The risk of a hard landing for large parts of the global economy is rising as countries struggle to cope with the triple threat of Covid-19, inflation and higher interest rates, the World fBank has said.
In its half-yearly forecasts, the Washington DC-based Bank said it expected a “pronounced slowdown” in growth in the next two years, with the less well-off parts of the world especially hard hit.
David Malpass, the World Bank’s president, called for action to reduce the debts of poor countries and said he was “very worried” about the permanent scarring of development caused by the pandemic. He said: “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.”
With the Bank predicting a slowdown in growth from 5.5% in 2021 to 4.1% this year and 3.2% in 2023, Malpass added: “Putting more countries on a favourable growth path requires concerted international action and a comprehensive set of national policy responses.”
The Bank said the rapid spread of the Omicron variant suggested the pandemic was likely to continue disrupting economic activity in the near term, while a marked deceleration in the world’s two biggest economies – the US and China – would reduce exports from 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 swathes of the world could increase the risk of a hard landing,” the report said.
Malpass said many countries were already facing an education “hard landing”, pointing out that in poor countries the number of 10-year-olds unable to read a simple text had risen from 53% to 70% in the past two years.
“Deep debt relief is needed,” Malpass said. “If we wait too long it will be too late and it won’t be successful.”
The Bank said growth in advanced economies was expected to decline from 5% in 2021 to 3.8% in 2022 and 2.3% in 2023 – a pace of expansion that would still be enough to restore output and investment to their pre-pandemic trend. By the end of next year, all advanced economies were expected to have achieved a full recovery in output.
Growth in emerging and developing economies was expected to drop from 6.3% in 2021 to 4.6% in 2022 and 4.4% in 2023, leaving output 4% below its pre-pandemic trend. For fragile and conflict-affected countries, output would be 7.5% below its pre-pandemic trend, while in small island states it would be 8.5% below.
The Bank said rising inflation – which hits low-income workers particularly hard – was 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.”
At a time when immunisation rates in the world’s poorest countries are below 10%, the World Bank said the immediate priority was to ensure vaccines were deployed more widely.
But it said there was also the need for long-term support to tackle setbacks in development progress, such as rising inequality.
“In a time of high debt, global cooperation will be essential to help expand the financial resources of developing economies so they can achieve green, resilient, and inclusive development,” said Mari Pangestu, the Bank’s managing director for development policy and partnerships.