The engines of the global economic recovery – which revved into high gear in 2021 after the world ground to a halt in 2020 – are slowing down.
FAIR warning: This isn’t what you wanted to hear at the start of the new year. But the engines of the global economic recovery – which revved into high gear in 2021 after the world ground to a halt in 2020 – are slowing down.
And 2023 could be even worse.
Taken together, this year and next are set to mark the sharpest slowdown after an initial rebound from a global recession since at least the 1970s. That grim assessment comes from the World Bank’s biannual Global Economic Prospects report, released on Tuesday.
After rebounding to an estimated 5.5 percent global growth in 2021 on the heels of the 2020 pandemic recession, the report said growth is poised to decelerate to a worse-than-expected 4.1 percent this year, and then soften to 3.2 percent in 2023.
Blame the slippage on the Omicron variant, coupled with persistent disruptions to supply chains, nagging vaccine inequality, soaring energy and food prices, and crippling levels of national debt as countries pick up the ever-expanding tab for the pandemic – a bill that has now drained the ability of many to keep protecting workers and businesses damaged by the seemingly endless Covid crisis.
Shrinking global growth is not an equal opportunity offender. Mounting evidence suggests the eruption of what the World Bank has called a “pandemic of inequality”, with the wealth gap worsening both among and within nations in a manner not seen in a generation.
“The core issue that’s going on in the world is inequality, poor people being hit the hardest by Covid, but also by interest rate hikes, by inflation, by macro policies and vaccine inequality,” World Bank president David Malpass said Monday in an interview with The Washington Post.
He added, “it’s especially harsh on people in poorer countries. And we’re seeing reversals in development that will leave scars for decades. That includes education, health, food insecurity and so on. Inflation is [also] a big problem. It’s hard to stop.”
On the heels of deadly demonstrations in Kazakhstan, experts are also warning that deepening inequalities created by the pandemic – coupled with worse-than-expected growth and more extreme weather from climate change – could lead to more civil unrest.
“The resulting global divergence will create tensions – within and across borders – that risk worsening the pandemic’s cascading impacts,” warned a new report, also published on Tuesday, by the World Economic Forum.
Let’s put this into perspective. Rich nations are now on track to get their economic groove back by 2023, completing a rebound back to pre-pandemic trajectories.
Not so for developing countries.
Some of the worst hit are nations in conflict and tourism-based economies. In fact, in one-third of emerging markets, output this year is expected to be even worse than in 2019, hampering efforts to combat global poverty and fund education, health-care and social programmes. Even China – a major anchor of the global economy – is set to see growth abate to a relatively weak 5.1 percent this year as its real estate woes spill into the broader economy, according to the World Bank’s report.
So who will see the sharpest drops?
Overall, the World Bank’s 4.1 percent growth figure for 2022 is revised down from an earlier prediction last June of 4.3 percent. But that seemingly small 0.2 percentage point revision includes some major national nose-dives. Crippled by Turkish President Recep Tayyip Erdogan’s unorthodox interest rate policy that spurred a plunge in the lira and spiking inflation, Turkey’s economy is set to fall from 9.5 growth percent in 2021 to 2 percent this year. Growth in Brazil is set to fall from 4.9 percent last year to 1.4 percent.
Even those outlooks could be rosy.
In some countries, the risk of so-called “hard landings” – even steeper economic plunges that follow growth spurts, like the one the world saw in 2021 – is increasing.
As Fortune reported, Omicron may be less severe than the Delta variant, but it could hit the global economy harder. Fresh lockdowns, travel cancellations, more woes for supply chains and overburdened hospitals due to the new variant are poisoning a well already teeming with surging inflation and fears of rising interest rates.
One problem with all this: The unpredictable pandemic has made forecasting far harder. Ian Shepherdson, chief economist and founder of economic research firm Pantheon Macroeconomics, for instance, anticipated the creation of 850,000 US jobs in December. What the United States actually got was 199,000 new workers.
“Everybody wants to be pursuing precision,” he told The Washington Post. “But even before Covid, it was like hitting a moving target from a moving vehicle. Now, we’ve got a blindfold on as well.”
But where revisions are being made, they’re tending to be more pessimistic, dampening the broad economic optimism witnessed a few months ago. The International Monetary Fund has delayed its global growth forecasts, initially set for January 19, to late January after its managing director warned of further downgrades in predictions due to the surging pandemic. Goldman Sachs recently cut its 2022 growth forecast for the United States from 4.2 percent to 3.8 percent.
“After the new year, a steady trickle of growth-downgrades became a torrent,” Bernhard Warner wrote in Fortune. The outlet quoted Berenberg Bank chief economist Holger Schmieding as telling investors last week that Omicron would shave as much as one percent off gross domestic product in the euro zone and Britain.
Some developing countries could be harder hit. The toxic cocktail of slowing economies and high debt is escalating the threat that some countries won’t be able to pay their bills this year.
“Some of these countries have debt payments coming, and financing conditions are going to get tighter – so you have a debt problem when you have weak growth and higher cost of debt, and this year, both of those things are going to happen,” Ayhan Kose, chief economist and director of the World Bank’s Prospects Group, said this week.
As debt fears rise, there is also growing recognition that a debt salvation plan for low income countries put in place by the Group of 20 is not working fast enough – with private investors resistant to co-operating on relief.
Some countries are already slouching toward disaster.
Sri Lanka – with its tourism-based economy battered by Covid – is, for instance, on the brink of bankruptcy. The Guardian noted that, since the pandemic started, 500,000 people there have fallen below the poverty line, erasing five years of poverty-fighting progress.
Desperate for breathing room, Sri Lankan President Gotabaya Rajapaksa appealed to visiting Chinese Foreign Minister Wang Yi over the weekend. Sri Lanka’s largest bilateral lender, China has notoriously taken a hard line on collecting its debts from the developing countries it lends to.
In a Sunday statement, Rajapaksa’s office said “the president pointed out that it would be a great relief if debt payments could be rescheduled in view of the economic crisis following the pandemic.”
– THE WASHINGTON POST