| World Bank IMF and Dev Agencies |    895 VIEWS  |
| World Bank IMF and Dev Agencies | |
| 895 VIEWS | |
 |
Tuesday, January 18,
2022 / 05:17 PM / by World Bank / Header Image Credit: World Bank
The global recovery is set to decelerate markedly amid
continued COVID-19 flare-ups, diminished policy support, and lingering supply
bottlenecks. In contrast to that in advanced economies, output in emerging
market and developing economies (EMDEs) will remain substantially below the
pre-pandemic trend over the forecast horizon. The global outlook is clouded by
various downside risks, including renewed COVID-19 outbreaks due to Omicron or
new virus variants, the possibility of de-anchored inflation expectations, and
financial stress in a context of record-high debt levels. If some countries
eventually require debt restructuring, this will be more difficult to achieve
than in the past. Climate change may increase commodity price volatility,
creating challenges for the almost two-thirds of EMDEs that rely heavily on
commodity exports and highlighting the need for asset diversification. Social
tensions may heighten as a result of the increase in between-country and
within-country inequality caused by the pandemic. Given limited policy space in
EMDEs to support activity if needed, these downside risks increase the
possibility of a hard landing. These challenges underscore the importance of
strengthened global cooperation to foster rapid and equitable vaccine
distribution, proactive measures to enhance debt sustainability in the poorest
countries, redoubled efforts to tackle climate change and within-country
inequality, and an emphasis on growth-enhancing policy interventions to promote
green, resilient, and inclusive development and on reforms that broaden
economic activity to decouple from global commodity markets.
Global Outlook
After rebounding to an estimated 5.5 percent in 2021,
global growth is expected to decelerate markedly to 4.1 percent in 2022,
reflecting continued COVID-19 flare-ups, diminished fiscal support, and
lingering supply bottlenecks. The near-term outlook for global growth is
somewhat weaker, and for global inflation notably higher, than previously
envisioned, owing to pandemic resurgence, higher food and energy prices, and
more pernicious supply disruptions. Global growth is projected to soften
further to 3.2 percent in 2023, as pent-up demand wanes and supportive
macroeconomic policies continue to be unwound. Although output and investment
in advanced economies are projected to return to pre-pandemic trends next year,
in emerging market and developing economies (EMDEs) particularly in small
states and fragile and conflict -afflicted countries they will remain markedly
below, owing to lower vaccination rates, tighter fiscal and monetary policies,
and more persistent scarring from the pandemic.
Various downside risks cloud the outlook, including
simultaneous Omicron-driven economic disruptions, further supply bottlenecks, a
deanchoring of inflation expectations, financial stress, climate-related
disasters, and a weakening of long-term growth drivers. As EMDEs have limited
policy space to provide additional support if needed, these downside risks
heighten the possibility of a hard landing. This underscores the importance of
strengthening global cooperation to foster rapid and equitable vaccine
distribution, calibrate health and economic policies, enhance debt
sustainability in the poorest countries, and tackle the mounting costs of
climate change. EMDE policymakers also face the challenges of heightened
inflationary pressures, spillovers from prospective advanced-economy monetary
tightening, and constrained fiscal space. Despite budgetary consolidation, debt
levels which are already at record highs in many EMDEs are likely to rise
further owing to sustained revenue weakness. Over the longer term, EMDEs will
need to buttress growth by pursuing decisive policy actions, including reforms
that mitigate vulnerabilities to commodity shocks, reduce income and gender
inequality, and enhance preparedness for health- and climate-related crises.
Regional Prospects
Growth in most EMDE regions in 2022-23 is projected to
revert to the average rates during the decade prior to the pandemic, with the
exception of East Asia and xx Pacific. This pace of growth will not be enough
to recoup output setbacks during the pandemic, however. By 2023, annual output
is expected to remain below the pre-pandemic trend in all EMDE regions, in
contrast to advanced economies, where the gap is projected to close. The pace
of recovery will be uneven across and within regions, with downside risks
dominating the outlook. On a per capita basis, the recovery may leave behind
those in economies that experienced the deepest contractions in 2020, such as
tourism-reliant island economies. Half or more of economies in East Asia and
Pacific, Latin America and the Caribbean, and the Middle East and North Africa,
and two-fifths of economies in Sub-Saharan Africa, will still be below their
2019 per capita GDP levels by 2023. This edition of Global Economic Prospects
also includes analytical pieces on the features and implications of global
commodity price cycles, the impact of the COVID-19 pandemic on global income
inequality, and the experience with past coordinated debt restructurings.
Commodity Price Cycles
Drivers and Policies. Commodity prices soared in 2021
following the broad-based decline in early 2020, with prices of several
commodities reaching all-time highs. In part, this reflected the strong rebound
of demand from the 2020 global recession. Energy and metal prices generally
move in line with global economic activity, and this tendency has strengthened
in recent decades. Looking ahead, global macroeconomic developments and
commodity supply factors will likely continue to cause recurring commodity
price swings. For many commodities, these may be amplified by the transition
away from fossil fuels. To dampen the associated macroeconomic fluctuations,
the almost two-thirds of EMDEs that are commodity exporters need to strengthen
their policy frameworks and reduce their reliance on commodity-related revenues
by diversifying exports and, more importantly, national asset portfolios.
Impact of COVID-19 on
Global Income Inequality.
The COVID-19 pandemic has raised global income
inequality, partly reversing the decline that was achieved over the previous two
decades. Weak recoveries in EMDEs are expected to return between-country
inequality to the levels of the early 2010s. Preliminary evidence suggests that
the pandemic has also caused within-country income inequality to rise somewhat
in EMDEs because of particularly severe job and income losses among
lower-income population groups. Over the medium and long term, rising
inflation, especially food price inflation, as well as pandemic-related
disruptions to education may further raise within-country inequality. Within country inequality remains particularly high in EMDE regions that account
for about two-thirds of the global extreme poor. To steer the global recovery
onto a more equitable development path, a comprehensive package of policies is
needed. A rapid global rollout of vaccination and redoubled
productivity-enhancing reforms can help lower between-country inequality.
Support targeted at vulnerable populations and measures to broaden access to
education, health care, digital services and infrastructure, as well as an
emphasis on supportive fiscal measures, can help lower within-country
inequality. Assistance from the global community is essential to expedite a
return to a green, resilient, and inclusive recovery.
Resolving High Debt
after the Pandemic: Lessons from Past Episodes of Debt Relief.
In the pandemic-induced global recession of 2020,
global debt levels surged. The rise in debt has led to several countries
initiating debt restructurings, while many others are in or at high risk of
debt distress and may also eventually need debt relief. Historically, several
umbrella frameworks coordinated debt relief to multiple debtor countries from
multiple creditors on common principles. They offered substantial but
protracted debt stock reductions that were typically preceded by a series of
less ambitious debt relief efforts. The G20 Common Framework provides a
structure to initiate debt restructuring for low-income IDA eligible countries,
but largely avoids the issue of outright debt reductions. Future umbrella
frameworks for debt restructuring will face greater challenges than those in
the past due to a more fragmented creditor base.
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