The head of the World Bank recently warned us that a “perfect storm” of challenges could reverse years of economic development and threaten to tip the global economy into recession – and potentially stagflation. The International Monetary Fund and the World Trade Organization have both warned that the world is entering a “global recession,” and experts say a combination of low growth and persistent inflation, known as stagflation, is a very real risk, particularly for developing economies.
Ngozi Okonjo-Iweala stated at the start of the World Trade Organization’s annual public forum in Geneva that both the World Bank and the International Monetary Fund have reduced their global growth forecasts and that trade indicators are “not looking too good.” Converging crises such as rising food prices, rising living costs, and an energy shortage, triggered by the Covid-19 pandemic and exacerbated by the Russia-Ukraine conflict, have created the conditions for a global recession.
Reasons behind the recession warning
The organization now forecasts merchandise trade volume growth of 3.0% in 2022, down from 4.7% previously and 3.4% in 2023, but these projections are less certain than usual due to the fluid nature of the conflict.
The crisis’s most immediate economic impact has been a sharp rise in commodity prices. Despite their small share of global trade and output, Russia and Ukraine are critical suppliers of essential goods such as food, energy, and fertilizers, all of which are now threatened by war. Grain shipments through Black Sea ports have already been halted, potentially threatening food security in developing countries.
The war isn’t the only thing weighing on global trade right now. Lockdowns in China to prevent the spread of COVID-19 have disrupted seaborne trade once again, just as supply chain pressures appeared to be easing. This could result in new manufacturing input shortages and higher inflation.
In an effort to reduce domestic inflation, rich and poor countries around the world have raised interest rates this year. However, Malpass warned that this approach significantly increased global recession risks and urged nations to consider alternative strategies.
Developing countries are amid one of the most globally coordinated periods of tightening monetary and fiscal policy. The World Bank’s President, David Malpass, added that trends in advanced economies, such as rising interest rates, slowing growth, lower economic productivity, and the depletion of global energy supplies, pose significant risks to the developing world.
Dr. Ngozi Okonjo-Iweala went on to say that the global economy would suffer “severe consequences” and that poorer countries would bear the brunt of the shortages and “food supply constraints.” Following Russia’s invasion of Ukraine, supplies of many food products, including wheat and corn, have been disrupted.
Industry groups have warned that there will be a shortage of sunflower oil in the EU. According to S&P Global, Ukraine accounts for 46.9% of global exports, and Russia accounts for 29.9%, but with Ukraine’s ports closed, it is struggling to export. Using Africa as an example, the former Nigerian finance minister said 35 of 55 countries there imported wheat and other grains from Russia and Ukraine, and 22 imported fertilizer.