The United States may ride out a recession, but the rest of the world may not be so lucky

The United States may ride out a recession, but the rest of the world may not be so lucky

With optimism growing that the US economic slowdown will end in a soft landing or a mild recession, most of the world is bracing for a sharper downturn.

Last year, gloom prevailed, with more than two-thirds of economists predicting a recession in the United States in 2023. But the outlook has since improved amid more evidence of easing inflation and an economy that continues to run relatively smoothly.

Just over half of US business leaders say the US economy is already in recession or expect it to start next year, according to a survey Monday by the National Association for Business Economics (NABE). And while NABE still refers to that number as “high,” it is down from the previous poll in October, when 64% of respondents were convinced of a recession coming.

The Fed’s war against rising prices has not yet been won, and lowering inflation may be more difficult in the future, but the momentum for just a mild recession in the US is undoubtedly building. However, for the rest of the world, the outlook is much more dire.

Developing countries, especially those heavily indebted and hit hard by global economic shock waves emanating from Ukraine, are staring down the barrel of years of slowing economic activity, according to one of the world’s largest international finance institutions. The end result can be a reversal of years of hard-earned development.

“It’s a prolonged slowdown,” World Bank President David Malpass said in an interview Sunday. Sky News. “It’s not exactly a cycle the way we used to have it in the past, and that has to do with continued inflation, and the lack of new investment that’s happening now.”

The perfect economic storm

Malpass described the ongoing economic consequences of the pandemic and the spike in food and fertilizer prices caused by the Ukraine war as a perfect storm that could set the developing world back by years.

“You get this combination of forces that make them fall into a recession, but it’s worse than that. It’s really a reversal in development. Poverty is getting worse, education levels are going down in a lot of countries,” he said.

The global inflationary impact of the Ukraine war has hit poor countries the hardest, throwing energy and food markets around the world into chaos. The International Monetary Fund issued an economic forecast in April titled “War Restores Global Recovery,” which predicted inflation in emerging markets would rise by 8.7% in 2023, compared to 5.7% in advanced economies.

The International Monetary Fund report warned that the deterioration of global economic conditions threatens to undermine development gains against poverty and hunger in the world. Philanthropists and humanitarians have shared these concerns, including Bill Gates, who in June described “huge global setbacks” to development due to war and the pandemic as the reason behind his foundation’s $9 billion annual output surge.

Malpass of the World Bank warned on Sunday that slowing growth in much of the world could set back global development for years.

“My concern is that this slowdown, this period of slow growth for the world, may continue into 2023-24 and that is a concern,” he said. “As you look out one year and two years ahead, it’s hard to see that there will be a strong rebound.”

For months, Malpass has been warning about overlapping crises creating devastating economic conditions in the developing world. In June he said much of the world was heading for recession and stagflation, a combination of low-to-zero growth and persistent inflation — a scenario he then described in September as a “perfect storm” of challenges.

In its annual report earlier this month, the World Bank warned that the world was “perilously close” to a global recession, while Malpass said it was already seeing “devastating setbacks in education, health, poverty and infrastructure” in the developing world. In addition to the severe backlog of financing for adaptation to climate change.

The most urgent crisis in the developing world

Advanced economies may also experience a slowdown in economic growth next year even if they avoid a recession. For example, Mark Zandi, chief economist at Moody’s, dismissed US recession warnings earlier this month, writing that the most likely scenario would be “a slow recession – growth that comes close to a standstill but never slides into reverse.”

But if the United States and other rich countries are going through a period of slow growth, the economic downturn in the developing world could be even more severe.

During his interview, Malpass suggested that the escalating debt crisis in the developing world is responsible for the poor outlook. Debt among developing countries was already high before 2020, but the pandemic and loss of revenue have caused debt levels to soar, while inflation and a strong dollar last year raised the specter of default and prolonged economic hardship as borrowing costs rose in poor countries.

“Debt is a huge challenge,” Malpass said, adding that another debt crisis occurring in advanced economies is draining “a large portion of global capital” leaving less money and financing available to developing countries, which are struggling to pay their debts. Huge debt due to low growth and low investment.

Malpass called on advanced economies to adopt more efficient budgeting and spending plans, including subsidy plans that target the most vulnerable segments of their society. For developing countries, Malpass said it is almost impossible for them to pay their debts in the current climate. “At the moment, there is no capital availability,” he said.

Instead, creditor countries and the private sector should explore more debt relief solutions. “There needs to be a hard look at large amounts of debt reduction,” Malpass said, echoing requests for debt relief he’s made since last summer.

These requests have so far fallen on deaf ears, with US officials recently accusing large lenders such as China of being sluggish in debt restructuring talks and not providing enough transparency in loan agreements. During a running trip to Africa, US Treasury Secretary Janet Yellen explores debt relief negotiations between developing countries and creditors including China. Last week, during a meeting with Chinese Vice Premier Liu He to discuss debt restructuring, she warned that failure to implement debt relief programs could lead to more war and global instability.

Last year, developing countries owed about $35 billion in debt payments, according to the World Bank, more than 40% of which is owed to China.

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