Thursday, June 13, 2024
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Navigating uncharted territory

Danial Norjidi

According to World Bank Group President David Malpass, the world economy is simultaneously facing COVID-19, inflation, and policy uncertainty, with government spending and monetary policies in uncharted territory. Rising inequality and security challenges are particularly harmful for developing countries.

He added, “Putting more countries on a favourable growth path requires concerted international action and a comprehensive set of national policy responses.”

In the East Asia and Pacific region, economic growth is projected to decelerate to 5.1 per cent in 2022 before increasing slightly to 5.2 per cent in 2023, according to a regional outlook in the World Bank’s January 2022 Global Economic Prospects.

In terms of recent developments, the report noted that growth in East Asia and the Pacific rebounded to an estimated 7.1 per cent last year, but that the speed of recovery differed considerably among countries.

“In China, GDP expanded by an estimated eight per cent in 2021, led by manufacturing and exports,” said the report. “Growth in the region excluding China also recovered in 2021, but by a modest 2.5 per cent – 1.5 percentage point slower than projected in June and about half the trend growth rate, reflecting the severe COVID-19 resurgence in mid-2021.”

The study also highlighted that a series of significant disruptions caused by the pandemic resulted in weaker-than-expected growth in several large economies in 2021.

“The damage to activity from the lockdowns and extended border closures was especially evident in tourism-dependent economies where the projected recovery was insufficient to restore output to its pre-pandemic level in 2019,” it said, adding that activity was also disrupted in some cases by natural disasters, including the effects of severe cyclones.

“Following fiscal tightening and the imposition of property and financial market curbs in the first half of 2021, fiscal and monetary policies were eased in China in the second half of last year to stabilise activity.

“In the rest of the region, the recovery has gained momentum on stronger domestic activity, as social distancing measures eased and vaccination rollouts accelerated.

Goods export growth softened as global growth and trade peaked amid persistent supply disruptions. Services trade remained subdued, reflecting remaining travel restrictions amid a resurgence of the pandemic,” it said.

In its outlook, the report stated that the region is expected to face a steady decline in global demand, as growth in major economies moderate.

International travel is projected to remain below pre-pandemic levels over the forecast horizon amid the lingering pandemic.

It said that tourism-dependent economies are not expected to recover to pre-pandemic levels until 2022 or 2023.

The report also noted that downside risks to the regional outlook predominate.

“The share of vaccinated people in many economies in the region is expected to surpass 70 per cent by mid-2022, but the region is vulnerable to renewed outbreaks of COVID-19.

“Mobility restrictions in the context of pandemic resurgence, incomplete vaccinations, and inadequate testing especially in the face of the highly transmissible Omicron variant, may disrupt the recovery of the tourism and travel industry and weigh on consumer confidence.

Financial risks have risen with the growth of indebtedness. The economies of small islands are particularly vulnerable to disruptions from natural disasters and weather-related events.”

A World Bank press statement pertaining to the report highlights that following a strong rebound in 2021, the global economy is entering a pronounced slowdown amid fresh threats from COVID-19 variants and a rise in inflation, debt, and income inequality that could endanger the recovery in emerging and developing economies.

It was shared that global growth is expected to decelerate markedly from 5.5 per cent in 2021 to 4.1 per cent in 2022 and 3.2 per cent in 2023 as pent-up demand dissipates and as fiscal and monetary support is unwound across the world. The statement further notes that rapid spread of the Omicron variant indicates that the pandemic will likely continue to disrupt economic activity in the near term. In addition, a notable deceleration in major economies will weigh on external demand in emerging and developing economies.

“At a time when governments in many developing economies lack the policy space to support activity if needed, new COVID-19 outbreaks, persistent supply-chain bottlenecks and inflationary pressures, and elevated financial vulnerabilities in large swaths of the world could increase the risk of a hard landing.”

The slowdown will coincide with a widening divergence in growth rates between advanced economies and emerging and developing economies, noted the report.

“Growth in advanced economies is expected to decline from five per cent in 2021 to 3.8 per cent in 2022 and 2.3 per cent in 2023 – a pace that, while moderating, will be sufficient to restore output and investment to their pre-pandemic trend in these economies.

“In emerging and developing economies, however, growth is expected to drop from 6.3 per cent in 2021 to 4.6 per cent in 2022 and 4.4 percent in 2023.”

The statement also noted that by 2023, all advanced economies will have achieved a full output recovery; yet output in emerging and developing economies will remain four per cent below its pre-pandemic trend. For many vulnerable economies, the setback is even larger: output of fragile and conflict-affected economies will be 7.5 per cent below its pre-pandemic trend, and output of small island states will be 8.5 per cent below.

“Meanwhile, rising inflation – which hits low-income workers particularly hard – is constraining monetary policy. Globally and in advanced economies, inflation is running at the highest rates since 2008. In emerging market and developing economies, it has reached its highest rate since 2011,” the statement said, adding that many emerging and developing economies are withdrawing policy support to contain inflationary pressures – well before the recovery is complete.