Nabeel Zafar on World Bank’s concern for the global economy
The World Bank has come out with grim view on the future prospects of the WB’s View Of The Global Economy implying that the impediments created by the Covid-19 are still lingering impeding the upward growth of global economies. The organisation has pointed out the global economy may be headed for years of weak growth and rising prices, a toxic combination that will test the stability of dozens of countries still struggling to rebound from the pandemic. This is a worrying prospect for economic planners who are trying hard to get to grips with the situation though they have made little headway in this respect. Not since the 1970s when twin oil shocks sapped growth and lifted prices, giving rise to the malady known as stagflation, has the global economy faced such a challenge and some point out that the malaise is deeper than that.
In this context, the World Bank slashed its annual global growth forecast to 2.9 per cent from January’s 4.1 per cent and mentioned that subdued growth will likely persist throughout the decade because of weak investment in most of the world. It is also pointed out that fallout from Russia’s invasion of Ukraine has aggravated the global slowdown by driving up prices for a range of commodities, fueling inflation. Global growth this year will be roughly half of last year’s annualised rate and is expected to show little improvement in 2023 and 2024. It is therefore estimated that this will be the sharpest slump after an initial post-recession rebound that the global economy has suffered in more than 80 years. The bank warns that the situation could get even worse as the Ukraine war could fracture global trade and financial networks and soaring food prices could spark social unrest in importing countries.
The World Bank mentions that the risk from stagflation is considerable with potentially destabilising consequences for low- and middle-income economies adding that there is a severe risk of malnutrition and of deepening hunger and even of famine in some areas. It was pointed out that if the worst outcomes materialise, global growth over the next two years could fall close to zero. It is advised that policymakers must act quickly to mitigate the Ukraine war’s consequences, help countries pay for food and fuel, and accelerate promised debt relief, while avoiding distortionary policies such as price controls and export bans. The global stagflation threat could have particularly dire effects in the developing world, where per-person income this year remains nearly 5 per cent below pre-pandemic levels.
It is also reported that persistent inflation raises the chances that the American Federal Reserve and other central banks will sharply increase interest rates to cool off demand, as happened in the late 1970s. That could lead to a more punishing global slump and financial crises in some emerging markets, the bank said. Developing countries as a group owe a record amount to foreign banks and other financial institutions. One-quarter of the typical poor country’s debt burden now carries variable interest rates, up from 11 per cent in 2010. So as inflation-fighting central banks tighten credit, repayment costs will rise for cash-strapped borrowing nations, the bank said. Sri Lanka last month defaulted on its foreign debts for the first time and the World Bank expects other highly-indebted countries will do the same.
Another worrying aspect is that it is not only the economies of the developing world that would be badly affected but even the world’s top economies will not escape damage. Bank economists now expect the United States to grow this year by just 2.5 per cent, down from the 3.7 per cent rate they projected in January. China, the world’s second-largest economy, will fall short of the government’s annual growth target, expanding by 4.3 per cent. That would be Beijing’s worst full-year figure since 1990, excluding 2020 when the pandemic depressed activity. The global economy was expected to struggle this year as it adjusted to the loss of pandemic-era government spending and ultralow interest rates but Russia’s invasion of Ukraine and continued coronavirus flare-ups have made the situation tougher.
The matters have aggravated by the fact that the price of a barrel of Brent crude oil has jumped to nearly $120, up almost 50 per cent this year and wheat has staged a similar rally, leading the bank to call for urgent action to ease worldwide food shortages. The bank’s downbeat forecast adds to concerns about global weakness as most major stock markets, including those in the United States, are in the red so far this year. In addition, the sister institution of the World Bank, the IMF, has lowered its global forecast in April. Though there exist similarities with the 1970s but the global economy also differs from it in important ways. The run-up in commodity prices, though painful, pales alongside what happened almost five decades ago. TW