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The World Bank (WB) has cut its global growth projection for this year from 4.1% to 2.9%, warning that many countries are likely to face recession.

“Amid the war in Ukraine, surging inflation, and rising interest rates, global economic growth is expected to slump in 2022,” the Tuesday WB press release said.

Below-average Growth

“Several years of above-average inflation and below-average growth are now likely, with potentially destabilizing consequences for low- and middle-income economies. It’s a phenomenon – stagflation – that the world has not seen since the 1970s.”

Recession Will Be Hard To Avoid

According to WB President David Malpass, “for many countries, recession will be hard to avoid.”

Investment And Trade Affected

The WB said that after halving from 5.7% in 2021, growth would be stuck at 3% in both 2023 and 2024 as the Russia-Ukraine conflict affected investment and trade, the pent-up demand from the pandemic faded, and policy support was withdrawn.

The report highlighted that the slowdown in growth between 2021 and 2024 was on course to be twice that of the period between 1976 and 1979. The recovery from the stagflation of the 1970s required steep increases in interest rates in the West, it said. Those “played a prominent role in triggering a string of financial crises in emerging market and developing economies.”

Rich And Poor Countries Would Be Hit

According to the report, both rich and poor countries would be hit by the growth slowdown, but developing and emerging market economies are the most vulnerable. Growth in advanced economies was forecast to decline from 5.1% to 2.6% this year, while in emerging and developing countries it is expected to drop from 6.6% to 3.4%.

World Economy Is Again In Danger

“Just over two years after Covid-19 caused the deepest global recession since World War II, the world economy is again in danger … Even if a global recession is averted, the pain of stagflation could persist for several years – unless major supply increases are set in motion,” said the report.

Global Debt About To Explode, Says IIF Report

The world’s two largest economies were the heaviest borrowers in the first three months of this year as global debt climbed to above $305 trillion, the Institute of International Finance (IIF) reported recently.

Its data showed that China’s debt increased by $2.5 trillion over the first quarter and the U.S. added $1.5 trillion. The total debt in the Eurozone declined for a third consecutive quarter, the IIF said.

Many Countries Are Entering Monetary Tightening Cycle

According to the analysis, many countries, both emerging and developed, are entering a monetary tightening cycle with high levels of dollar-denominated debt.

Increased Debt Vulnerabilities

“As central banks move ahead with policy tightening to curb inflationary pressures, higher borrowing costs will exacerbate debt vulnerabilities,” the IIF report said.

“The impact could be more severe for those emerging market borrowers that have a less diversified investor base,” it added.

Corporate debt outside of banks and government borrowing were the largest sources of the increase in borrowing. Debt excluding the financial sector surged above $236 trillion, some $40 trillion higher than two years ago when the pandemic hit. Government debt has risen more slowly in the same period.

“With government financing needs still running well above the pre-pandemic levels, higher and more volatile commodity prices could force some countries to increase public spending even further to ward off social unrest,” said the report, noting that “this might be particularly difficult for emerging markets that have less fiscal space.”

The IIF also said that growth is expected to slow significantly this year, which would have adverse implications for debt dynamics.

“On the back of strict lockdowns in China and tighter global funding conditions, the anticipated slowdown will likely limit or even reverse the downward trend in debt ratios,” it explained.


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