00:00 Introducing Ayhan Kose, Director of the World Bank’s Prospects Group
00:47 Economic growth: Forecasts for the coming years
02:41 Trends: Advanced economies vs. emerging markets & developing economies
03:55 Global inequality and the impact for future generations
05:29 Forecast: The impact of the Omicron variant
06:52 Inflation, interest rates, and economic recovery
08:40 Responding to slowdowns in a context of record levels of debt
10:24 Booms and busts in commodity prices
11:39 Addressing the challenges ahead
14:35 Thanks Ayhan Kose for sharing your expertise!
00:00 - [Ayhan Kose] We have slowing growth, we have withdrawn policy support, and we have a plethora of risks that increases the possibility of a hard landing.
[Paul Blake] On this edition of "Expert Answers," we're asking if developing economies are headed for a hard landing. As the world enters the third year of the COVID-19 pandemic, the World Bank's Global Economic Prospects are forecasting a pronounced slowdown in economic activity. So what can we expect, what's driving this, and what can be done? For answers to this, and more, I recently spoke to Ayhan Kose, the World Bank's Prospects Group's Chief Economist and Director.
00:47 - [Paul Blake] So Ayhan, we saw strong global growth after economies recovered from the initial waves of COVID-19 lockdowns. What are your forecasts for the coming years looking like?
[Ayhan Kose] Indeed, Paul, we had a very strong rebound last year. That rebound was driven by pent up demand and significant policy support. Going forward, we are projecting a pronounced slowdown. And the numbers are very clear. The global economy delivered 5 1/2% growth last year. It's a remarkable number. But, going forward, this year, we will see growth around 4%. And the next year that number is going to go down to 3%. Why? Because, basically, pent up demand will not be there. Demand's going to be smaller. In addition, policymakers around the world are withdrawing these support measures. Between those two, we will have a slow down. There are risks down the road and those risks are significant. COVID is still with us. We are experiencing, of course, the Omicron variant. Debt levels are quite high. We have inflationary pressures. We have climate related challenges. When you put all of these with very limited policy space in emerging market developing economies, these risks increase the possibility of a hard landing. In a nutshell, we have slowing growth, we have withdrawn policy support, and we have a plethora of risks that increases the possibility of a hard landing. Policymakers need to be proactive to get ahead of these risks and mitigate that possibility.
02:41 - [Paul Blake] Talk to me about some of the trends when it comes to advanced economies versus emerging market and developing economies.
[Ayhan Kose] On the surface, advanced economies are slowing. Emerging market, developing economies are slowing as well. But, it is as if these two groups of countries are following different flight paths. Advanced economies are still flying hot. By the end of 2023, they are gonna go back to their pre-pandemic trend output levels. When you look at emerging market developing economies, they are flying low. At the end of 2023, their output levels are gonna be still 4% below what they would have if they didn't have the pandemic in trend terms. So, in the case of emerging market, developing economies, flying high is there, but at the same time, they don't have much gas left in their tanks. Between the two, you have slowing growth and you don't have the policy space to react if there is a risk materializing, there is this possibility of hard landing.
03:55 - [Paul Blake] And in light of these different flight paths that you're talking about here, to use your metaphor, do you think that we'll see global inequality start to widen? And what does that mean for future generations in countries around the world?
[Ayhan Kose] The truth is that this pandemic is a pandemic of inequality. It's not just incomes are being effected. You see availability of vaccines. You look at the access to education and healthcare. And of course, the scale of job losses, especially in the context of women, especially in the context of those workers in informal sectors, especially in the context of poor. So, when you put all of these together, the picture with respect to inequality is quite serious. And, you asked me about future generations. We had a significant loss when it comes to educational attainment. And of course that loss has huge implications when it comes to human capital. And these types of losses basically spread along the generations. So, if people were, for future generations, the big question is that how policymakers can implement policies to erase the scars of the pandemic. And our hope is that they will do so.
05:29 - [Paul Blake] I know you and your team spend months putting together these Global Economic Prospects reports, but here in the last kind of month, month and a half, we've seen the emergence of the Omicron variant. How has that affected your forecast?
[Ayhan Kose] So Paul, it is clear that this variant, Omicron, showed us, once again, the pandemic is still here. And we needed to learn how to live with the pandemic. We have seen so far much more limited lockdowns relative to what we saw, of course, in 2020. And if this wave subsides soon it's economic impact will be much milder. So it may dent global growth in the first quarter a little bit, but this will likely be followed by a pickup in the second quarter. So its overall impact will be limited. Having said that, there are risks of additional disruptions associated with the Omicron variant. Depending on how long we have to deal with Omicron, we might see global growth declining anywhere between 0.2 percentage points, to 0.7 percentage points than what we have in our baseline. We also need to worry about its inflationary impact, if we see a protracted wave, and how that protracted wave impacts supply disruptions.
