The war in Ukraine is weighing on aggregate emerging market and developing economies (EMDEs) growth prospects owing to higher inflation and input costs, disruptions to trade, weaker confidence, and a steep rise in policy uncertainty, according to the latest World Bank EMDE outlook.

These will add to pre-existing headwinds to growth, including rising inflationary pressures and tightening financial conditions, the ongoing removal of fiscal and monetary policy support, and softening external demand, World Bank Global Economic Prospects, June 2022, notes.

According to WB forecast, EMDE growth is projected to roughly halve this year, slowing from 6.6 per cent in 2021 to 3.4 per cent in 2022—well below its annual average of 4.8 per cent over 2011-19, despite a still incomplete recovery from the pandemic. This downward revision reflects, to a significant degree, deep recessions in Russia and Ukraine, the report points out.

Excluding these two countries, the EMDE growth forecast for 2022 has been downgraded by 0.5 percentage point, as improved growth prospects in energy exporters partly offset broad-based downgrades in other EMDEs. Forecasts for 2022 growth have been lowered in nearly 70 per cent of EMDEs, including most commodity-importing economies. EMDE growth is anticipated to firm to an average of 4.3 per cent in 2023-24, as the lingering effects of the war abate.

The invasion and its spillovers are having substantially different effects across EMDE regions. The adverse spillovers from the invasion will be most severe for Europe and Central Asia (ECA), where output is forecast to sharply contract this year, the report predicts.

“Output growth is projected to slow this year in all other regions except the Middle East and North Africa (Mena), where the benefits of higher energy prices for energy exporters are expected to outweigh those prices’ negative impacts for other economies in the region,” it says.

Risks for all EMDE regions are tilted to the downside and include intensifying geopolitical tensions, rising inflation and food shortages, financial stress and rising borrowing costs, renewed outbreaks of Covid-19, and disruptions from disasters.

‘The war is expected to cause a major recession in Europe and Central Asia (ECA), while its global spillovers will weigh particularly heavily on regions with many commodity importers. Regions with many commodity exporters, by contrast, will benefit from higher commodity prices, but new investment in extractive sectors is expected to be limited because of policy uncertainty, price volatility, and higher input costs.

Downside risks to regional baseline forecasts— such as worsening geopolitical tensions, financial stress, and severe food insecurity—have increased because of the war in Ukraine, while disasters or renewed outbreaks of Covid-19 still have the potential to weaken activity.

Forecasts for activity have also been downgraded this year in East Asia and the Pacific (EAP) a result of lockdowns in China and recent commodity price movements, while the forecast for Sub-Saharan Africa (SSA) has been downgraded if major energy exporters such as Nigeria are excluded.

By contrast, some regions with large numbers of commodity exporters, especially in Middle East and North Africa (Mena), are expected to benefit from the significant increases in the prices of energy, some agricultural commodities, and several metals. However, increased policy uncertainty, price volatility, higher input costs, and weaker global demand are all expected to reduce new investment, including in extractive sectors.

EMDE exports are expected to be dampened by a sharp slowdown in growth in advanced economies and continued strains on global supply chains. The spike in commodity prices and disruption to exports from Russia and Ukraine are anticipated to hinder production in some large manufacturing economies, as their value chains are especially exposed to intermediate goods and services from these countries, the report says.

Although the pandemic is weighing less heavily on the near-term outlook, it is still expected to have lasting effects on long-term growth across EMDEs, and many of these effects will be compounded by the war. The adverse impact on human capital, investor confidence, fixed capital formation, and supply chains from these two crises will weigh on long-term growth prospects. As a result, EMDE potential growth is expected to be below 4 per cent over 2022-30—a sharp slowdown from about 5 percent in the 2010s.