2022 has arguably been one of the most challenging years, the world has experienced in modern times. It’s hard to downplay the scale of the geopolitical and economic uncertainty facing every one of us – from individual households to governments and business leaders. The global economic outlook has deteriorated amid high inflation, aggressive monetary tightening, and uncertainties from both the war in Ukraine and the lingering pandemic.
Global growth is forecast to slow from 6.0% in 2021 to 3.2% in 2022 and 2.7% in 2023. This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic. It is projected that in the year 2022 the growth would be between 2.5 and 2.8%. This is a considerable descending trend from the previous forecasts released in January and May 2022.
Furthermore, the baseline forecast for 2023 is highly indeterminate. Unfortunately, the indicators are showings a further slowdown in global growth. The rising price pressures are now attaining new heights in decades. Definitely, it is hitting vulnerable population groups hard and prompting central banks to quickly tame inflation.
The manufacturing purchasing managers’ indexes are one of the key measures of business confidence. This index is indicating broad-based declines during the past six months. The deterioration in business confidence is particularly alarming for many developing countries that are yet to fully recover from the pandemic. International food and energy prices have fallen from recent peaks but continue to be at very high levels. Global trade remains largely subdued as global supply chain disruptions and bottlenecks in international freight movements persist.
Normalization of monetary and fiscal policies that delivered unprecedented support during the pandemic is cooling demand as policymakers aim to lower inflation back to target. But a growing share of economies is in a growth slowdown or outright contraction. The global economy’s future health rests critically on the successful calibration of monetary policy, the course of the war in Ukraine, and the possibility of further pandemic-related supply-side disruptions, for example, in China. Global growth is forecast to slow from 6.0% in 2021 to 3.2% in 2022 and 2.7% in 2023. This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic. A US GDP contraction in the first half of 2022, a euro area contraction in the second half of 2022, and prolonged COVID-19 outbreaks and lockdowns in China with a growing property sector crisis. About a third of the world economy faces two consecutive quarters of negative growth. Global inflation is forecast to rise from 4.7% in 2021 to 8.8% in 2022 but to decline to 6.5% in 2023 and to 4.1% by 2024.
In Africa, the slowing external demand from the European Union – its main trading partner, representing about 33 percent of African exports – and waning monetary and fiscal support are constraining the recovery. Surging energy prices are benefiting oil-exporting countries, but net energy importers face rising pressures on current and fiscal accounts. Amid elevated levels of debt and rising borrowing costs, several governments are seeking bilateral and multilateral support to finance public investments. In many countries, there is increasing pressure to cut spending or raise taxes. Risks to regional security and domestic stability are rising as frustration mounts over inflation, lack of employment, and economic mismanagement.
East Asia’s growth is expected to weaken in 2022. Higher commodity prices and rising interest rates are set to curtail spending and investment and slow the recovery. In addition, external demand is expected to soften as growth in the region’s main trading partners slows. In South Asia, higher global energy and food prices are severely affecting food insecurity. Tightening financial conditions, depreciation of domestic currencies, and the spillover effects from the Ukraine conflict are creating fiscal and balance of payments pressures. India’s GDP growth is moderating, as high inflation and rising borrowing costs weaken domestic demand. Sri Lanka’s severe debt crisis, which has been accompanied by a major energy emergency and shortages of food and other essentials, illustrates the potential risks for many developing countries – most notably energy and food importers. In Western Asia, economic growth prospects have slightly improved due to high energy prices and waning adverse effects from the pandemic.
The outlook in Latin America and the Caribbean remains challenging, amid aggressive monetary tightening, slowing growth in China and the United States, and domestic political uncertainties in some countries. Inflation remains close to multi-year highs in many countries. Higher oil prices are providing a windfall to oil exporters such as Colombia, the Bolivarian Republic of Venezuela, and Ecuador. Growth in Brazil – the largest economy in the region – remains subdued as fiscal cuts and political uncertainty add to the challenges. Given the region’s weak growth prospects, the scars from the pandemic will last for years, with poverty projected to increase further in 2022.
