Global economic headwinds gather force stoking fears of recession

As the world faces a series of shockwaves set in motion by the war in Ukraine, the Global Economic Prospects projects that global growth will slow down sharply

On Monday June 13, 2022, S&P 500, an index that’s watched the world over as an indicator of macroeconomic trends, went into bear territory. It had happened some weeks ago, for a brief while before things corrected. Life Insurance Corporation of India, one of the crown jewels of Indian economy that had a huge IPO on May 17, 2022, that was dubbed as India’s Aramco moment, lost US$17 billion in value in the Monday bloodbath. Stocks didn’t rebound the next day, like it had happened in the past. Markets remained choppy;as a record U.S. Federal Reserve interest rate hikes spooked traders. Central banks of other countries began to followin a globally orchestrated attempt to curb runaway inflation by raising interest rates, which would have the unfortunate consequence of making borrowings costly for everyone.

This was not unexpected, as the world faces a series of shockwaves set in motion by the war in Ukraine. The war has not only caused an enormous humanitarian catastrophe, but an economic shock as well— putting the global post-pandemic recovery in reverse gear. It is leading to high commodity prices, adding to supply disruptions, increasing food insecurity and poverty, exacerbating inflation, contributing to tighter financial conditions, magnifying financial vulnerability, and heightening policy uncertainty.

Against this backdrop, the Global Economic Prospects projects that global growth will slow down sharply, to 2.9 percent in 2022. Various downside risks cloud the outlook, including intensifying geopolitical tensions, growing stagflationary headwinds, rising financial instability, continuing supply strains, and worsening food insecurity.

Ukraine and Russia are major producers of wheat, barley and maize, accounting for an average (combined) share of 27, 23 and 15 percent of global exports between 2016 and 2020, respectively. Even the World Food Programme itself gets 50 percent of its grain supplies from the Ukraine-Russia area and is now facing dramatic cost increases in its efforts to combat food emergencies around the world.

“This is a catastrophe on top of a catastrophe,” WFP Director Beasley said, referring to the devastating effect the Covid-19 pandemic has had on world hunger. According to the UN organization, the number of people facing acute food insecurity had jumped from 135 million to 276 million since 2019 – and that’s not even taking the conflict in Ukraine into account. In total, more than 800 million face hunger around the world, while 44 million people in 38 countries are teetering on the edge of famine, according to WFP.

Policymakers in emerging markets and developing economies (EMDEs) are facing rising inflation, soaring borrowing costs, and elevated debt levels. Rather than implementing export restrictions or price controls, policymakers can instead opt to reprioritize spending toward targeted relief for vulnerable households. Over the long run, policies that reverse the damage inflicted by the dual shocks of the pandemic and the war on growth prospects, including those that improve education and raise labour force participation will be required.

The war is hastening a global slowdown

The effects of the invasion—including more acute inflationary pressures and a faster pace of monetary tightening than previously expected—account for most of the 1.2 percentage point downward revision to this year’s global growth forecast. Headwinds from the war in Ukraine are adding to large cumulative losses in output since the onset of the pandemic, particularly for commodity-importing EMDEs.  

Chart 1. Cumulative output losses, 2020-24

Note:  EMDEs = emerging market and developing economies. Bars show cumulative output losses over 2020-24, which are computed as deviations from trends, expressed as a share of GDP in 2019. Output is measured in U.S. dollars at 2010-19 prices and market exchange rates. The trend is assumed to grow at the regression-estimated trend growth rate of 2010-19. EMDE commodity exporters exclude the Russian Federation and Ukraine.

Growth outlook downgraded in the majority of countries    

EMDE (emerging markets & developing economy) output is expected to slow from 6.6 percent in 2021 to 3.4 percent in 2022 due to negative spill-over from the war in Ukraine and a deteriorating global environment—including commodity price volatility, global trade disruptions, tighter financing conditions and softening external demand. Other than the pandemic-induced recession in 2020, this is the weakest year of EMDE growth since 2009. Growth forecasts for 2022 have been downgraded in nearly 70 percent of EMDEs, including the vast majority of commodity-importing countries. With the exception of some energy-exporting EMDEs, the majority of countries have suffered downgrades across all country groups. 

Chart 2. Forecast revisions to 2022 growth 

Note: EMDEs = emerging market and developing economies. Forecast revisions are the change in 2022 growth forecasts between January 2022 and June 2022 editions of Global Economic Prospects. Data for 2022 are forecasts.

Inflationary pressures broaden across the world, raising stagflation risks 

Global consumer price inflation has risen substantially around the world and is above central bank targets in almost all countries that have targets. Inflation is envisioned to remain elevated for longer and at higher levels than previously assumed. It is expected to peak around mid-2022 and then decline gradually as global growth moderates, demand shifts further from goods toward services, supply chain bottlenecks abate, and commodity prices edge down (albeit at high levels), including for energy. However, additional adverse shocks could increase the possibility that the global economy will experience a period of stagflation reminiscent of the 1970s, with tepid growth and high inflation (Global Stagflation). 

Chart 3. Countries with inflation above target 

Note: EMDEs = emerging market and developing economies. Bars show the share of inflation-targeting economies with average inflation during the course of the year (or month) above the target range. The sample includes 12 advanced economies and 31 EMDEs.

Several downside risks could materialize at once

This Global Economic Prospects report features simulations from a global macroeconomic projection model to assess key downside scenarios for the global economy. In the first scenario, U.S. monetary policy tightening would be substantially accelerated to rein in inflation. In the second scenario, renewed disruptions to energy markets related to the war in Ukraine would deliver a large spike in global energy prices, particularly those of oil and natural gas. In the third scenario, a large-scale COVID-19 resurgence in China would prompt authorities to reimpose strict lockdowns. The simultaneous materialization of all three scenarios would reduce global growth to only 2.1 percent in 2022 and 1.5 percent in 2023—0.8 and 1.5 percentage points slower than in the baseline forecast. This would bring the global economy to the brink of recession—and when combined with heightened risks of persistently high inflation—raise the probability of stagflation. The Fed says it won’t hold back in its battle against inflation and won’t stop until there’s “compelling evidence” prices are falling — even if it comes with the trade-off of a softer economy.

Chart 4. Global growth scenarios 

Note: Scenario outcomes produced using the Oxford Economics Global Economic Model. Scenarios are linearly additive. Aggregate growth rates are calculated using real U.S. dollar GDP weights at average 2010-19 prices and market exchange rates.

Global cooperation a must to tackle mounting food insecurity

In 2021, more than 190 million people had already experienced acute food insecurity.  Russia’s invasion of Ukraine has further contributed to this, pushing up global food prices and heightening the risk of severe food shortages. Improving access to safe and nutritious food, and maintaining food security in times of crisis, are critical for health and human development. To the extent possible, policymakers in EMDEs need to refrain from responding to rising prices of food and fertilizers by adding to the already-high number of price controls, which are often paired with subsidies. Trade restrictions should also be avoided and, where possible, pared back. 

Chart 5. People in acute food insecurity 

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