The Bank expects that the world economy will grow by only 1.7% this year - a 1.3% decrease from what it predicted in June.
The most recent report contributes this to the expected factors - the war in Ukraine and the COVID-19 pandemic.
The key challenge for policy makers to overcome, according to the report, is the impact of higher interest rates.
David Malpass, the President of the World Bank, said the downturn would be "broad-based" and growth in earnings in nearly every part of the world was expected to "be slower than it was during the decade before COVID-19".
The growth figure of 1.7% would be the lowest figure since 1991, with the exception of the 2009 and 2020 recessions.
It's pointed out that the rise in rates has been done by central banks "with a degree of synchronicity not seen over the past five decades" to tackle soaring prices,
This warning comes ahead of monetary policy meetings by the US Federal Reserve and Bank of England next week, which are expected to increase key interest rates.
On Thursday, the World Bank said the economy on a global level was in its steepest slowdown following a post-recession recovery since 1970.
According to a study "the world's three largest economies - the US, China and the euro area - have been slowing sharply," it said.
"Under the circumstances, even a moderate hit to the global economy over the next year could tip it into recession."
The World Bank also urged central banks to coordinate their actions and "communicate policy decisions clearly" to "reduce the degree of tightening needed".
While attending the World Bank and IMF spring meetings in Washington on Thursday, Bailey said the BoE is striking a difficult balance between combating inflation and tackling the threat of recession. He also voiced concerns over increasing wages keeping inflation higher for longer.
"We are now walking a very tight line between tackling inflation and the output effects of the real income shock, and the risk that that could create a recession and pushes too far down in terms of inflation," Bailey said at the Peterson Institute for International Economics.
While officials have begun to tone down their language on the need for further rate hikes, Bailey did point to another rise next month. The BoE has already increased interest rates on three occasions since December. Some traders believe the bank is looking to adjust rates from their current 0.75% level to 2.5% by this time next year.
In March, consumer price inflation hit a record 7%, over three times higher than the BoE’s target of 2%.
The FTSE 100 dropped 0.3%, while France’s CAC was down 1.1%. In Germany, the DAX fell 1%. Across the pond, US benchmarks closed lower on Monday. Wall Street’s S&P 500 dropped around 0.1%, as did Nasdaq and Dow Jones.
World Bank Chief Economist Carmen Reinhart has warned that the global economy is experiencing a period of “exceptional uncertainty.” Reinhart cited an “array of disruptions”, including lockdowns in China, soaring food prices, and the conflict in Ukraine. She said she would not rule out further downgrades to the growth outlook.
On Monday, the World Bank slashed its global growth forecast for the year by almost a full percentage point, to 3.2% from 4.1% because of the added economic pressures of the war in Ukraine.
"Unsurprisingly the weak economic outlook, uncertain geopolitical situation and rising inflationary environment has prompted the World Bank to cut its 2022 global growth outlook," said Michael Hewson, chief market analyst at CMC Markets. "This move is likely to be followed by the IMF later this week as it gets set to meet in Washington."
With ongoing chaos caused to industry in the east of the country and a blockade of Black Sea ports in the south, Ukraine’s GDP is projected to drop by approximately 45% in 2022.
The World Bank warned that Russia will likely also fall into recession, as will many other countries surrounding Ukraine, with some likely to soon require external support from international agencies to prevent them from defaulting on existing debts.
On Sunday, the World Bank said, “The war is having a devastating impact on human life and causing economic destruction in both countries, and will lead to significant economic losses in the Europe and central Asia region and the rest of the world.”
“It comes at a particularly vulnerable time for ECA as its economic recovery was expected to be held back by scarring from the pandemic and lingering structural weaknesses. The economic impact of the conflict has reverberated through multiple channels, including commodity and financial markets, trade and migration links, and the damaging impact on confidence.”
Is globalised trade in reverse? Is protectionism on the rise with the potential of a spreading trade war? These are questions at the top of many business leaders’ minds. The answer to both these questions is yes, and business models are going to have to change as a result. Dr Joe Zammit-Lucia, co-author of ‘Backlash: Saving Globalisation from Itself’, explains for Finance Monthly.
WTO figures already show a significant slowdown in the growth of international trade as a percentage of GDP. We are still only at the early stages, but a trade war and a stalling of globalized trade is almost inevitable.
This first part of the 21st century has seen many shifts from the post-war global world order that we had all become used to and on which the trans-national business model has been built. These changes are significant, encompassing political, cultural and economic shifts that have upended old assumptions.
To cite but a few examples, global governance structures (WTO, IMF, World Bank, etc) were previously seen as fair arbiters of the global order. Now their governance structures are seen by developing countries as dominated by the West and by the developed world as no longer serving their interests.
‘World trade produces net benefits for all’ was the 20th century mantra. Now it is clear that such benefits are very unevenly distributed with consequent economic, social and political implications. The free movement of global capital was seen as a vital fuel for growth and development. Now it is seen as potentially destabilizing, a system for hiding large amounts of illicit money, and a facilitator of tax arbitrage.
Low labour costs were seen as the competitive advantage of developing countries. Now they are seen as the basis of ‘unfair competition.’ Persistent trade imbalances were dismissed. Now we understand their corrosive effects on deficit countries.
In an information driven world, privacy and national security issues affect trade – from the manufacturing of routers to the security of data platforms, to building self-driving cars. For instance, Qi Lu of the Chinese tech company Baidu explains: “The days of building a vehicle in one place and it runs everywhere are over. Because a vehicle that can move by itself by definition it is a weapon.
But maybe most important is the major geopolitical shift. The post-war world order was characterized by Western dominance and overseen by the hegemonic power of the US. Now we have three more or less equally potent trading blocs – the US, China and its sphere of influence, and the European Union. Economists have known for decades that in such a structure, competition between blocs was much more likely than co-operation.
Trans-national business has played a role in these changes. A meaningful proportion of the US trade deficit comes not from ‘Chinese goods’ but from American goods that are being manufactured in China (the computer I am writing this on, for example). Businesses have long engaged in arbitrage between countries in investment, jobs and taxes, nurturing, over time, what has turned out to be a political time-bomb.
Neither can business leaders be blamed for such behaviour. They were doing their job: optimizing their business models. But times have changed. The rules of world trade need overhaul. And business models will have to change with them.
Some business leaders are already taking action. “The days of outsourcing are declining. Chasing the lowest labor costs is yesterday’s model” says Jeff Immelt of GE. “Now we have a strategy of localization and regionalization” states Inge Thulin of 3M.
It is also worth bearing in mind that the trade agreements that we have all become used to were developed in a world of trading largely in goods. They are poorly suited to trade in services, digital commerce and large financial flows.
It is tempting to dismiss talk of trade wars as a Trump phenomenon. Much bombast, little meaningful action, and something that will soon pass. That would be to misunderstand the slow but sure tectonic shifts – political, cultural and economic – that are happening.
How individual businesses react, or, preferably, pre-empt these shifts will determine their future performance. And they will determine whether the political consequences of their actions will, over time, smooth things out or make them worse.
