Global economy loses expansion steam: World Bank

The world economy still faces many challenges as it tries to make up ground lost during the coronavirus pandemic.

World Bank president David Malpass.

The pandemic has disrupted nearly every part of life across the world. It hit businesses and their global supply chains hard. Factories and shops were temporarily closed. Many workers were put out on the street, and poverty increased. Yet, in 2021, much of the world learned to deal with the huge disruptions caused by the spreading coronavirus. Last year global growth was up about 5.5 per cent. But this year looks less promising according to "Global Economic Prospects," a new report from the World Bank released on January 11.

Amid unpredictable COVID flare-ups, supply chain issues and less government support, it projects growth will slow down dramatically and only reach 4.1 per cent in 2022 and 3.2 per cent in 2023. It's even more pessimistic about the nearterm because of extremely high shipping costs and unexpectedly high inflation, especially concerning food and energy.

Much of the growth it does expect will come from advanced economies like the U.S., the E.U., Australia, Japan, Korea and Israel as they are forecast to return to pre-pandemic growth and output levels soon. At the same time, emerging market and developing economies (EMDE) will mostly stay behind, "owing to lower vaccination rates, tighter fiscal and monetary policies, and more persistent scarring from the pandemic," the report concluded. Simply put, they need vaccines and many are running out of room to maneuver.

A big global imbalance

The most obvious obstacle to economic recovery is plain uncertainty. Even though the supply of vaccines is up, waves of new variants of the coronavirus like delta and omicron can destroy planning within weeks or even days as places go into lockdown or regions and states close their borders. The bank also sees danger in unprecedented government spending, mainly on economic stimulus. Governments have indeed taken on huge amounts of debt. In 2020, global debt came in at 263 per cent of gross world product, the highest level in 50 years. But here again, emerging market and developing economies are at a disadvantage. Many are in debt distress; some have already defaulted. This is bound to lead to unfavorable credit conditions or no more lines of credit at all. These countries may also face higher interest rates, increased inflation and unfavorable exchange rates.

Besides this, the bank also worries about increasing income inequality. Around the world, there is growing poverty as many workers lost their jobs or endured big income losses. Those in lower income groups like women, unskilled and informal workers have suffered the most, partly reversing a hard-fought decline in income inequality over the past 20 years. The authors think that 100 million more people could experience extreme poverty this year because of the COVID pandemic. Simultaneously the rich have been getting richer — much richer — as tech company stocks and asset prices hit new highs. This heightened inequality could lead to social discontent particularly in developing countries, warned David Malpass, president of the World Bank, in an introduction to the report.

A big global plan

The lender is pushing for more debt relief or debt restructuring for poorer countries. Only by freeing these countries of crushing debt can they focus on health, public services, education, infrastructure and growth, the bank argues. The report urges 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."

Still in 2022-2023 growth in all EMDE regions besides East Asia and the Pacific is projected to revert to the average rates during the decade prior to the pandemic. Despite this growth, output will most likely stay below the pre-pandemic trend for all these regions. Overall, two-fifths of economies in sub-Saharan Africa and 50 per cent or more of the economies in East Asia and the Pacific, Latin America and the Caribbean, and the Middle East and North Africa "will still be below their 2019 per capita GDP levels by 2023," noted the report.

Germany on the right path

Rich countries will not have to wait so long for a recovery as their annual output is expected to reach pre-pandemic levels by 2023. The situation in Germany looks particularly good, since it has a lot of cash to splurge on stimulus while it has become better at managing the knock-on effects of COVID-19. After a sluggish winter and the end of the current coronavirus wave, the county can expect to see a strong recovery not least because of its relatively high vaccination rate. "All the elements for a recovery are in place," Sebastian Dullien, a macroeconomist at the Hans-Böckler Foundation, told DW in a recent interview. The only thing the government has to do is "protect businesses from going bankrupt over the winter."

Last year, many industries were held back by supply issues, most importantly a lack of the all-important semiconductors. On the other side of the equation, German consumers have saved €200 billion ($226 billion) in excess to what they would have otherwise saved, "and they are going to spend that as soon as infections come down in the spring," said Dullien.