Timestamps
00:00 Welcome! Introducing the topic and the expert
00:55 Main headlines of the Global Economic Prospects, Jan. 2023
01:44 The scope of the slowdown and its impact
04:12 The risk of a recession
06:51 Slowdown and development goals
08:50 Investment growth
10:27 What can countries do to overcome these challenges
13:01 The plight of small states
15:29 Good news about the global economy
18:13 Thanks Ayhan for sharing your expertise!
Transcript
[00:00] WB Expert: So, the global economy is on a razor’s edge. Even a small shock can trigger an outright recession.
Host: On this edition of Expert Answers, the attention turns to the global economy as we unpack the latest findings from the January 2023 edition of the Global Economic Prospects report. The main headline: that the global economy is dangerously close to a recession with global growth sharply declining due to high inflation, deteriorating financial conditions, rising geopolitical tensions and more.
So, what will this mean as we look to the year ahead? Is a global recession imminent, and how can countries overcome these challenges? Well, to answer these questions and more, let’s talk to the World Bank’s Director of the Prospects Group, Ayhan Kose.
[00:55] Well, Ayhan, it’s great to have you back on Expert Answers to talk about the Global Economic Prospects. I know we check in with you and your team every January and June as new additions of the report are launched. Tell me, what are the headlines for this year?
WB Expert: This year the big headline is unfortunately, once again, the global economy is in a tight spot. We downgraded our global growth forecast. We are now expecting global growth to be around 1.7%. This is half of almost what we expected six months ago. So, the global economy is on a razor’s edge. Even a small shock can trigger an outright recession.
[01:44] Host: I want to talk more about a global recession in a minute, but what really struck me this year with this report is the scope of the slowdown, right? That the countries, the economies, the people that are affected, the impact seems to be very widespread. Can you talk to me more about that?
WB Expert: Slowdown is a very sharp one, and it is broad-based. Relative to six months ago, when we released the Global Economic Prospects in June, we downgraded our forecast for 2023 for around 75% of countries around the world. For advanced economies, we downgraded this year’s forecast for almost all of them. For emerging market developing economies, we downgraded for nearly 70% of them. In the case of advanced economies, we are expecting a very deep downturn. So, they’re going to slow from 2.5% last year to 0.5% this year. This is one of the sharpest slowdowns we have seen over the past five decades. And when these types of slowdowns actually take place in advanced economies, they have forested of global recessions.
In the US, we are expecting growth to be around 0.5%. This is a very weak number for the US economy. In the Euro area, growth will be flat, zero, and of course that’s not a good outcome either.
So, some people debate whether the US will have a recession, the Euro area will have a recession. Actually, whether they will have a recession or not, they will feel it is like a recession.
In the case of emerging market developing economies, China is critical, and there is a major COVID outbreak in China that will have in the near term negative effects, and they will… these negative effects will translate into [? dollars] to the rest of the world. So, if you take out China, emerging market developing economies growth will slow from 3.5% last year to 2.7% this year. In the case of China, we are hoping that growth will be around 4%, but it is still 1% points almost lower than what we expected six months ago.
[04:12] Host: Sure. Let’s talk about this a bit more because of course, every forecast carries within some downside risks, right? That conditions could be worse than expected. You might have new factors come into play that exacerbate the situation. You touched upon this a bit in your previous answer, but how real is the risk of a recession and do you believe in a so-called, soft landing?
WB Expert: So, now, six months ago, we had a downside scenario. We talked about global economy could slip into a sharp downturn. That scenario has now materialized. So, our downside scenario six months ago became the baseline scenario for 2023, and global growth is really weak around 1.7%. This is the lowest growth rate since the early 1990s, outside of global recessions. The question is whether there will be a global recession.
Now, there is a large menu of risks, and a small shock, materialization of one of these risks, could trigger a global recession. One of these risks is associated with higher interest rates because inflation rates remaining persistently high. We are expecting inflation moderating this year relative to last year, but core inflation might remain elevated, and central banks have to continue increasing interest rates or they keep interest rates at a high level.
So, nowadays, interest rates around at the global level 5%. In the report we discuss one scenario, if global policy interest rates go up to 6%, we might end up seeing recessions in major economies and of course, a global recession. Meaning that, this global growth number I mentioned, 1.7%, could go down to all the way 0.6%. That means, of course, per capita income contracting by about 0.3%, and that is the technical definition of a global recession. And policymakers need to be proactive in an environment with multiple risks. The risk of policy mistakes is also higher.
