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With the confluence of factors like the ongoing Russia-Ukraine war, skyrocketing inflation rates and worldwide economic slowdown, the future of the global economy is turning out as the International Monetary Fund (IMF) described it — “gloomy and more unclear.”

Krishna Srinivasan, director for IMF’s Asia-Pacific department, who shared his insights on the organization’s economic outlook for 2023 during BusinessWorld’s most recent Economic Forum, said that, “We are dealing with a world of compound crises, and they are creating a challenging environment globally and for Asia.”

The IMF’s World Economic Outlook Report released last October forecast global growth to slow from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023 — the weakest growth profile since 2001 except for the global financial crisis and the height of the coronavirus disease 2019 (COVID-19) pandemic.

The report further projected global inflation 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.

“The headwinds are cultivating a marked slowdown in global economic activity, including in Asia and the Pacific. But the region continues to perform better than the rest of the world. Our latest forecasts have downgraded growth in Asia and the Pacific by 0.9 percentage points in 2022, reflecting the slowdown in the second half, and by 0.8 percentage points in 2023,” Mr. Srinivasan said.

“Monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy. Structural reforms can further support the fight against inflation by improving productivity and easing supply constraints, while multilateral cooperation is necessary for fast-tracking the green energy transition and preventing fragmentation,” the report said.

The grim outlook is shared by the World Bank (WB), which recently published its latest Global Economic Prospects report.

The WB predicts that due to increased inflation, higher interest rates, decreased investment and disruptions brought on by Russia’s invasion of Ukraine, global gross domestic product (GDP) will continue to see sharp declines in growth for the foreseeable future.

According to the report, global economy is projected to grow by 1.7% in 2023 and 2.7% in 2024. The steep slowdown in growth is anticipated to be universal, and forecasts for 2023 have been lowered for 95% of advanced economies and almost 70% of emerging markets and developing nations.

In emerging market and developing economies, per-capita income growth is expected to average 2.8% during the next two years, which is a full percentage point less than the average for the period 2010-2019. The growth in per-capita income for 2023-2024 is predicted to average about 1.2% in Sub-Saharan Africa, which is home to nearly 60% of the world’s extreme poor. At this rate, poverty rates may increase rather than decline.

Real risks

The WB added that there are very real risks of the world plunging into another recession given the fragile economic environment at the start of 2023. Any adverse development — such as higher-than-expected inflation, abrupt rises in interest rates to contain it, a resurgence of the COVID-19 pandemic, or escalating geopolitical tensions — could tip the balance.

This would mark the first time in more than 80 years that two global recessions have occurred within the same decade.

“The crisis facing development is intensifying as the global growth outlook deteriorates,” said WB Group President David Malpass.

“Emerging and developing countries are facing a multi-year period of slow growth driven by heavy debt burdens and weak investment as global capital is absorbed by advanced economies faced with extremely high government debt levels and rising interest rates. Weakness in growth and business investment will compound the already-devastating reversals in education, health, poverty and infrastructure, and the increasing demands from climate change.”

It is predicted that growth in advanced economies will decrease from 2.5% in 2022 to 0.5% in 2023. Slowdowns of this size have predicted a worldwide recession over the past 20 years. Growth in the United States is anticipated to slow to 0.5% in 2023, which is 1.9 percentage points below earlier projections and the lowest performance since 1970 that is not part of an official recession.

The forecast for euro-area growth in 2023 has been revised downward by 1.9 percentage points to zero percent. Growth in China is predicted to be 4.3% in 2023, which is a 0.9 percentage point decline from earlier projections.

With China excluded, it is anticipated that growth in emerging market and developing economies will slow from 3.8% in 2022 to 2.7% in 2023, reflecting significantly lower external demand that will be exacerbated by high inflation, currency depreciation, tighter financing conditions and other domestic headwinds.

The GDP levels in emerging and developing economies will be about 6% below what was anticipated before the epidemic by the end of 2024. Although it is predicted that worldwide inflation would moderate, it will still be higher than before the pandemic, according to the report.

The WB’s Global Economic Prospects report offers the first comprehensive assessment of the medium-term outlook for investment growth in emerging market and developing economies.

Collaboration, investments in fighting issues

Ayhan Kose, the director of the multilateral lender’s Prospects Group, said that worldwide economic slowdown will likely have an impact on the global fight against poverty and inequality.

“That is actually the crux of the argument, when we think about poverty, when we think about inequality, when we think about inclusive growth, when we think about the types of development goals global economy set for itself by 2030. These goals are possible. For us to make meaningful progress in these goals, we need to have sustained, robust growth,” she said in an interview for World Bank’s Expert Answers series.

However, there’s good news. Ms. Kose pointed out that there is a greater recognition of the inflation problem across the globe, and major central banks have been acting decisively to address it in both advanced and developing economies in the past year. Given this worldwide effort, inflation is expected to moderate. She also mentions as positive opportunities the resilience of the global financial sector at weathering the headwinds, as well as the growing strength of international measures addressing climate change.

“In this context, investment is critical. We raise the issue of investment weakness. Of course, without significant infrastructure investment, we cannot overcome the climate challenge. So, it is a demo outlook, but I think there are good reasons to be optimistic and we should look to the future, stay on course, and on the part of policy makers deliver what is necessary in a credible fashion,” she said.

“At the global level, there is no question what we need to do. We need to collaborate to address these global problems. Of course, that starts with the peace in Europe. We need to basically find ways to work even more aggressively to address the climate change challenge. We need to find ways to address the food insecurity in many countries, and we need to have robust frameworks to have quick and durable solutions in the context of debt-related challenges we have.” — Bjorn Biel M. Beltran

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