TWN Info Service on Finance and Development (Jan23/02)
27 January 2023
Third World Network

UN: Global economic growth to slow sharply due to multiple shocks
Published in SUNS #9732 dated 27 January 2023

Geneva, 26 Jan (Kanaga Raja) — Global economic growth is projected to decelerate from an estimated 3 per cent in 2022 to 1.9 per cent in 2023, marking one of the lowest growth rates in recent decades, a new United Nations report has said.

According to the World Economic Situation and Prospects 2023 report, issued by the United Nations Department of Economic and Social Affairs, the deceleration in world output growth is the result of a series of severe and mutually reinforcing shocks – the COVID-19 pandemic, the war in Ukraine and resulting food and energy crises, surging inflation, debt tightening, as well as the climate emergency – that battered the world economy in 2022.

It said that the economic outlook for 2023 and 2024 remains notably uncertain.

“It is highly susceptible to the pace and sequence of further monetary tightening, the course and consequences of the war in Ukraine and other geopolitical tensions, and the possibility of further supply chain disruptions,” the report added.

“This is not the time for short-term thinking or knee-jerk fiscal austerity that exacerbates inequality, increases suffering and could put the SDGs (Sustainable Development Goals) farther out of reach. These unprecedented times demand unprecedented action,” said United Nations Secretary-General Antonio Guterres.

“This action includes a transformative SDG stimulus package, generated through the collective and concerted efforts of all stakeholders,” he added.

According to the UN report, the world economy faced a series of severe and mutually reinforcing shocks in 2022 as it approached the mid-point of the 2030 deadline for achieving the Sustainable Development Goals (SDGs).

“While the COVID-19 pandemic receded in many regions, the war in Ukraine unleashed a new crisis, disrupting food and energy markets, and escalating food insecurity and malnutrition in many developing countries.”

Surging inflation across the world reduced real income, triggering a global cost-of-living crisis, particularly for the most vulnerable groups.

At the same time, the climate crisis continued to impose a heavy toll, with heat waves, wildfires, floods and hurricanes inflicting massive economic damages and generating humanitarian crises in many countries, it said.

These shocks and the monetary policy responses to inflation have put the world economy on a slippery slope, it added.

“High inflation has prompted aggressive monetary tightening in many developed and developing countries.”

Rapid interest rate hikes by major developed country central banks have triggered capital outflows and currency depreciations in developing countries, increasing balance-of-payment pressures, said the report.

Financing conditions have tightened sharply amid high levels of debt and rising debt servicing costs, increasing fiscal consolidation pressure and sovereign default risks.

Rising interest rates and diminishing purchasing power have eroded consumer confidence and investor sentiment, further weakening the near-term growth prospects of the world economy, said the report.

Against this backdrop, it said global economic growth is projected to slow to only 1.9 per cent in 2023, sharply lower than the 3 per cent in 2022. Global growth is forecast to moderately pick up to 2.7 per cent in 2024.

The report said the slowdown is broad-based, unfolding across developed and developing countries. While the lifting of COVID-19-related restrictions in most countries in 2022 supported domestic demand recovery, rising inflation weakened household and business spending.

Trade growth slowed sharply amid continued supply chain weakness, tapering demand for consumer goods and a protracted war in Ukraine, it added.

ECONOMIC GROWTH FACES STRONG HEADWINDS

Amid high inflation and tighter monetary policy, the United States of America and the European Union (EU) face sharp growth slowdowns in 2023, said the report.

“In China, growth is projected to pick up in 2023 due to the easing of COVID-19-related restrictions but will likely remain below the pre-crisis trend.”

After expanding by 5.7 per cent in 2021, growth of gross domestic product (GDP) in the United States fell to 1.8 per cent in 2022 and is forecast at only 0.4 per cent in 2023, said the report.

It said that consumer spending, which accounts for about 70 per cent of economic activity, is expected to soften considerably, despite a still buoyant labour market that made a full recovery, in numerical terms, from the 22 million jobs lost at the outset of the pandemic.

