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Following a strong rebound in 2021, 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, according to the World Bank’s latest Global Economic Prospects report. Global growth is expected to slow markedly from 5.5% in 2021 to 4.1% in 2022 and 3.2% in 2023 as pent-up demand dissipates and as fiscal and monetary support is unwound across the world.

The report cautions 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 US 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.

David Malpass (pictured), World Bank group president, 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.

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

Supply chain changes

In its assessment of global GDP growth professional services firm PwC predicts that 2022 will be the first year the Chinese economy overtakes that of the EU in market exchange rates and where the Indian output hits the US$3 trillion mark.

The firm’s latest Global Economy Watch states global GDP growth is expected to increase by around 4.5% in market exchange rates this year as global economies continue to grow, and are likely to remain resilient in the face of the Omicron variant. However, the report cautions the outlook remains highly uncertain.

Barret Kupelian, senior economist at PwC, said: “Even though the short-term outcome is highly uncertain due to the potential economic impact of Omicron, in our base case scenario we expect the larger economies to stay on their recovery path for the rest of the year with the global economy growing at around 4.5% in market exchange rates, above its long-term average rate. We are likely to see some advanced economies slow down in the first quarter of this year due to higher inflation rates, although growth is likely to pick up later.”

The report suggests the global supply chain issues which have created economic disruption throughout 2021 will ease in 2022, which will reduce inflationary pressures in the second half of the year and create extra capacity for central banks to respond to further disruption caused by the pandemic.

PwC predicts more resources will be dedicated to making supply chains more resilient and domestic, particularly for strategic industries ranging from semiconductors to car battery manufacturing, and says this will be one of the defining trends of the remainder of the decade.

Kupelian stated: “While supply chain disruption will ease, the longer-term impact will be a greater focus on ‘strategic autonomy’ where policy focuses on domestic production for key industries. The shift from the ‘just in time’ to the ‘just in case’ economy is a trend we expect to see intensify in most advanced economies this year and to continue for the remainder of the decade.”