[06:51] Host: I have to ask, from what you’ve just said here, what does this mean for our development goals, for poverty, for inequality in general? Because it doesn’t sound good.
WB Expert: That is actually the crux of the argument. When we think about poverty, when we think about inequality, when we think about inclusive growth, when we think about the types of development goals global economy set for itself by 2030. These goals are possible. For us to make meaningful progress in these goals, we need to have sustained, robust growth.
Three years ago, we had a global recession: global economy contracted because of the pandemic. Now, we are in the midst of a sharp downturn. When you look at during the next two years, emerging market developing economies — per capita income– in these economies will grow slightly below 3%. That’s 1% points lower than what they delivered on average during the previous decade, and we were not happy with that growth performance. So, even weaker per capita income growth.
In the case of Sub-Saharan Africa, which is basically home to 60% of extreme pool. Per capita income growth is going to be barely above 1%. What does that mean? That type of growth is far below what is needed to have meaningful reduction in poverty. So, with these growth outcomes, it is much more difficult for the global community to make serious meaningful progress when it comes to development objectives.
[08:50] Host: So, let’s talk a bit more about growth. One of the areas of this edition of the report mentions is around investment growth, and you highlight a slowdown in that area. Why is that a problem? Why is it going to be bad if we have poor investment growth?
WB Expert: Now, I’m happy you ask that. We go to international meetings. Of course, we have meetings in the World Bank, and there is not much agreement about what are the big global policy priorities. Some people might say the number one priority is power to reduction. Some people might say, “No, no, no. The number one priority is to increase growth, and basically make progress in terms of income convergence.” Some others might say, “No, no, no. Number one priority is climate change.” But the good news is that everybody agrees there is one solution. We need to have sustained, strong investment growth if we would like to make progress to deliver in these policy priorities. Whether that’s climate change, whether that is power to reduction or basically income convergence. What happened is that we basically ended up with a very weak income growth outlook, especially after the pandemic. Prior to the pandemic, investment growth has been slowing, along with of course, income growth.
When you think about the numbers from 2000 to 2009, investment growth around 9% to 10%, from 2010 to 2019 around let’s say 5%, so you basically half the number. During the pandemic, 70% of emerging market develop economies experienced outright investment contractions, so investment growth stopped. Since then, investment has been recovering at a very slow pace, and if you compare it with the 2010, again, we were not very happy with that performance. It is almost one third slower pace than what we saw after the global financial crisis. So, when we look at the future, this 5% number I mentioned is not going to be with us. We are going to basically see growth numbers, investment growth numbers around 3% to 4%. So, when we are not investing sufficiently today, it is difficult to generate potential growth, it is difficult to generate productivity growth, and it’s difficult to deliver broader development objectives
[10:27] Host: On the thing here is, we’re not dealing with just one crisis, right? We’re dealing with multiple crises, and they bring with them near term and medium term risks. What can countries do to overcome these challenges?
WB Expert: There are policy prescriptions at the global level, as well as at the national level. At the national level, policymakers need to take care of their house. They need to make sure their house is in order. So, in the context of short-term policies, frameworks, implementation, flexibility are the keywords. What do I mean by policy frameworks? We need robust frameworks in the context of fiscal policy, monetary policy, and in the context of course, financial policies. Take for example, fiscal policy. We need to have very clear debt sustainability metrics. We need to have a medium term fiscal plan, so we have a good idea about our revenues and expenditures. We are trying to adjust the fiscal policy through this difficult period.
The other important issue, of course, implementation. Sometimes, policymakers pass laws, they’re in the books, but they need to be implemented. And the crisis provides great opportunity to enforce policies. And finally, flexibility of policies, critical. Why? We are already in a tight spot, and we have multiple risks confronting the global economy. So, it’s important to be flexible, resilient, calibrate the policies as the new shocks emerge.
At the global level, there is no question what we need to do. We need to collaborate to address these global problems. Of course, that starts with the peace in Europe. We need to basically find ways to work even more aggressively to address the climate change challenge. We need to find ways to address the food insecurity in many countries, and we need to have robust frameworks to have quick and durable solutions in the context of debt related challenges we have.
[13:01] Host: So, let’s talk more about countries in particular, because another part of the addition this year, which I found particularly fascinating, is on the plight of small states. Now, these are countries that have a population of 1.5 million people or less. Tell me more about small states. Why are they significant? What are the issues that they’ve been facing and might continue to face if their economic situation were to worsen?
WB Expert: Yes, small states are like the canaries in the coal mine. In the sense that they tell us the magnitude of these shocks, we are experiencing, consequences of these shocks, and what might happen next.