With a still tight labour market in the United States, average hourly earnings in the private sector rose by 4.7 per cent year-on-year in October 2022.

But with inflation averaging about 7.7 per cent during the same period, households saw their purchasing power erode and are projected to cut spending.

Meanwhile, a strong dollar will hurt exports and exacerbate the trade deficit of the United States, negatively impacting GDP growth, said the report.

The housing market has taken a hit due to higher mortgage rates and soaring building costs, with residential fixed investment and home sales declining.

The house price index has trended downward since June 2022. The net worth of households in the United States fell from $142 trillion in the first quarter of 2022 to $135 trillion in the third quarter.

“Diminished household net worth and the wealth effect are likely to lead to a further reduction in household spending in 2023,” the report cautioned.

It said that the economic outlook for Europe is grim due to the fallout from the war in Ukraine.

It said many European countries are projected to experience a mild recession during the winter of 2022 to 2023, as high inflation reduces household purchasing power and increases production costs for firms, interest rate hikes tighten financial conditions, and sizeable fiscal deficits and elevated debt levels constrain governments’ ability to provide further fiscal support to the economy.

“Growth in the GDP of the European Union is forecast at only 0.2 per cent in 2023, after a surprisingly strong expansion of 3.3 per cent in 2022, when further relaxation of COVID-19 restrictions and the release of pent-up demand boosted household spending.”

Despite massive policy efforts, the region is still vulnerable to disruptions in energy supplies and gas shortages, it added.

It said that the economy of the United Kingdom is estimated to have entered recession in the second half of 2022, with GDP projected to contract by 0.8 per cent in 2023.

It added that lower real incomes, rising interest rates and elevated uncertainty are depressing aggregate demand in the economy.

“In addition, external demand is expected to weaken amid slowing growth in the European Union and the United States. Fiscal austerity measures, including cuts to public services, will likely deepen or prolong the downturn.”

In contrast, the report said growth in China is expected to moderately improve in 2023. The Chinese economy is estimated to have grown by 3 per cent in 2022, marking a significant downward revision from earlier projections, due to recurring COVID-19-related lockdowns in different cities and prolonged stress in the real estate market.

It said with the Government abandoning its zero-COVID-19 policy in late 2022, and easing monetary and fiscal policies, the economy is projected to expand by 4.8 per cent in 2023.

The report said that bucking the trend in the developed economies, the Chinese monetary authorities cut the key lending rate in August and have since kept the rate unchanged at 3.65 per cent to ease credit constraints in the economy.

However, growth is still significantly lower than the pre-pandemic rate of 6 to 6.5 per cent, it added.

“Moreover, the re-opening from zero COVID-19 is expected to be bumpy. Increases in COVID-19 cases could continue to disrupt business activities and lower consumer sentiment.”

Growth prospects in many transition and developing economies have deteriorated due to protracted geopolitical tensions, high inflation, waning monetary and fiscal support, rising borrowing costs and projected slowdowns in major trading partners.

The contraction of the economy of the Russian Federation and Ukraine’s significant loss of output are expected to affect the rest of the Commonwealth of Independent States (CIS), said the report.

In Africa, slowing demand from China and the European Union, its main trading partners, and waning monetary and fiscal support are weighing on near-term growth prospects.

The report said amid elevated levels of debt and rising borrowing costs, several governments are seeking bilateral and multilateral support to finance public investment.

A few African countries are still coping with substantial public health concerns such as the Ebola virus and low shares of people fully vaccinated against COVID-19.

The report said that East and South Asian countries face headwinds similar to those in other regions. Moderate improvement in growth in 2023 mainly reflects the recovery of China’s economy.

“Weaker external demand will adversely affect manufacturing activities and investment in export-dependent economies, such as Malaysia and Viet Nam.”

Economic growth in India is projected to moderate in 2023, with higher interest rates weighing on investment and slower global growth weakening exports, it added.

