The Russian Federation’s invasion of Ukraine was another supply shock to a global economy still reeling from the consequences of the COVID-19 pandemic. According to the June 2022 edition of Global Economic Prospects In the report, global growth is expected to slow sharply from 5.7 percent in 2021 to 2.9 percent this year (Figure 1). The effects of the invasion caused most of the downward revision of 1.2 percentage points to this year’s global growth forecast. Growth in emerging market and developing economies (EMDEs) is expected to slow from 6.6% in 2021 to 3.4% in 2022 due to the negative repercussions of the war in Ukraine and the deterioration of the global environment. Other than the pandemic-induced recession in 2020, this year is the weakest growth year for emerging market and developing countries since 2009.
Faced with this baseline of sharp decline in global growth, there are many overlapping and mutually reinforcing downside risks, including heightened geopolitical tensions, growing financial instability, and continued supply pressures. Three of these, which are discussed and quantified in the subsections below, may already be realized. If these shocks materialize at the same time, they could lead to a more severe global slowdown in 2022-23 than projected at the baseline.
Figure 1. Global growth
Source: World Bank.
Note: EMDCs = EMDEs. The bars show cumulative production losses over the period from 2020 to 24, which are calculated as deviations from the trend, expressed as a share of GDP in 2019. Output is measured in US dollars at 2010-19 prices and market exchange rates. The trend is assumed to grow at the rate of growth of the estimated regressive trend for 2010-19. Exporters of goods in emerging markets and developing countries exclude the Russian Federation and Ukraine.
High financial pressures
Relentless inflationary pressures have led to chaotic repricing of monetary policy expectations around the world. Prior to June, markets were setting an increase in the US federal funds rate to 2.5% by the end of 2022. Barely after a few short weeks, in response to another inflation surprise – CPI inflation totaled 8.6% y/y in May The forecast for the end of 2022 has risen above 3 percent (Figure 2). Similar revisions have hit other major central banks, sending stock markets down amid continued volatility in stocks. In contrast, financial conditions in emerging markets and developing countries are at their lowest since the start of the pandemic. Sovereign margins have increased steadily across emerging market and developing countries, particularly in commodity importers, where debt service may come under increasing pressure (Figure 3).
Figure 2. Market-based expectations of Fed policy rates
Bloomberg Resources. global bank.
Note: The figure shows changes in market-based expectations of monetary policy rates over time. “December 21” indicates December 21, 2021. “May 22” indicates May 26, 2022 and “June 22” indicates June 28, 2022.
Figure 3. Changes in sovereign price differentials in emerging markets and developing countries by status of the commodity exporter
Sources: J.P. Morgan; global bank.
Note: The figure shows the difference in bond spreads between the latest available data and February 23, 2022 (the day before the invasion of Ukraine). Last note on June 24, 2022.
Expectations of faster monetary policy tightening in the United States could lead to fiscal pressures in emerging market and developing countries starting in the third quarter of this year. In this scenario, the Fed would see no choice but to raise the policy rate to 4% by the first quarter of 2023, causing an even sharper tightening of financial conditions in emerging markets and developing countries. Many major emerging market and developing economies may see large-scale capital outflows and increased bond spreads, eventually forcing the authorities to accelerate fiscal consolidation efforts. Global growth will decline by 0.3 percentage points in 2022 and another 0.6 percentage points in 2023 compared to the current baseline forecast. Emerging market and developing economies will be disproportionately affected, with their overall growth declining by 0.5 percentage point in 2022 and 0.9 percentage point in 2023.
turmoil in energy markets
The war in Ukraine has caused significant supply disruptions and higher price volatility across many commodities, including energy, food, and fertilizer. There are many potential catalysts for further upward moves in energy prices. It is all driven by Russia’s invasion of Ukraine and could include an immediate ban by Russia on all energy exports to EU members, additional G7 sanctions targeting shipping companies, and the possibility of secondary sanctions on third parties buying Russian energy supplies.
In a scenario of additional major disruptions to energy markets centered around Europe, natural gas, oil and coal prices could rise in the third quarter of 2022 and remain elevated over the remainder of the scenario horizon, reflecting both hedge buying and a global downturn. supplies. Growth will slow sharply in advanced economies – particularly in the eurozone – while emerging market and developing economies will face significant headwinds from higher energy prices and weak foreign demand. At the net level, global growth could be reduced by 0.5 percentage point in 2022 and another 0.7 percentage point in 2023.
Frequent shutdowns in China
Economic activity in China is recovering from the deep disruption caused by a strict lockdown in response to the widespread COVID-19 outbreak. But the country may witness renewed epidemic turmoil. The possibility of repeating epidemic lockdowns in China is being explored in a third risk scenario for global growth. A large-scale resurgence of COVID-19 will lead to sporadic shutdowns all the way to 2023, reducing growth in China by 0.5 percentage points in 2022 and another 0.3 percentage points in 2023. The global spillovers will be modest, though. The first two scenarios are reversed, but the risks of prolonged disruption to global supply chains would increase dramatically.
The possibility of a severe global downturn with three shocks
Simultaneous embodiment of all three scenarios presented above could reduce global growth to just 2.1 percent in 2022 and 1.5 percent in 2023 – 0.8 and 1.5 percentage points slower than the baseline forecast (Figure 4). This would correspond to a severe global downturn and effectively push the global economy to the brink of recession. The prospects for a dire global economic outcome, soon after a pandemic global recession, could have disastrous consequences for the world’s poor.
Figure 4. Global Growth Scenarios
Sources: Oxford Economics. global bank.
Note: The scenario results were produced using the Oxford World Economic Model. The scenarios are linearly added.
Policies can help!
Even if many downside risks materialize, policymakers may be able to avoid the worst economic outcomes. At the national level, a strong policy response requires an urgent reprioritization of spending toward targeted relief for vulnerable families, a firm commitment to credible monetary frameworks, and general restraint in the use of distorting policies such as export restrictions and price controls. Once the global economy is stabilized, reversing the damage caused by the dual shocks of the pandemic and war in Ukraine will require a firm commitment to growth-enhancing policies, including large-scale investment in education and digital technologies, and enhancing the employment force of participation—particularly female participation—through active labor market policies.