- The rapid spread of the Omicron variant indicates that the pandemic will likely continue to disrupt economic activity in the near term
- A rise in inflation, debt, and income inequality is posing a danger to the recovery of emerging and developing economies
- A notable deceleration in major economies will weigh on external demand in emerging and developing economies
- Inflation, debt, and income inequality add to the uncertainty
The World Bank forecasts that global economic growth will decelerate markedly from 5.5% in 2021 to 4.1% in 2022 and 3.2% in 2023 as pent-up demand dissipates and fiscal and monetary support is unwound across the world.
In its latest Global Economic Prospects report, the financial institution warned that the global economy is headed for a pronounced slowdown amid fresh threats from COVID-19 variants and a rise in inflation, debt, and income inequality, posing danger to the recovery of emerging and developing economies.
The report said 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, it further said.
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% in 2021 to 3.8% in 2022 and 2.3% in 2023. While the pace is moderating, it 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% in 2021 to 4.6% in 2022 and 4.4% in 2023.
By 2023, all advanced economies will have achieved a full output recovery; yet output in emerging and developing economies will remain 4% 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% below its pre-pandemic trend, and output of small island states will be 8.5% 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 global recovery is set to decelerate amid continued COVID-19 flare-ups, diminished policy support, and lingering supply bottlenecks. The outlook is clouded by various downside risks, including new virus variants, unanchored inflation expectations, and financial stress. If some countries eventually require debt restructuring, the recovery will be more difficult to achieve than in the past. Climate change may increase commodity price volatility. Social tensions may heighten as a result of the increase in inequality caused by the pandemic,” said the report published this month.
“These challenges underscore the need to foster widespread vaccination, enhance debt sustainability, tackle climate change and inequality, and diversify economic activity,” it added.
Looking at the regional prospects, the World Bank said that in East Asia and Pacific, growth is projected to decelerate to 5.1% in 2022 before increasing slightly to 5.2% in 2023.
Europe and Central Asia is forecast to see growth slow to 3.0% in 2022 and 2.9% in 2023.
In Latin America and the Caribbean, growth is projected to slow to 2.6% in 2022 before increasing slightly to 2.7% in 2023.
The Middle East and North Africa will see growth accelerate to 4.4% in 2022 before slowing to 3.4% in 2023.
South Asia is projected to accelerate to 7.6% in 2022 before slowing to 6.0% in 2023.
Sub-Saharan African growth is forecast to accelerate slightly to 3.6% in 2022 and rise further to 3.8% in 2023.