While economic growth prospects in oil-producing countries in Western Asia have slightly improved through high energy prices, a less favourable external environment and rising fiscal constraints will negatively impact growth in the region’s non-oil producing economies in 2023.

The outlook in Latin America and the Caribbean remains challenging amid unfavourable external conditions, limited macroeconomic policy space, and elevated and persistent inflation, said the report.

Growth in Brazil is projected to slow sharply given monetary tightening, fiscal consolidation pressures and slower export growth. In Mexico, GDP growth will remain anaemic considering the slowdown in the United States, tightening monetary policy and supply chain disruptions hampering industrial activity.

The report said the least developed countries, many of which are highly vulnerable to external shocks, will face continuing challenges in 2023. As most of these countries are food and oil importers, disruptions in global food supplies and rising prices are intensifying food insecurity and adding to balance-of-payment pressures.

Growth is estimated at 4.3 per cent in 2022 and projected at 4.4 per cent in 2023, significantly below the 7 per cent target set in SDG 8, on decent work and economic growth, it added.

The report said limited productive capacity, insufficient fiscal space, large macroeconomic imbalances and rising debt vulnerabilities propel rising risks of a lost decade for many least developed countries.

“For the small island developing States, the short-term outlook also remains bleak, as tourist arrivals have not fully recovered from the pandemic, and many of these countries are disproportionately affected by growing climate risks and natural disasters.”

The landlocked developing countries, which have transport costs that are 50 per cent higher than other countries in normal times, confront additional logistical challenges as steeper energy prices exacerbate intrinsically greater transport costs and connectivity gaps, it added.

ENERGY AND FOOD CRISES

The war in Ukraine has had significant negative spillover effects globally. Regional security concerns, shipment restrictions through the Black Sea ports and economic sanctions against the Russian Federation have adversely affected energy and food supplies, said the report.

It said since the Russian Federation is one of the leading energy exporters, and both the Russian Federation and Ukraine are major suppliers of grains and fertilizers, the war accelerated the upward trend in oil and natural gas prices along with food prices, among other commodities, particularly during the first half of 2022.

In the second half of the year, energy and food prices receded amid a deteriorating global outlook for economic growth.

In particular, Brent crude oil prices increased from about $78 per barrel at the beginning of 2022 to a peak of $130 per barrel in June, before declining to around $85 per barrel in late November.

In Europe, natural gas prices surged from about $5 per million British thermal units (Btu) before the pandemic to $99 per million Btu on 26 August 2022, before dropping to $35 per million Btu in November, said the report.

The food commodity price index of the United Nations Conference on Trade and Development (UNCTAD) rose steeply during March and May 2022.

“Despite some easing afterwards, food prices have remained close to the record highs experienced during the 2008-2011 global food crisis.”

Currency depreciations against the dollar in many developing countries have further contributed to higher food and energy prices in domestic currencies, said the report.

Although grain shipments through Black Sea ports have generally resumed through the Black Sea Grain Initiative brokered by the United Nations and Turkiye, food supply challenges persist as the duration and intensity of the conflict between the Russian Federation and Ukraine remain highly uncertain, it added.

“Furthermore, food export restrictions implemented in a few developing countries have contributed to further diminishing supplies and increasing the cost of food imports.”

As of June 2022, export restrictions had pushed prices of wheat, rice and soybean oil up by 9 per cent or more.

While a few countries ended food export restrictions as of October, about 7 per cent of traded calories remained restricted due to a ban, licensing or tax.

“Other pressures come from higher fertilizer and energy prices, which will likely reduce fertilizer imports and crop yields in many developing countries. More frequent and catastrophic climate disasters could also diminish agricultural output in the near term.”

Higher food and fertilizer prices and food supply disruptions present food security concerns in many developing countries but particularly those that are net food importers, said the report.

For example, it said that food insecurity has worsened in Ethiopia, Nigeria and South Sudan.

According to the World Food Programme (WFP), the number of people, particularly women, facing severe food insecurity soared from 135 million in 53 countries before the pandemic to 345 million in 82 countries in 2022.