Upside inflation surprises have been most widespread among advanced economies, with greater variability in emerging markets and developing economies. Risks to the outlook remain unusually large and to the downside. Monetary policy could miscalculate the right stance to reduce inflation. Policy paths in the largest economies could continue to diverge, leading to further US dollar appreciation and cross-border tensions. More energy and food price shocks might cause inflation to persist for longer. Global tightening in financing conditions could trigger widespread emerging market debt distress. Halting gas supplies by Russia could depress output in Europe. A resurgence of COVID-19 or new global health scares might further stunt growth. A worsening of China’s property sector crisis could spill over to the domestic banking sector and weigh heavily on the country’s growth, with negative cross-border effects. And geopolitical fragmentation could impede trade and capital flows, further hindering climate policy cooperation. The balance of risks is tilted firmly to the downside, with about a 25 percent chance of one year-ahead global growth falling below 2.0% in the 10th percentile of global growth outturns since 1970. Warding off these risks starts with monetary policy staying the course to restore price stability. The front-loaded and aggressive monetary tightening is critical to avoid inflation de-anchoring as a result of households and businesses basing their wage and price expectations on their recent inflation experience. Fiscal policy’s priority is the protection of vulnerable groups through targeted near-term support to alleviate the burden of the cost-of-living crisis felt across the globe. But its overall stance should remain sufficiently tight to keep monetary policy on target. Addressing growing government debt distress caused by lower growth and higher borrowing costs requires a meaningful improvement in debt resolution frameworks. With tightening financial conditions, macro-prudential policies should remain on guard against systemic risks. Intensifying structural reforms to improve productivity and economic capacity would ease supply constraints and in doing so support monetary policy in fighting inflation. Policies to fast-track the green energy transition will yield long-term payoffs for energy security and the costs of ongoing climate change. And last, successful multilateral cooperation will prevent fragmentation that could reverse the gains in economic well-being from 30 years of economic integration.
Many developing countries are fighting an uphill battle to fully recover from the pandemic, with high inflation, rising borrowing costs, and the slowdown in the major economies further hurting their growth prospects. Despite the windfall of high commodity prices for the commodity exporters in Africa and Latin America and the Caribbean, growth remains largely insufficient to mitigate the slack in labor markets. The ILO estimates that in developing countries, the gap in hours worked relative to pre-pandemic levels stood at 6.0% in the second quarter of 2022, compared to only 1.5% in high-income economies.
A growing number of developing countries find themselves in precarious debt situations. According to the IMF, 39 out of 69 low-income countries are now at high risk of or already in debt distress. Moreover, middle-income countries with market access also face mounting financial pressures. A record 21 emerging market sovereigns’ dollar bonds are trading at distressed levels – with yields more than 1,000 basis points (10 percentage points) above US treasuries of the same maturity. Lebanon, Sri Lanka, Suriname, and Zambia are already in default after the COVID-19 crisis exacerbated long-standing debt problems. Several other countries, especially in sub-Saharan Africa, are on the brink of default. Even if the scenario of widespread debt distress and disorderly defaults does not materialize, heightened fiscal consolidation pressures threaten to trigger large cuts to public investment and social spending. This, in turn, would undermine economic recovery and cause further setbacks to sustainable development.
The outlook in the least developed countries (LDCs) – whose economies are most vulnerable to external shocks – is extremely challenging. As most LDCs are food and oil importers, the rise in global prices and the disruptions of global food supplies are severely impacting these economies, raising fiscal and balance of payment financing needs and increasing food insecurity.
The author, Mr. Nazir Ahmed Shaikh is a freelance writer, columnist, blogger, and motivational speaker. He writes articles on diversified topics. Mr. Shaikh could be contacted at nazir_shaikh86@hotmailcom.