says, is expected to decline from five per cent in 2021 to 3.8 per cent in 2022 and 2.3 per cent in 2023 – a pace that, while moderate, will be sufficient to restore output and investment to their pre-pandemic trend in these economies.’

In emerging and developing economies, the World Bank projects that growth 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. By 2023, all advanced economies will have achieved a full output recovery; yet output in emerging and developing economies will remain four per cent below its pre-pandemic trend.

According to the World Bank, for many vulnerable economies, the setback is even larger: output of fragile and conflict-affected economies will be 7.5 per cent below its pre-pandemic trend, and output of small island states will be 8.5 per cent 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.

Analysis into emerging obstacles

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.

The report notes that COVID-19 has pushed total global debt to the highest level in half a century, even as the creditors’ landscape became increasingly complex, arguing that future coordinated debt relief initiatives will face higher hurdles to success. Applying lessons from the past restructurings to the G20 Common Framework, the World Bank contends can increase its effectiveness and avoid the shortcomings faced by earlier initiatives.

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 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 such as the availability of vaccines, economic growth, 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, it says has the potential to leave lasting scars citing the example of losses to human capital caused by disruptions in education can spill over across generations.