SURGING INFLATION

According to the report, after a long period of price stability, inflation has returned in many countries. Pandemic-induced inflationary pressures have proven persistent, with demand recovering quickly and supply lagging amid significant disruptions in supply chains.

Soaring food and energy prices and renewed supply shocks, caused by the war in Ukraine, have not only fuelled a surge in inflation but also pushed up short- and medium-term inflation expectations. In 2022, global inflation reached an estimated 9 per cent, the highest level in the past two decades, it said.

Upward price pressures will likely ease due to aggressive monetary tightening, but global inflation is projected to remain elevated at 6.5 per cent in 2023, it added.

In developed countries, nominal wages have risen amid tight labour markets, contributing to headline inflation and sparking concerns about “wage-price” spirals, said the report.

In the United States, inflation is projected to moderate from an estimated 8.1 per cent in 2022 to 4.8 per cent in 2023. In the European Union, consumer prices rose by an estimated 8.6 per cent in 2022 and are forecast to grow by 6.6 per cent in 2023.

The report said in developing countries, external factors, including greater import bills due to rising commodity prices and currency depreciations against the dollar, have added extra inflationary pressures.

Argentina, Venezuela, Lebanon, Sri Lanka, Sudan, Turkiye and Zimbabwe saw particularly high inflation as rates soared around the world.

The report also said the pandemic prompted many countries, especially China and other Asian export-oriented economies, to introduce measures restricting mobility. This disrupted global supply chains in manufacturing.

With the expectation of slowing global demand, businesses quickly laid off workers and scaled back production at the outset of the crisis.

The report said unprecedented fiscal packages, however, ignited a strong and swift recovery of consumer demand in the developed economies.

“As pandemic-related restrictions persisted in 2021, households reduced spending on contact-intensive services such as restaurant meals and recreational activities and increased spending on goods, particularly durables.”

The supply of these goods, often involving complex supply chains, failed to keep pace with surging demand. At the same time, shipping bottlenecks increased transportation costs, intensifying price pressures, it added.

It noted that firms struggled to return to pre-COVID-19 levels of staffing and operation in developed economies.

“Many laid-off workers chose to delay their return to the workforce or leave the labour market altogether. This resulted in acute labour shortages, especially in the United States, adding to inflationary pressures. Then came the war in Ukraine, which further disrupted global supply chains and pushed up energy prices.”

Oil prices were already on an upward trend before the war as declining demand during the pandemic led the Organization of Petroleum Exporting Countries Plus (OPEC Plus) to agree to cut output in 2020.

Price pressures broadened throughout 2022. Yet in most countries, especially in the developing world, nominal wages have not kept pace, said the report.

“This has diminished household purchasing power and triggered a cost-of-living crisis for many. Rapidly rising costs are taking a heavy toll on low-income households struggling to afford necessities such as rent, gasoline and food.”

It said the impact is higher in the least developed countries, where large shares of people already live in extreme poverty.

Since late 2021, many central banks have been raising interest rates in quick succession to bring inflation under control and anchor inflation expectations, the report noted.

It said this shift towards tighter monetary policy is exceptionally broad-based; over 85 per cent of central banks worldwide increased interest rates in 2022. The main exceptions to this trend are the People’s Bank of China and the Bank of Japan.

Central banks in many developed countries seek a “soft landing” for their economies, expecting to tame inflation without causing a recession, said the report.

The Federal Reserve in the United States has taken an aggressive stance, raising its key policy rate six times from 0 to 0.25 per cent in March 2022 to 4.25 to 4.50 per cent in December.

“This marks the Federal Reserve’s highest rate increase in any given year since 1980. It has also accelerated its balance sheet reduction since September 2022.”

The European Central Bank increased its key interest rates by a cumulative 250 basis points between July and December 2022 while also discontinuing its net asset purchases.