In the report, we are looking at 37 small states. These are emerging market developing economies. They do not have diversified production basis. They rely on small number of goods. Most of the time, they rely on tourism. Most of them are small island states. They are quite open to trade, and they of course, import a lot of energy and food. So, what happened during the past three years created this perfect storm for these economies in the sense that during the pandemic, tourism collapsed primarily because of that, these economies contracted by about 11% in 2020. And this is seven times more than what happened in a typical emerging market developing economy.
Since then, of course, there were new shocks emerged. The shock associated with the Russian invasion of Ukraine created this turmoil in food markets, in energy markets. And of course, they translated into a negative shock, another negative shock for these small states.
Now, a number of them are highly indebted. Financing conditions have been getting tighter. It is becoming more difficult for them to basically make the [date -sic] debt payments. So, the recovery has been very slow in all likelihood that slow recovery will be with us for the foreseeable future.
It is very important to talk about the bigger challenge of climate change in the context of small states. These small states are very vulnerable to climate-related shocks, especially in the context of natural disasters. I mean, we see that the frequency of natural disasters has been increasing over time. And the typical natural disaster shaves of 5% of GDP on average in small state., this is much, much larger than what a typical emerging market developing economy experiences.
So, in a nutshell, small states actually are the perfect laboratory. When we think this, the adverse impact of these shocks, especially the climate-related shocks. National policymakers in small states need to undertake policies to make their economies resilient. And there is no question about that, and these policymakers do know that. But the room for policy implementation is limited. So, small states have unfortunately large problems. Global community needs to provide help, and that help should be quite sizable.
Host: I mean, what you just said about their economic output falling 11% in 2020. I mean, that to me, that’s a pretty massive statistic. So, to me, from what you’ve just said, it sounds like there really is a lot at stake when it comes to small states.
WB Expert: Indeed, there is a lot of stake. 11% contraction, you might call that a depression. So, the challenge is that, when we look at, for example, how they have been recovering, they have been recovering, as I mentioned, very slowly. We are hoping that this year they are going to go back to their pre-crisis GDP level. Emerging market, developing economies actually recovered within two years. Advanced economies recovered very quickly, but recovery has been very slow because of this multiple crisis global economy has been experiencing, and each of this crisis has been really hitting these economies.
[15:29] Host: So, Ayhan, we have unpacked a lot here today, and I know a lot of it has been pretty grim, but in the spirit of the new year, I have to ask, can you give me some good news about the global economy?
WB Expert: Yes, good news. Good news are there. First of all, there is greater recognition of the inflation problem. Especially during the past year, major central banks, central banks in emerging market developing economies have been acting decisively to get ahead of the inflation problem. Six months ago, we talked about the threat of stagflation, but the policymakers acted decisively. So, we think that inflation will moderate, and that’s good news. I think second piece of good news is on the financial stability front. Despite repeated interest rate increases, financial sector has been resilient. This does not necessarily mean that there are some cracks here and there in the system. We will see this year, hopefully there won’t be a major crack. And I think the third important news, when we look back 2022, there is greater recognition by the global community: the need that there should be larger resources to address the climate change problem.
I’m not saying that we are making sufficient progress, but we can make no progress if we do not recognize the magnitude of the problem and the magnitude of resources needed to solve that problem. I think we have made good progress last year in terms of acknowledging the problem and acknowledging the need to address this problem. In this context, investment is critical. We raise the issue of investment weakness. Of course, without significant infrastructure investment, we cannot overcome the climate challenge. So, it is a demo outlook, but I think there are good reasons to be optimistic and we should look to the future, stay on course, and on the part of policymakers deliver what is necessary in a credible fashion.
Host: And perhaps, as you said, not only does it let us look ahead, but these moments really offer up a chance to reflect on what we’ve been doing.
WB Expert: Indeed.
[18:13] Host: Well, Ayhan, thank you again so much for joining me on Expert Answers, and unpacking some of the findings from this year’s Global Economic Prospects report. Really appreciate it. Thank you.
WB Expert: Thank you. Thank you, Sri.
Host: Thank you so much.
Several crucial yet sobering messages coming to the fore from our conversation here today. You can of course get your very own copy of the Global Economic Prospects report. It’s available now, and it is chockfull of analysis and data on the topics that we’ve touched upon here today. And there is also a special focus in this edition on investment growth prospects, post pandemic, as well as the plight of small states.
To get your own copy, head on over to our website, www.worldbank.org/gep, G-E-P. That’s it for this edition of Expert Answers. We’ll see you again next time. Goodbye.
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