06:52 - [Paul Blake] You mentioned inflation there. Some developing countries are starting to raise their interest rates to try to combat some of that inflation. How is that gonna impact recoveries?
[Ayhan Kose] So, inflation is a problem almost everywhere. When you look at the global economy, when you look at the advanced economies, last year we saw the highest rate of inflation since 2008. For emerging market, developing economies, we saw the highest rate of inflation since 2011. Of course, emerging market and developing economies central banks are trying to contain these inflationary pressures. 1/3 of these central banks already raised interest rates. On the one hand, growth is slowing. On the other hand, inflationary pressures are there, debts and deficits are quite sizeable. And monetary authorities need to get ahead of inflation so they have to increase interest rates. Fiscal authorities need to basically think about how they are going to reduce the debt and deficit at the same time. This will require a concerted effort to withdraw the policy in a calibrated fashion, thinking through how they can basically expand the revenue base, how they can have more efficient spending for public investment projects. And of course, ultimately, implementing the type of reforms necessary to improve overall productivity of the economy.
08:40 - [Paul Blake] Your report also highlights the record levels of debt that many countries, developing countries especially, are holding. How will that affect their ability to respond to any slowdowns or to the slow down that you're forecasting?
[Ayhan Kose] Yes, because of the pandemic, of course, there was a significant fiscal expansion. With that we saw the single highest increase in debt in 2020. Debt is high, at record levels. When you look at the public debt, when you look at private debt. And having these high debt levels limits the government's ability to implement fiscal policy, to basically allocate spending for health and education and infrastructure, and climate related, of course, projects. Now, that problem is an even a bigger issue for low-income developing countries. Some of these countries are experiencing debt distress, and they need the help from the global community. In the latest report, we look at historical debt-relief initiatives undertaken by the global community. And the lessons from those historical initiatives are very clear. We need to have aggressive debt reduction and we need to do that rapidly. We also need to make sure private sector creditors are on the table. They are basically doing what they need to do before these problems get out of control.
10:24 - [Paul Blake] We've seen these extraordinary booms and busts in commodity prices over the past couple years. Will this pattern continue over the foreseeable future? And how could that affect the poorest countries ability to recover?
[Ayhan Kose] So indeed, over the past two years, the price savings have been exceptionally strong. Commodity price collapsed with the arrival of the pandemic, and that surge, in some cases, reaching all time highs last year. Most emerging market and developing economies rely on commodity export for their fiscal revenues. Most of the time booms tend to be larger than busts when we look at these commodity cycles. So, if emerging market, developing economy governments can take advantage of these boom periods, use the windfalls more effectively during bust periods, they can smooth the cycle. And of course, they also need to find ways to diversify their economies, implement disciplined policies, and ultimately get the best out of their natural resources.
11:39 - [Paul Blake] So you've made some forecasts here. We've talked about some of the causes for this outlook, for what appears to be this unprecedented confluence of challenges. What needs to be done? What would you recommend to policymakers and others in terms of how they can address the challenges ahead?
[Ayhan Kose] When we think about the slow down, we are projecting. And the risks ahead of us. It is absolutely essential for national policymakers, and the global community, to be proactive. So at the country level, national policymakers need to carefully withdraw fiscal and monetary policy, think about the consequences of their decisions, and, at the same time, of course, communicate clearly what they are trying to do. That means having a medium-term plan. How they are going to overcome certain excesses accumulated because of the pandemic, and how they are going to create the revenues, how they are going to improve the public expenditure efficiency. Beyond that, in the medium and longterm, at the national level, there's a lot to be done in terms of reforms, in terms of policy interventions when it comes to health, when it comes to education, when it comes to infrastructure, when it comes to having a stronger digital service to different remote parts of emerging market developing economies. Ultimately the objective is to promote long-term growth prospects. Now, at the global level, I think the message is very clear. We need aggressive global cooperation in vaccines, in debt relief, and in climate change. All of these will require global community acting together and taking these challenges seriously and implementing the policies necessary.
[Paul Blake] Alright, so some difficult challenges ahead. Give us some hope, what are some bright spots on the horizon?
[Ayhan Kose] I think, Paul, there is no question we are in better shape today than we were two years ago, at the beginning of the pandemic. In a very short time period we were able to produce the vaccines in the case of advanced economies, some emerging markets, significant progress made in terms of vaccinating populations, but more progress is needed. I think that, as much as we worry about these risks than the problems, we know them. There are good reasons to be hopeful as long as we have a good sense of the challenges ahead of us.
14:35 - [Paul Blake] Fantastic. Ayhan Kose, thank you so much for taking the time today. A big thanks to Ayhan Kose for his time. If you wanna learn more, read the report, you can find it at worldbank.org/GEP. And while you're at it, send us your feedback: firstname.lastname@example.org. Until next time. Goodbye.
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