Tough times ahead for the global economy, say experts

A group of chief economists expect high inflation, greater food insecurity and lower wages to persist in 2022.

These are the key findings of the World Economic Forum’s Chief Economists Outlook report. It aims to identify priorities for further action by policymakers and business leaders in response to the compounding shocks to the global economy from the COVID-19 pandemic and geo-political events.

Instead of entering a post-pandemic recovery phase, economies are reeling from the fallout from the war in Ukraine as well as new outbreaks of COVID-19 and lockdowns in major industrial centres. Beyond the immediate humanitarian impact of the conflict and the ongoing health consequences of the pandemic, this has meant downward revisions to growth prospects and exacerbated inflationary pressures from disruptions to commodities and food supplies. The combined impact of these shocks means a continued focus on managing crises, a high risk of secondary shocks and a diversion from investment.

The view of the general public in high-income countries is also pessimistic. In only three countries – the US, Australia and Canada – do more people say they expect their standard of living to rise rather than fall. In seven of the 11 countries recently surveyed by Ipsos and the World Economic Forum, a majority say they are concerned about their ability to pay their household bills over the next six months.

At the beginning of 2022, the consensus forecast was for the largest economies to have returned to pre-COVID growth paths by the end of the year, led by China, Europe and the US. The OECD had forecast global growth at 4.5%. Forecasts were more subdued for low and middle-income countries, with growth predicted still to be 5.5% below trend in 2024 (excluding China). The expectation was that overall inflation would be short-term, upward movement on wages medium-term, and global fragmentation medium- to long-term but ultimately reversible.

Six months later, the picture is significantly different. The majority of respondents in the latest survey expect weak growth in the United States, China, Latin America, South Asia, East Asia, sub-Saharan Africa and the Middle East and North Africa. In Europe, the majority expect economic activity to be very weak.

According to the views of the economists surveyed for the Outlook report, the inflation outlook in 2022 remains toughest for Latin America and the US. Fewer respondents expect very high pressures for MENA, Europe, sub-Saharan Africa, South Asia and East Asia, including China. Overall, inflation expectations are highest for the US, followed by Europe and Latin America.

In parallel, two-thirds of economists expect average real wages to decline in the near term in developed economies, while one-third are uncertain. However the vast majority of respondents expect average real wages to fall across low-income economies.

The war in Ukraine is having significant global repercussions, says the report. In 2020, 36 countries imported more than 50% of their wheat from Russia or Ukraine. In March 2022, the Food and Agriculture Organization’s Food Price Index leapt to its highest level since its inception in 1990.

Vegetable oils, cereals and meat sub-indices are at all-time highs, while wheat prices are forecast to increase by more than 40%. In the next three years, economists expect higher food insecurity in Latin America and South Asia and a highly insecure environment in sub-Saharan Africa and in the Middle East and North Africa.

The Outlook survey cites a UN report which says a combination of rising food and energy prices and their impact on already strained public budgets in many countries could lead to food shortages and blackouts, and trigger secondary armed conflicts. There is agreement among the economists in the Forum report that food security is unlikely to be affected in the US, Europe and, to a lesser extent, China and the East Asia and Pacific region. As a reaction to the drop in global supply, export restrictions are being erected in the name of national interests.

Global supply chains have been increasingly redrawn over the past years, including through the shock of Brexit, the deep impact of the global pandemic, and uncertainty caused by the war in Ukraine. Amid fears of continued shocks, both governments and business are rethinking their approach to exposure, self-sufficiency and security in trade and production relationships, says the report.

Chief economists expect a substantial restructuring of supply chains in the next three years. The realignment of global value chains along new geopolitical fault lines is also considered likely. Around 1,000 companies have announced stronger measures in relation to their presence in Russia than international sanctions currently require.

As well as fragmenting value chains, the report says the pandemic experience has strained trade relationships and financial ties. The repercussions from recent geopolitical events are both cementing and disrupting these trends, creating new fault lines in physical integration and compounding rifts where spheres of US and Chinese influence have become a feature of the current system. A majority of economists polled expect goods, technology and labour markets to fragment further.

The Outlook report concludes that aside from mitigating the immediate energy price shock, governments find themselves faced with the medium-term challenge of overhauling their national energy policies while aiming to balance supply security with climate-related targets. It warns that prioritizing short-term national interests risks deprioritizing the urgent need for action to combat climate change.

Faced with domestic pressures and tough decisions in uncertain conditions, the report’s authors believe it will therefore be critical for policy-makers to remain focused on the longer-term horizon, and a continued understanding of the world’s shared humanity and common future.