…Central banks may be forced to tighten monetary policy more rapidly than currently expected to bring rising price pressures under control
Global consumer price inflation has climbed higher around the world and is above central bank targets in almost all countries which have them according to the World Bank Global Economic Prospect –June 2022
According to the bank, Inflation is envisioned to remain elevated for longer and at higher levels than previously assumed. It is expected to peak around mid-2022 and then decline only gradually as global growth moderates, demand shifts further from goods toward services, supply chain bottlenecks abate, and commodity prices edge down, including for energy.
It stated that whereas wage pressures remain generally contained in emerging market and developing economies (EMDEs), they are likely to persist in several advanced economies in the near term.
“Despite new headwinds to growth, monetary policy across the world is expected to be further tightened as central banks seek to contain inflationary pressures. Pandemic-related fiscal support will also continue to be withdrawn in advanced economies and EMDEs.”
The abrupt growth slowdown in EMDEs implies a pronounced deceleration in per capita income growth, from 5.4 percent in 2021 to 2.3 percent in 2022. As a result of the damage from the pandemic and the war in Ukraine, the level of EMDE per capita income this year will be nearly 5 percent below its pre-pandemic trend.
EMDE catch-up with advanced-economy income levels is expected to be markedly slower over the next few years than in the pre-pandemic period, with progress reversing in EMDEs excluding China, the bank stated
Higher food prices are likely to lower real per capita incomes in many EMDEs reliant on food imports and substantially worsen global food insecurity and poverty.
The lingering effects of the pandemic, the war, and the surge in food prices are combining to make the external environment far more challenging for many countries, and are expected to lead to a net increase of 75 million people in extreme poverty by the end of this year relative to pre-pandemic projections.
The global outlook the bank stated is subject to various interlinked downside risks. Intensifying geopolitical tensions could further disrupt economic activity, generate policy uncertainty and, if persistent, lead to fragmentation in global trade, investment, and financial systems.
Supply disruptions from the pandemic and the war in Ukraine have led to a spike in commodity prices comparable to the oil shocks of 1973 and 1979-80.
Additional adverse shocks would increase the possibility that the global economy will experience a period of stagflation reminiscent of the 1970s, with low growth and high inflation.
Central banks may be forced to tighten monetary policy more rapidly than currently expected to bring rising price pressures under control.
“Historically, EMDE financial crises have been more likely when U.S. monetary policy pivots toward a more aggressive tightening stance, as it is currently doing to rein in elevated inflation. Financial stress could spread across countries. The production and shipping of food and fertilizer could be further disrupted, leading to widespread food shortages, pushing millions of people into food insecurity and extreme poverty.”
“The pandemic could worsen due to the appearance of new, more virulent variants and lead to the reintroduction of disruptive control measures. The simultaneous materialization of several downside risks could result in a much sharper and more prolonged global slowdown.”
Specifically, if faster tightening of U.S. monetary policy were to cause acute financial stress in EMDEs, European Union (EU) member countries were to face a sudden ban on their energy imports, and China were to experience renewed pandemic-related lockdowns; global growth could fall to 2.1 percent and 1.5 percent in 2022 and 2023, respectively.
The more subdued global economic prospects and the risks clouding the outlook underscore the major challenges policy makers face at the global and national levels.
Global efforts are urgently in 2022 has been revised down by 0.5 percentage point, as improved prospects in energy exporters are more than offset by downgrades to most other EMDEs. Indeed, forecasts for 2022 growth have been revised down in nearly 70 percent of EMDEs, including most commodity-importing countries. EMDE growth is anticipated to firm to an average of 4.3 percent in 2023-24, as the lingering effects of the war abated