Recession fears as Ukraine hits global growth forecast
WORLD BANK PREDICTS SLOWER INDIA RATE OVER SUPPLY CHAIN DISRUPTIONS
THE World Bank on Tuesday (7) slashed its global growth forecast by nearly a third to 2.9 per cent for 2022, warning that Russia’s invasion of Ukraine has compounded the damage from the Covid-19 pandemic, and many countries now faced recession.
The war in Ukraine had magnified the slowdown in the global economy, which was now entering what could become “a protracted period of feeble growth and elevated inflation,” the bank said in its Global Economic Prospects report, warning that the outlook could yet grow worse. In a news conference, World Bank president David Malpass said global growth could fall to 2.1 per cent in 2022 and 1.5 per cent in 2023, driving per capita growth close to zero, if downside risks materialised.
Malpass said global growth was being hammered by the war, fresh Covid lockdowns in China, supply-chain disruptions and the rising risk of stagflation - a period of weak growth and high inflation last seen in the 1970s.
“The danger of stagflation is considerable today,” Malpass wrote in the foreword to the report.
“Subdued growth will likely persist throughout the decade because of weak investment in most of the world. With inflation now running at multi-decade highs in many countries and supply expected to grow slowly, there is a risk that inflation will remain higher for longer.”
Between 2021 and 2024, the pace of global growth is projected to slow by 2.7 percentage points, Malpass said, more than twice the deceleration seen between 1976 and 1979.
India’s economic growth forecast for the current fiscal was cut to 7.5 per cent as rising inflation, supply chain disruptions and geopolitical tensions taper recovery. The GDP growth compares to an 8.7 per cent expansion in the previous 2021-22 fiscal.
“In India, growth is forecast to edge down to 7.5 per cent in the fiscal year 2022/23, with headwinds from rising inflation, supply chain disruptions, and geopolitical tensions offsetting buoyancy in the recovery of services consumption from the pandemic,” the bank said.
Growth, it added, will also be supported by fixed investment undertaken by the private sector and by the government, which has introduced incentives and reforms to improve the business climate. This forecast reflects a 1.2 percentage point downward revision of growth from the January projection, the bank added.
“Growth is expected to slow further to 7.1 per cent in 2023-24 back towards its longer-run potential,” it noted.
High inflation prompted the Reserve Bank to hold an unscheduled meeting to raise the benchmark interest rate by 40 basis points to 4.40 per cent last month.
Another hike is expected on Wednesday (8), after Eastern Eye went to press.
The bank’s report also warned that interest rate increases required to control inflation at the end of the 1970s were so steep that they touched off a global recession in 1982, and a string of financial crises in emerging market and developing economies. Ayhan Kose, director of the World Bank unit that prepares the forecast, told reporters there was “a real threat” that faster than expected tightening of financial conditions could push some countries into the kind of debt crisis seen in the 1980s.
While there were similarities to conditions back then, there were also important differences, including the strength of the US dollar and generally lower oil prices, as well as generally strong balance sheets at major financial institutions.
To reduce the risks, Malpass said, policymakers should work to coordinate aid for Ukraine, boost production of food and energy, and avoid export and import restrictions that could lead to further spikes in oil and food prices.
He also called for efforts to step up debt relief, warning that some middleincome countries were potentially at risk; strengthen efforts to contain Covid; and speed the transition to a low-carbon economy. The bank forecast a slump in global growth to 2.9 per cent in 2022 from 5.7 per cent in 2021, a drop of 1.2 percentage points from its January forecast, and said growth was likely to hover near that level in 2023 and 2024.
It said global inflation should moderate next year but would likely remain above targets in many economies.
Growth in advanced economies was projected to decelerate sharply to 2.6 per cent in 2022 and 2.2 per cent in 2023 after hitting 5.1 per cent in 2021.
US growth was seen dropping to 2.5 per cent in 2022, down from 5.7 per cent in 2021, with the euro zone to see growth of 2.5 per cent after 5.4 per cent.
Emerging market and developing economies were seen achieving growth of just 3.4 per cent in 2022, down from 6.6 per cent in 2021, and well below the annual average of 4.8 per cent seen in 2011-2019. China’s economy was seen expanding by just 4.3 per cent in 2022 after growth of 8.1 per cent in 2021.
Negative spillovers from the war in Ukraine would more than offset any near-term boost reaped by commodity exporters from higher energy prices, with 2022 growth forecasts revised down in nearly 70 per cent of emerging markets and developing economies.
The Middle East and North Africa would benefit from rising oil prices, with growth seen reaching 5.3 per cent in 2022 before slowing to 3.6 per cent in 2023, while south Asia would see growth of 6.8 per cent this year and 5.8 per cent in 2023.