World Bank warns of ‘pronounced slowdown’ over inflation and Covid variants

The global economy will experience "a pronounced slowdown" this year after the a strong rebound in 2021, amid fresh threats from Covid-19 variants and a rise in inflation, debt, and income inequality, the World Bank has warned.

In its latest Global Economic Prospects report, the Washington-based institution said the rapid spread of the Omicron variant indicated that the pandemic was far from over and was likely continue to disrupt economic activity in the near term.

A "notable deceleration" in major economies – including the United States and China – was also likely to weigh on external demand, particularly for emerging and developing economies.

Slowing growth

It also warned that surging inflation rates meant many countries were withdrawing policy supports “well before” the recovery is complete.

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The agency expects global growth to slow from 5.5 per cent in 2021 to 4.1 per cent this year and to 3.2 per cent in 2023 “as pent-up demand dissipates and as fiscal and monetary support is unwound across the world”.

“The slowdown will coincide with a widening divergence in growth rates between advanced economies and emerging and developing economies,” it said.

Growth in advanced economies is expected to decline from 5 per cent in 2021 to 3.8 per cent in 2022 and 2.3 per cent in 2023 – a pace that, while moderating, 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 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 4 per cent below its pre-pandemic trend,” it said.

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.

In its report, the bank pinpoints three potential obstacles to an enduring recovery from the pandemic: debt; the boom-and-bust cycles of commodity prices; and global inequality.

Debt

It noted that Covid-19 had pushed total global debt to the highest level in half a century, suggesting “that future coordinated debt relief initiatives will face higher hurdles to success”.

It also highlighted that commodity price swings were being amplified by the forces of climate change and the energy transition away from fossil fuels.

"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," said World Bank group president David Malpass.

“Putting more countries on a favourable growth path requires concerted international action and a comprehensive set of national policy responses,” he said.