GDP Headwinds & Stagflation: What is In Store for the Global EconomyBy
Global growth is expected to slump to 2.9% in 2022, significantly lower than the 4.1% projected in January, according to a World Bank analysis. Concerns of stagflation, an economic situation not seen since the 1970s, looms.
Darkening macroeconomic outlook
A more pessimistic outlook for the global economy in 2022 bodes ominously for all industries, including the bio/pharmaceutical industry. Although historically not subject to the same cyclical economic concerns as other industries tied closely to consumer spending, such as the automotive industry, housing, retail, or other consumer-product-based markets, the bio/pharma industry is facing headwinds that could derail its growth prospects. Key variables in the near term for the performance of all industries, including the bio/pharmaceutical industry, will be the impact of higher energy, raw materials, production, and transportation costs. Strong growth in gross domestic product (GDP) in 2021 stemming from higher demand for products and services as the world emerged from the pandemic has since dimmed. Russia’s invasion of Ukraine and its effects on commodity markets (including energy markets), supply chains, inflation, and financial conditions have steepened the slowdown in global growth, according to a recent analysis by the World Bank, which issued a report, Global Economic Prospects, earlier this month (June 2022). One key risk to the outlook is the possibility of high global inflation accompanied by tepid growth, reminiscent of the stagflation of the 1970s. This could eventually result in a sharp tightening of monetary policy in advanced economies, which in turn, could lead to financial stress in some emerging market and developing economies.
Global economic growth is expected to slump from 5.7% in 2021 to 2.9% in 2022, significantly lower than 4.1% that was projected in January (January 2022), according to the World Bank analysis. The World Bank expects global growth to hover around that 2.9% pace over 2023–2024, as the war in Ukraine disrupts activity, investment, and trade in the near term, pent-up demand fades, and fiscal and monetary policy accommodation is withdrawn.
“The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth,” said World Bank President David Malpass in commenting on the recent outlook. “For many countries, recession will be hard to avoid. Markets look forward, so it is urgent to encourage production and avoid trade restrictions. Changes in fiscal, monetary, climate, and debt policy are needed to counter capital misallocation and inequality.”
Stagflation: coming or not?
The World Bank analysis provides a systematic assessment of how current global economic conditions compare with the stagflation of the 1970s—with a particular emphasis on how stagflation could affect emerging market and developing economies. The recovery from the stagflation of the 1970s required steep increases in interest rates in major advanced economies, which played a prominent role in triggering a string of financial crises in emerging market and developing economies.
The World Bank analysis says the current economic situation resembles the 1970s in three key aspects: persistent supply-side disturbances fueling inflation, preceded by a protracted period of highly accommodative monetary policy in major advanced economies, prospects for weakening growth, and vulnerabilities that emerging market and developing economies face with respect to the monetary policy tightening that will be needed to rein in inflation.
However, the World Bank analysis points out that the current situation also differs from the 1970s in multiple dimensions: the dollar is strong, a sharp contrast with its severe weakness in the 1970s; the percentage increases in commodity prices are smaller; and the balance sheets of major financial institutions are generally strong. “More importantly, unlike the 1970s, central banks in advanced economies and many developing economies now have clear mandates for price stability, and, over the past three decades, they have established a credible track record of achieving their inflation targets,” according to comments in a June 7, 2022, World Bank press release.
Global inflation is expected to moderate next year (2023) but it will likely remain above inflation targets in many economies, according to the World Bank report. The report notes that if inflation remains elevated, a repeat of the resolution of the earlier stagflation episode could translate into a sharp global downturn along with financial crises in some emerging market and developing economies.
Growth prospects: crunching the numbers
The war in Ukraine and its impact on energy markets are dampening the global economic growth outlook. The war in Ukraine has led to a surge in prices across a wide range of energy-related commodities. Higher energy prices will lower real incomes, raise production costs, tighten financial conditions, and constrain macroeconomic policy, especially in energy-importing countries.
Growth in advanced economies is projected to sharply decelerate in 2022 and 2023: from 5.1% in 2021 to 2.6% in 2022, a 1.2 percentage point below projections made by the World Bank in January (January 2022). Growth is expected to further moderate to 2.2% in 2023, largely reflecting the further unwinding of the fiscal and monetary policy support provided during the pandemic. A regional breakdown in key advanced economies shows that in the US, growth is projected to drop to 2.6% in 2022 from 5.1% in 2021 and further decline in 2023 to 2.2%. In the Euro Area, growth of 2.5% is projected for 2022 and 2.4% in 2023, down from 5.7% growth in 2021. In Japan, growth of only 1.7% is projected for 2022 and only 1.3% in 2023, which is on par with the low growth of 1.7% seen in 2021.
Among emerging market and developing economies, growth is also projected to fall: from 6.6% in 2021 to 3.4% in 2022, well below the annual average of 4.8% over 2011-2019. The negative spillovers from the war in Ukraine will more than offset any near-term boost to some commodity exporters from higher energy prices. Forecasts for 2022 growth have been revised down in nearly 70% of emerging markets and developing economies, including most commodity-importing countries as well as four-fifths of low-income countries. The World Bank provides a further breakdown in emerging markets and developing economies as outlined below.
East Asia and Pacific: Growth is projected to decelerate to 4.4% in 2022 before increasing to 5.2% in 2023.
Europe and Central Asia: The regional economy is expected to shrink by 2.9% in 2022 before growing by 1.5% in 2023.
Latin America and the Caribbean: Growth is projected to slow to 2.5% in 2022 and 1.9% in 2023.
Middle East and North Africa: Growth is forecast to accelerate to 5.3% in 2022 before slowing to 3.6% in 2023.
South Asia: Growth is projected to slow to 6.8% in 2022 and 5.8% in 2023.