sad and more uncertain
A tentative recovery in 2021 was followed by an increasingly disappointing growth in 2022 as risks began to materialize. Global production slowed in the second quarter of this year due to slowdowns in China and Russia, while US consumer spending fell short of expectations. The pandemic has dealt several blows to an already weakened world economy: higher-than-expected inflation around the world – particularly in the United States and major European economies – triggering dire financial conditions; a worse-than-expected slowdown in China, reflecting the COVID-19 outbreak and lockdown; And more negative spillover from the war in Ukraine.
The baseline forecast is to slow to 3.2 percent in 2022 from 6.1 percent last year, 0.4 percent lower than the April 2022 World Economic Outlook. Lower growth, reduced domestic purchasing power, and tighter monetary policy caused the United States to decline 1.4 percentage points earlier this year. In China, further lockdowns and a deepening real estate crisis have revised up growth by 1.1 percentage points, with major global spillovers. And in Europe, the significant downgrade reflects spillover from the war in Ukraine and tighter monetary policy. Global inflation has been revised upwards due to supply-demand imbalances along with food and energy prices, and is projected to reach 6.6 percent in advanced economies and 9.5 percent in emerging market and developing economies this year—0.9 and 0.8 percent. above modification point, respectively. In 2023, inflationary monetary policy is expected to bite, with global output growing by just 2.9 percent.
The risks to the outlook are largely downward sloping. The war in Ukraine could abruptly halt European gas imports from Russia; Inflation may be harder to bring down than expected if labor markets are tighter than expected or inflation expectations are not stable; Tighter global financial conditions may induce debt crises in emerging market and developing economies; The renewed COVID-19 outbreak and lockdown as well as further escalation in the property sector woes could further stifle Chinese growth; And geopolitical fragmentation can disrupt global trade and cooperation. A plausible alternative scenario in which risks materialize, inflation rises further, and global growth declines to about 2.6 percent and 2.0 percent in 2022 and 2023, respectively, would increase in the bottom 10 percent of outcomes since 1970.
With rising prices continuing to lower the standard of living around the world, controlling inflation should be the first priority of policy makers. Tight monetary policy will inevitably have real economic costs, but delays will only increase them. Targeted fiscal support can help mitigate the impact on the most vulnerable, but with government budgets swelled by the pandemic and the need for a deflationary overall macroeconomic policy stance, such policies have to be offset by increased taxes or reduced government spending. would be required. Tighter monetary conditions will also impact financial stability, which will require judicious use of macroprudential tools and further reforms in the debt resolution framework. Policies to address specific impacts on energy and food prices should focus on those most affected without distorting prices. And as the pandemic continues, vaccination rates must increase to protect against future forms. Finally, mitigating climate change requires urgent multilateral action to limit emissions and increase investment to accelerate the green transition.