Dark and more uncertain
A tepid recovery in 2021 was followed by increasingly bleak developments in 2022 as risks began to materialize. Global output contracted in the second quarter of this year, due to slowdowns in China and Russia, while US consumer spending came in below expectations. Several shocks hit a global economy already weakened by the pandemic: higher-than-expected inflation around the world –– particularly in the United States and major European economies –– triggering tighter financial conditions; a worse than expected slowdown in China, reflecting COVID-19 outbreaks and lockdowns; and other negative fallout from the war in Ukraine.
The baseline forecast calls for growth to slow from 6.1% last year to 3.2% in 2022, 0.4 percentage point lower than in the April 2022 World Economic Outlook. Weaker growth at the start of the year, a decline in household purchasing power and a tightening of monetary policy led to a downward revision of 1.4 percentage points in the United States. In China, new containment measures and the worsening of the real estate crisis led to a downward revision of growth by 1.1 percentage points, with significant global spillovers. And in Europe, the significant downgrades reflect the fallout from the war in Ukraine and the tightening of monetary policy. Global inflation has been revised upwards due to higher food and energy prices as well as persistent supply and demand imbalances, and is expected to reach 6.6% in advanced economies and 9.5 % in emerging and developing economies this year, upward revisions of 0.9 and 0.8%. tip, respectively. In 2023, disinflationary monetary policy is expected to weigh, with global output increasing by just 2.9%.
The risks to the outlook are overwhelmingly tilted to the downside. The war in Ukraine could lead to an abrupt halt in European gas imports from Russia; inflation could be more difficult to reduce than expected, either if labor markets are tighter than expected, or if inflation expectations are not anchored; tighter global financial conditions could lead to over-indebtedness in emerging and developing countries; further COVID-19 outbreaks and lockdowns as well as a further escalation of the property sector crisis could further dampen Chinese growth; and geopolitical fragmentation could hamper global trade and cooperation. A plausible alternative scenario in which risks materialize, inflation rises further and global growth declines to around 2.6% and 2.0% in 2022 and 2023, respectively, would place growth in the bottom 10% of outcomes since 1970.
With rising prices continuing to weigh on living standards around the world, controlling inflation should be the top priority for policymakers. Tighter monetary policy will inevitably have real economic costs, but any delay will only exacerbate them. Targeted fiscal support can help cushion the impact on the most vulnerable, but with government budgets strained by the pandemic and the need for disinflationary global macroeconomic policy, these policies will need to be offset by higher taxes or lower taxes. public expenses. Tighter monetary conditions will also affect financial stability, requiring judicious use of macroprudential tools and making reforms of debt resolution frameworks all the more necessary. 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 guard against future variants. Finally, climate change mitigation continues to require urgent multilateral action to limit emissions and increase investment to accelerate the green transition.