As inflation likely peaked in late 2022, central banks in the developed countries are expected to slow the pace of interest rate hikes in 2023, said the report.

“Higher interest rates in developed countries, coupled with a strong dollar, have further increased pressure on central banks in developing countries to tighten monetary policy.”

In many cases, most notably in Latin America, central banks had already started raising interest rates in 2021, taking an increasingly aggressive tightening stance in 2022.

In comparison, many Asian central banks started later and accelerated their interest rate hikes during the second half of 2022.

The report said that if supply-side constraints, including challenges in the labour market, are largely responsible for current inflationary pressures, however, aggressive monetary tightening may have limited success in curbing inflation.

It said central banks around the world are therefore facing difficult trade-offs between lowering inflation and sacrificing growth, with lower growth delaying recovery and raising unemployment.

The current global environment, with slowing economic growth, rapidly tightening global financial conditions and a strong dollar, threatens to exacerbate fiscal and debt vulnerabilities in developing countries, it added.

The report said sovereign borrowing costs escalated across developing countries in 2022. As a result, servicing external debt is becoming increasingly expensive, taking up a larger share of fiscal revenues and limiting much needed expenditures to support recovery and finance sustainable development.

Moreover, it said tightening financial and capital market conditions make it more difficult for many developing countries to roll over and restructure existing debt, pushing up risks of debt defaults.

It said that a growing number of developing countries find themselves in precarious debt situations. According to estimates by the International Monetary Fund (IMF), nearly 60 per cent of countries that are eligible for the Group of Twenty (G20) Debt Service Suspension Initiative were in debt distress or at high risk of debt distress in 2022, doubling from 27 per cent in 2015.

Lebanon, Sri Lanka, Suriname and Zambia are already in default, after the COVID-19 crisis exacerbated long- standing debt problems.

On 19 December 2022, Ghana announced it would suspend its payments on all external debt, with an outstanding amount of $28.4 billion, including $13.1 billion the country owes to private creditors.

NEED FOR EFFECTIVE COORDINATION

The report said monetary and fiscal policies in most countries have moved in the same direction in the past three years.

“To mitigate the economic impact of the pandemic, most countries lowered policy rates and increased public spending. More recently, countries have shifted to a contractionary monetary and fiscal policy stance to lower inflation and address rising debt distress.”

The report said as the pandemic lingers and the war in Ukraine continues, however, countries, particularly the developing ones, still need continued support to cushion the impact of the crises as well as continued public investment for sustainable development.

“This requires more effective coordination between monetary and fiscal policies, without compromising central bank operational independence and credibility.”

Monetary and fiscal policies could and should be complementary, the report said, adding that energy and food price inflation and a broad cost-of-living crisis have disproportionately affected vulnerable groups of people.

Policy tightening has weakened the global economic outlook and will slow income growth, which will affect the poor the most, it added.

“Fiscal policy can play a major role in protecting the most vulnerable, including through targeted cash transfers, food and energy subsidies, child credits and unemployment insurance.”

With effective targeting, such programmes are not expected to stimulate aggregate demand or be inflationary, it said.

Monetary tightening is contributing to higher borrowing costs, increasing rollover costs and debt-servicing costs, and prompting governments to cut much needed fiscal spending to stimulate recovery, it added.

“Monetary policy decisions will need to pay far greater attention to how higher policy rates impact output losses.

There can be significant trade-offs between inflation and output – often far greater than the trade-offs between inflation and unemployment. Such considerations must be taken into account when central banks set their policy rates.”

The pandemic, the global food and energy crisis, the worsening climate catastrophe and the looming debt crisis in many developing countries are testing the limits of existing multilateral frameworks, said the report.

It said many countries have responded to new challenges and threats by adopting more inward-looking policies, ignoring the spillover effects on the rest of the world.

“Such reactions are short-sighted. Only through globally coordinated and concerted policies and efforts can the world solve many current crises, ensure faster progress towards the SDGs and clear bottlenecks to effective resilience in the face of future shocks,” the report concluded.+