In 2021, the world economy surged to a growth spurt not seen in 40 years, but the momentum is expected to lose steam during this year and the next, said the United Nations, owing to lingering supply-chain constraints, rising inflation, and new waves of COVID-19 infections.
“After a global contraction of 3.4 percent in 2020 and following an expansion of 5.5 percent in 2021, the highest rate of growth in more than four decades, the world economy is projected to grow by 4 percent in 2022 and 3.5 percent in 2023,” according to the World Economic Situation and Prospects 2022 report published Thursday.
Even as global economies start recovering from the pandemic-era lockdown and restrictions, free flow of commerce and industry remains fragile with the advent of the Omicron variant that has disrupted workers returning to offices and contributed to logistical constraints.
“Near-term global growth prospects face major risks with the pandemic far from over. With new waves of infections spreading quickly, the human and economic tolls are expected to increase,” reads the report.
Robust consumer spending and an increase in investments spurred the growth after a significant period of inactivity. Trade has now bounced back to exceed pre-pandemic levels. But the effects of monetary and fiscal restrictions will hamper future growth in major economies.
The Fed’s tapering of asset purchases and interest rate hikes to curb the almost 40-year-high inflation in the United States will have an impact on local businesses and international trade. As credit becomes more difficult to obtain, companies will start spending conservatively leading to constraining chain reactions throughout the market.
“Rising inflationary pressures in major developed economies and a number of large developing countries present additional risks to recovery. Global headline inflation rose to an estimated 5.2 percent in 2021, more than 2 percentage points above its trend rate in the past 10 years,” reads the report.
The organization warned about abrupt and unexpected changes in monetary policies having adverse effects in emerging economies like financial instability, currency depreciation, and rapid inflation.
People living in absolute poverty will reduce to 876 million this year, said the agency as poverty rates are anticipated to go down in East Asia and South Asia. In 2023, the number of poor people in Africa is expected to rise due to slow recovery in employment levels and insufficient fiscal reforms.
The U.N. projects that “global trade in goods and services will grow by 5.7 percent in 2022 after an expansion of 11 percent in 2021,” if Omicron does not cause much disruption. Even though global investments have expanded to 7.5 percent, the organization points to “large fiscal stimulus packages and ultraloose monetary policies,” which cannot continue for a prolonged period.
Growth in the United States will decelerate to about 3.5 percent in 2022. The recovery, which was mostly driven by disposable household income from fiscal stimulus, will lose steam as the high inflation levels combine with associated monetary restrictions. The supply chain crisis and shortages of key materials like semiconductors will add to the slowing of the economy.
As for the European Union, “another wave of the pandemic prompted the reintroduction of containment measures that are disrupting many service sector activities.” Inflation has gone up but the European Central Bank is estimated to sustain low-interest rates till 2023. Growth will moderate to 3.9 percent for this year.
Ultra-strict pandemic protocols will slow China’s growth this year to around 5.2 percent from 7.8 percent in 2021. “The reintroduction of restrictive measures under the ‘zero-COVID-19’ policy has taken a toll on services and consumption while policy-induced property market cooling and temporary power rationing to phase out fossil fuels have weighed on investment.”