This was all before Russia invaded Ukraine and exacerbated energy and food shocks and increased the potential for economic and humanitarian crises in many developing economies.
With Russia and Ukraine the world’s leading producers of cereals and fertilizers, the combination of significant increases in food prices and declining grain availability, in particular, is a serious threat to the world’s poorest countries, which are also they are among the most indebted at a time of sharp rise in world interest rates.
China’s strict COVID measures are just one of the factors affecting the global economy. Credit: Getty Images
Not only developing countries are at risk from the mix of VOCID and war-related tensions.
The World Bank expects advanced economies to grow by just 2.5% this year, with major recessions in Europe and Central Asia.
China’s growth has fallen from 8.1% last year to 4.3% and Russia’s economy is expected to shrink by 8.9%. Both forecasts are quite optimistic compared to most private sector forecasts.
The outlook described by the World Bank would be the “strongest slowdown after an initial recovery from a global recession in more than 80 years.” However, it may still be too optimistic.
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It is obvious that if inflation in developed economies is more stubborn than the World Bank or the central banks currently predict, interest rates will continue to rise until they are controlled. The experience of the 1970s, when central banks were slow to respond to rising inflation, has not been lost.
This would export tighter financial conditions to the rest of the world, likely triggering financial crises in some developing economies similar to the disaster that has occurred in Sri Lanka.
The war in Ukraine and the West’s efforts to squeeze Russia’s revenue from its energy exports, efforts recently intensified significantly with the ban on insurance for ships carrying Russian oil, could prolong and intensify the shock. energy, adding to the pressure of supply and forcing even higher prices even higher.
The impact of the war and sanctions on other commodity exports from Russia and Ukraine could also further fuel its inflationary effects.
Global debt topped $ 300 trillion last year. It was about $ 197 trillion in 2019 before the pandemic.
The other source of threat to the already weak global outlook is the combination of China’s “zero COVID” policy with its locally developed imperfect vaccine, which has already led to abrupt and severe blockages of major cities and ports and, given the experience of other economies that have come to live with COVID, it seems likely to cause more of the same.
While the World Bank seems optimistic that the outlook is not for a repeat of the 1970s, mainly because it believes that central banks and other economic policy makers and more flexible economies are better equipped to cope with a period of turmoil. of high inflation rates and low growth. type: the balance of the risks would seem inclined downwards.
These risks are magnified by record global debt levels following the most aggressive level of fiscal stimulus (in response to the pandemic) since World War II.
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In response to initial COVID outbreaks, the debt of advanced economies more than doubled during the 2008 financial crisis. Global debt topped $ 300 trillion ($ 415 trillion) last year. It was about $ 197 trillion in 2019 before the pandemic.
This, and inflation rates, limit the ability of governments to respond to the recession and will amplify the impacts of rising interest rates and declining liquidity, and means that an already weak global economy is especially vulnerable. to existing and potential threats.
The World Bank is seeing anemic growth for at least the next two years. Global growth is forecast at 3% in 2023.
Unless inflation is controlled relatively quickly and painlessly and there is a resolution to the war in Ukraine and the growing disruption of energy, food and other markets it is generating, this seems more of an optimal scenario than the outcome. probable.
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