World Bank slashes global growth forecast amid new pandemic waves

WASHINGTON, Jan. 11 (Xinhua) -- The World Bank Group on Tuesday slashed global growth forecast for this year amid incessant COVID-19 flare-ups, rising inflation and lingering supply bottlenecks, warning of various downside risks to global growth prospects.

In its newly released semiannual Global Economic Prospects, the multilateral lender projected that global economy is on track to grow by 4.1 percent this year, 0.2 percentage point lower than the forecast in June. It also revised down estimation for 2021 global growth by 0.2 percentage point to 5.5 percent.

The U.S. economy is estimated to grow by 5.6 percent in 2021, and moderates to 3.7 percent this year. The Chinese economy is estimated to grow 8.0 percent in 2021, and slow to 5.1 percent this year. The Euro area economy is expected to expand by 5.2 in 2021 and 4.2 percent in 2022.

"The world economy is simultaneously facing COVID-19, inflation, and policy uncertainty, with government spending and monetary policies in uncharted territory," said World Bank Group President David Malpass.

VACCINATION INEQUITIES

The Washington-based development organization highlighted that the COVID-19 pandemic has raised global income inequality, partly reversing the decline that was achieved over the previous two decades.

By 2023, annual output is expected to remain below the pre-pandemic trend in all emerging market and developing economy (EMDE) regions, in contrast to advanced economies, where the gap is projected to close.

In developing economies, particularly in small states and fragile and conflict-afflicted countries, output and investment will remain markedly below pre-pandemic trends, "owing to lower vaccination rates, tighter fiscal and monetary policies, and more persistent scarring from the pandemic," the report noted.

The World Bank called for a rapid global rollout of vaccination and redoubled productivity-enhancing reforms, which, it argued, can help lower international vaccination inequality.

For most of 2021, the main obstacle was the limited access to vaccine doses, "with low-income countries suffering the most," according to the report. New variants and vaccine deployment bottlenecks remain "major obstacles."

To soften the increased global inequality, the report called for a concerted effort to mobilize external resources and accelerate debt relief efforts, noting that the recent 93-billion-U.S.-dollar replenishment of the International Development Association -- the World Bank's fund for the poorest countries -- is a key milestone in this respect.

More progress, however, is needed on the implementation of the Group of 20's Common Framework for debt restructuring for low-income countries under stress, Malpass said.

"In light of the projected slowdown in output and investment growth, limited policy space, and substantial risks clouding the outlook, emerging and developing economies will need to carefully calibrate fiscal and monetary policies," said Ayhan Kose, director of the World Bank's Prospects Group.

Kose noted that EMDEs also need to undertake reforms to erase the scars of the pandemic. "These reforms should be designed to improve investment and human capital, reverse income and gender inequality, and cope with challenges of climate change," he added.

The latest forecast assumes that COVID-19 will continue to flare up across the globe this year, but with "steadily diminishing" economic impact, the report noted.

Noting that the forecast assumes that COVID-19 has its biggest impact on the first quarter this year, Malpass said if the variant persist, "there is risk to the forecast that could reduce global growth further anywhere from two tenths to seven tenths of a percentage point."

RISING INFLATION

The global outlook is "clouded by various downside risks," including renewed COVID-19 outbreaks due to new virus variants, the possibility of unanchored inflation expectations, and financial stress in a context of record-high debt levels, according to the semiannual report.

Rising inflation, which hits low-income workers particularly hard, is constraining monetary policy, as many emerging and developing economies are already withdrawing policy support to contain inflationary pressures, the World Bank noted.

The near-term outlook for global inflation, according to the bank, is "notably higher" than previously envisioned, owing to pandemic resurgence, higher food and energy prices, and more "pernicious" supply disruptions.

The bank estimated that supply bottlenecks and labor shortages are assumed to gradually dissipate through 2022, while inflation and commodity prices are assumed to gradually decline in the second half of the year.

Continued supply strains, however, could lead to additional disruptions to international trade and contribute to further inflation surprises, increasing the risk that inflation expectations become unstable, the bank warned.

The report also outlined a few "daunting challenges" for many developing countries, one of which is that macroeconomic imbalances have reached "unprecedented" proportions, as many countries are now facing record levels of external and domestic debt.

"Adding to these debt-related risks is the potential for higher interest rates: it is difficult to predict how rapidly interest rates will rise as advanced economies slow down their expansion in monetary policies," said Malpass.

"With fiscal and monetary policy in uncharted territory, the implications for exchange rates, inflation, debt sustainability, and economic growth are unlikely to be favorable for developing countries," Malpass continued.

U.S. Federal Reserve Chair Jerome Powell said on Tuesday that that the central bank could start to shrink its balance sheet later this year and it will have to raise interest rates more if inflation remains elevated.

Economists have warned that a faster tightening in U.S. monetary policy could push up global borrowing costs sharply and cause an adverse financial spillover to emerging markets and developing economies, particularly those with high debt levels.

"We are already seeing capital flows to the emerging markets drying up on the expectation of higher U.S. interest rates next year," Desmond Lachman, resident fellow at the American Enterprise Institute and a former official at the International Monetary Fund, recently told Xinhua.

"If the Fed is forced to raise interest rates at a faster pace than presently planned, we must expect capital to be repatriated from the emerging markets. This could be problematic for many emerging market economies that have very high debt levels," Lachman said.