A restaurant in Milan last month. Growth in Europe is forecast to slow to 2.5 per cent this year. Photo / Alessandro Grassani, The New York Times
A restaurant in Milan last month. Growth in Europe is forecast to slow to 2.5 per cent this year. Photo / Alessandro Grassani, The New York Times
"For many countries, recession will be hard to avoid," David Malpass, head of the bank, said.
For large and small nations around the globe, the prospect of averting a recession is fading.
That grim prognosis came in a report Wednesday from the World Bank, which warned that the grinding warin Ukraine, supply chain chokeholds, Covid-19-related lockdowns in China, and dizzying rises in energy and food prices are exacting a growing toll on economies all along the income ladder. This suite of problems is "hammering growth," David Malpass, the bank's president, said in a statement. "For many countries, recession will be hard to avoid."
World growth is expected to slow to 2.9 per cent this year from 5.7 per cent in 2021. The outlook, delivered in the bank's Global Economic Prospects report, is not only darker than one produced six months ago, before Russia's invasion of Ukraine, but also below the 3.6 per cent forecast in April by the International Monetary Fund.
Growth is expected to remain muted next year. And for the remainder of this decade, it is forecast to fall below the average achieved in the previous decade.
Other than a handful of oil-exporting nations such as Saudi Arabia, which are benefiting from prices above US$100 a barrel, there is barely a spot on the globe that has not seen its outlook dim. Among the most advanced economies like the United States and Europe, growth is forecast to slow to 2.5 per cent this year.
China, the second-largest economy and the engine of much of the world's increasing prosperity in recent decades, is projected to see growth drop to 4.3 per cent from 8.1 per cent in 2021.
Emerging nations will experience the harshest setback, with the blows from the pandemic and the Ukraine war still reverberating. The poorest nations will grow poorer, hungrier and less secure.
Roughly 75 million more people will face extreme poverty than were expected to before the pandemic.
Per capita income in developing economies is also expected to fall 5 per cent below where it was headed before the pandemic hit, the World Bank report said. At the same time, government debt loads are getting heavier, a burden that will grow as interest rates increase and raise the cost of borrowing.
"In Egypt more than half of the population is eligible for subsidised bread," said Beata Javorcik, chief economist at the European Bank for Reconstruction and Development. "Now, that's going to be much more expensive for government coffers, and it's happening where countries are already more indebted than before."
People eat dinner at a restaurant in Beijing after the easing of Covid restrictions, which have damaged China's economy. Photo / AP
In some ways, the bank said, the economic threats mirror those in the 1970s, when spiraling oil shocks followed by rising interest rates caused a paralysing stagflation, or a menacing combination of high prices and low growth. That combination of events triggered a series of financial crises that rocked developing nations, resulting in what was known as a "lost decade" of growth.
Fortunately, the global economy and governments are better positioned to manage the challenging combination than they were 40 years ago, the World Bank said. The dollar is strong, as are the balance sheets of most financial institutions. Despite the sudden jump in energy prices, the increase is still not of the magnitude experienced in the 1970s. Central banks also have a credible record of managing inflation, which helps keep self-defeating inflationary expectations in check.
The United States, which has fewer economic ties with Russia and is less dependent on Russian energy than Europe, is less vulnerable to the fallout from the Ukraine war and retaliatory sanctions.
"The war is expected to cause a major recession in Europe and Central Asia," the report warned. "In addition to its tragic human toll, the invasion is expected to cause a devastating economic contraction in Ukraine this year, a sharp recession in Russia, and a significant slowdown" in the rest of the region.
Russia's economy is expected to shrink 8.9 per cent — a hefty reduction, though one that is smaller than predictions by other forecasters.
At the same time, Europe is dealing with one of the biggest waves of refugees since World War II as nearly 7 million Ukrainians, predominantly women and children, have streamed across the border to avoid the violence. Even though some have returned home, the sudden strain on host countries' budgets and resources further stresses economies when they are already under pressure.
Ukrainian nationals fleeing the ongoing war in Ukraine arrive at Trudeau Airport in Montreal. Photo / AP
Spillover effects radiate outward. In some Central Asian countries, a significant chunk of the economy comprises remittances that citizens working in Russia send back home, Javorcik said. Those payments are now reduced because of the downturn. Countries that benefit from Russian tourism, such as Cyprus, Armenia and Estonia, are also taking hits, she said.
Elsewhere, the impact can be more critical. The Democratic Republic of Congo, Madagascar, Rwanda and Uganda, which rely heavily on grain exports from Russia and Ukraine to feed their populations, will have to confront high food prices for an extended period.
"Insecurity and violence continue to weigh on the outlook" for many low-income countries, the World Bank said, while "more rapid increases in living costs risk further escalating social unrest." Several studies have pointed to rising food prices as an important trigger for the Arab Spring uprisings in 2011.
In Latin American and the Caribbean, growth is expected to slow to 2.5 per cent from 6.7 per cent last year. India's total output is forecast to drop to 7.5 per cent from 8.7 per cent, while Japan's is expected to remain flat at 1.7 per cent.
People sit in a street cafe in St. Petersburg. Russia's economy is expected to contract by 8.9 per cent. Photo / AP
The World Bank, founded in the shadow of World War II to help rebuild ravaged economies, provides financial support to low- and middle-income nations. It reiterated its familiar basket of remedies, which include limiting government spending, using interest rates to dampen inflation and avoiding trade restrictions, price controls and subsidies.
Managing to tame inflation without sending the economy into a tailspin is a difficult task no matter what the policy choices are — which is why the risks of stagflation are so high.
At the same time, the United States, the European Union and allies are struggling to isolate Russia, starving it of resources to wage war, without crippling their own economies. Many countries in Europe, including Germany and Hungary, are heavily dependent on either Russian oil or gas.
The string of disasters — the pandemic, droughts and war — is injecting a large dose of uncertainty and draining confidence.
Among its economic prescriptions, the World Bank underscored that leaders should make it a priority to use public spending to shield the most vulnerable people.
That protection includes blunting the impact of rising food and energy prices as well as ensuring that low-income countries have sufficient supplies of Covid vaccines. So far, only 14 per cent of people in low-income countries have been fully vaccinated.
"Renewed outbreaks of Covid-19 remain a risk in all regions, particularly those with lower vaccination coverage," the report said.
