How severe will the global recession be?

The invasion of Ukraine by the Russian Federation was another supply push for a global economy that is still suffering from the aftermath of the COVID-19 epidemic. According to the June 2022 edition Global economic prospects According to the report, global growth is projected to slow sharply from 5.7 percent in 2021 to 2.9 percent this year (Figure 1). The impact of the onslaught for most of the 1.2 percentage points downward correction in this year’s global growth forecast. Growth in emerging markets and developing economies (EMDEs) is expected to slow to 3.4 percent in 2022 from 6.6 percent in 2021 due to the negative spillover of the Ukraine war and a deteriorating global environment. With the exception of the epidemic-induced recession in 2020, this is the weakest year of EMDE growth since 2009.

Arranged against this fundamentals of rapidly declining global growth are the risks of various overlapping and mutually reinforcing downward risks, including intense geopolitical tensions, increasing financial instability, and continued supply pressures. Three of these, which have been discussed and measured in the sub-sections below, may already be implemented. If these pushes are implemented at the same time, they could cause a much sharper global slowdown than predicted at baseline in 2022-23.

Figure 1. Global growth

Figure 1: Global growthSource: World Bank.
Note: EMDEs = emerging markets and developing economies. The bars show increasing output losses between 2020-24, which is calculated as a deviation from the trend, which is expressed in 2019 as a part of GDP. The output is measured in US dollars at the 2010-19 price and market exchange rate. The trend is expected to increase at the rate of regression-projected trend growth of 2010-19. Exporters of EMDE products exclude the Russian Federation and Ukraine.

The financial pressure is growing

Endless inflationary pressures have led to a chaotic reassessment of monetary policy expectations around the world. Prior to June, markets were pricing the U.S. Federal Reserve to raise rates by 2.5 percent by the end of 2022. Just a few weeks later, in response to another inflation surprise মোট total CPI inflation reached 8.6 percent year-over-year in May প্রত্যা expectations rose to above 3 percent by the end of 2022 (Figure 2). Similar corrections have surrounded other major central banks, plunging stock markets into sustainable equity volatility. Instead, the EMDE financial situation has reached their most difficult level since the epidemic began. Sovereign spreads continue to grow across EMDEs, especially among commodity importers, where credit services may come under increasing pressure (Figure 3).

Figure 2. Market-based expectations of the Fed policy rate

Figure 2: Market-based expectations of Fed policy ratesSource Bloomberg; World Bank.
Note: The figure shows the change in market-based expectations of monetary policy rates over time. “Dec-21” means December 21, 2021. “May-22” means May 26, 2022 and “Jun-22” means June 28, 2022.

Figure 3. EMDE sovereign spread change by product exporter status

EMDE spreads sovereign change product by exporter statusSource: JP Morgan; World 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). The last observation is June 24, 2022.

Expectations of rapid financial tightening in the United States could put financial pressure on the EMDE, which began in the third quarter of this year. Under these circumstances, the Federal Reserve will see no other option but to raise the policy rate to 4 percent in the first quarter of 2023, which will further tighten the EMDE financial condition. Several large EMDEs will experience large capital outflows and increasing bond spreads, which will ultimately force the authorities to accelerate financial consolidation efforts. Compared to the current baseline forecast, global growth will decline by 0.3 percentage points in 2022 and a further 0.6 percentage points in 2023. EMDEs will be affected disproportionately, with their overall growth declining by 0.5 percentage points in 2022 and 0.9 percentage points in 2023.

Barriers to the fuel market

The war in Ukraine has disrupted significant supplies across a number of products, including fuel, food and fertilizer, and led to high price instability. There are many potential triggers for further upward movement in energy prices. These are all driven by Russia’s aggression in Ukraine and may include Russia’s immediate ban on all energy exports to EU members, additional G-7 sanctions targeting shipping companies, and the possibility of secondary sanctions on third parties purchasing Russian energy supplies.

In a scenario of additional major disruptions in energy markets centered in Europe, natural gas, oil and coal prices could rise in the third quarter of 2022 and the situation could be higher on the rest of the horizon, reflecting both cautious buying and the lower world. Growth in supply-driven economies will slow sharply – especially in the eurozone – as EMDEs face significant headwinds due to high energy prices and weak foreign demand. On the net, global growth could slow to 0.5 percentage points in 2022 and a further 0.7 percentage points in 2023.

Repeated lockdowns in China

Economic activity in China is recovering from the deep disruption caused by the severe lockdown in response to the large-scale outbreak of COVID-19. However, the country may face new epidemic barriers. This possibility of a recurring epidemic lockdown in China has been explored in a third risk situation for global growth. Large-scale COVID-19 resurgences will trigger uninterrupted lockdowns until 2023, reducing China’s growth by 0.5 percentage points in 2022 and a further 0.3 percentage points in 2023. Unlike the first two situations, global spillovers will be modest, but the risk of prolonged disruption to the global supply chain will increase significantly.

The possibility of a sharp global recession with three pushes

Simultaneous implementation of the three conditions presented above could slow 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 be consistent with a severe global recession and would effectively push the world economy to the brink of recession. The prospect of a catastrophic global economic outcome, right after the epidemic global recession, could have devastating consequences for the world’s poor.

Figure 4. Global growth situation

Scenario of global growth

Source: Oxford Economics; World Bank.
Note: Scene results produced using the Oxford Economics Global Economic Model. The scenario is linearly contiguous.

Policies can help!

Even if a number of negative risks are implemented, policymakers may be able to withstand the worst economic consequences. At a national level, a stronger policy response would require an urgent reassessment of spending towards targeted relief for at-risk families, an unwavering commitment to a credible financial structure, and a general restraint in the use of distorted policies such as export restrictions and price controls. Once the global economy has stabilized, it will need to reaffirm its commitment to growth-enhancing policies, including large-scale investments in education and digital technology, and the promotion of labor, to offset the damage caused by the epidemic and the dual impact of the war in Ukraine. Coercion through active labor market policies অংশগ্রহণ especially women’s participation.

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