The world is at a point of significant economic danger, say experts

The outlook for the global economy has “darkened” and the world is at a point of “significant economic danger”, according to the World Economic Forum’s Chief Economists Outlook survey.

The survey report cites a World Bank prediction that 2022 will be one of the worst years for global poverty since the turn of the century - second only to 2020, which was spent in the grip of the coronavirus pandemic.

COVID-19 continues to impact economies’ growth and the war in Ukraine is causing significant global economic disruption, fuelling stubbornly high inflation.

Expectations for economic growth have been scaled back across the world, with 64% of respondents considering a global recession to be at least “somewhat likely”, the report says.

Almost 90% of those surveyed expect growth in Europe to be either weak or very weak, due to the war in Ukraine, high inflation and threats to energy supplies. And growth projections are expected to be worse next year, across the continent.

In 2022, weak or very weak growth in China is expected by 67% of those surveyed, with COVID-19 restrictions and concerns about its real-estate sector weighing this down. However, more respondents expect its economy to pick up in 2023, with 66% anticipating moderate or strong growth.

Although almost 65% of those surveyed expect moderate growth or better in the US in 2022, optimistic projections drop to 37% when it comes to 2023. The likelihood of ongoing monetary tightening is considered to be a key factor in this.

Four in 10 economists expect growth to be weak in Central Asia in 2023, twice as many as in 2022. While in sub-Saharan Africa, 43% are predicting weak growth in 2022, with a much higher 60% of respondents predicting the same for 2023.

However, the picture is looking less grim in other parts of the world. The report says 71% expect growth in the Middle East and North Africa (MENA) region to be moderate or better. This is reflected in a strong year enjoyed by the region’s energy exporters.

In South Asia, the vast majority of economists expect moderate growth in both 2022 and 2023. More people expect moderate growth in Latin America’s next year than they do for the rest of 2022 - 56% (rising from 50%).

The survey indicates very high rates of inflation are a key contributor to the weak outlook for global growth. Most respondents (93%) say they expect inflation to remain high in the US and Europe. With the exception of China and the MENA region, the survey predicts “elevated rates of inflation” in most areas of the world for the rest of the year.

Monetary tightening by the US Federal Reserve and the European Central Bank appears to have influenced chief economists’ predictions for next year. Of those surveyed, 57% expect inflation to be either moderate or low next year in the US and 52% when it comes to Europe. Nearly 80% of respondents said they believed higher interest rates would be “effective” or “highly effective”.

But there appears to be less optimism elsewhere: “In most of the rest of the world, only a very small proportion of our respondents expect low inflation next year, but there is a clear shift from ‘high’ to ‘moderate’ expectations between 2022 and 2023,” the authors say.

There is however a drawback of the current tightening of monetary policy highlighted in the report. The report notes that this could increase public debt burdens, which have risen significantly over the past decade. The survey is almost unanimous (95%) about the risks of defaults in low-income countries.

In July 2022, more than 125 countries experienced food price inflation in excess of 5% according to the World Bank data cited in the report. This was felt in 90% of low and middle-income countries and in more than 80% of high-income countries.

There is also pessimism about global food security, which respondents believe could be at risk across large areas of the world in the next three years. They say Sub-Saharan Africa and the MENA region are particularly vulnerable. However, large minorities of respondents also expect food security to be an issue in parts of South and Central Asia.

The World Food Programme reported acute food insecurity in 53 countries in 2021, accounting for around 193 million people. This is expected to rise to over 205 million people by the end of 2022.

On energy security, the report authors say: “Natural gas prices hit record highs for the fourth consecutive month in August 2022, up 130% from the start of the year and by almost 250% year on year.”

Governments, especially in Europe, have been spending billions on support measures for households and businesses. However, this risks adding to levels of public borrowing that are already high after significant levels of state spending on previous crises, the authors add.

The Chief Economists surveyed are “near-unanimous” that wages won’t be able to keep up with rising prices in 2022 and 2023, with real wages expected to decline in low- and high-income economies during that period.

Real wages fell across the Eurozone by 1.7% year-on-year in the first quarter of 2022. Beyond “the economic shock from the outbreak of COVID-19 in 2020, this represents the worst hit to inflation-adjusted wages since before the global financial crisis,” the report’s authors said.

The survey suggests that the threat to basic living standards is likely to increase the risk of societal disruption. Almost 80% of respondents say they expect social unrest to be triggered in low-income countries by rising costs. The report points out that global political instability is now at its highest since the financial crisis in 2008, according to the 2022 Global Peace Index.

In a separate interim report, The OECD Economic Outlook, September 2022 also concludes that the prospects for the global economy have “darkened” and that has been exacerbated by Russia’s decision to launch military action in Ukraine.

The OECD predicts economic growth will remain subdued in the back half of 2022, and will slow further in 2023. It also expects inflation in the major economies to begin to decline, but remain well above central bank targets almost everywhere. Supply diversification and demand reduction are needed to avoid energy shortages, it says.

“With inflation soaring and real wages falling, the global cost-of-living crisis is hitting the most vulnerable in our societies hardest.” says Saadia Zahidi, Managing Director at the World Economic Forum.

“Policymakers are in a difficult position, but it is vital now to find the right mix of fiscal and monetary interventions to control inflation while minimising the impact on growth and ensuring direct support to those who need it most. The stakes could not be higher.”