Risk of double dip recessions as inflation and Covid restrictions bite, World Bank warns

A man walks past a Covid-19 coronavirus awareness mural along the roadside in Chennai

Soaring inflation and tough Covid restrictions risk triggering double dip recessions, the World Bank has warned, as countries run out of economic ammunition after two years fighting the pandemic.

Carmen Reinhart, chief economist at the international financial institution, sounded the alarm on the ability of countries to tackle the twin threats of omicron and a cost of living crisis as tougher Covid rules are put in place.

Forecasters had predicted another strong year of recovery for the global economy in 2022. However, the economic outlook has darkened considerably in recent weeks as fresh lockdown restrictions imposed to curb the spread of omicron also threaten to stoke already high inflation.

Ms Reinhart told the Telegraph the variant is a “setback” for the global recovery as she warned “the longer this goes on the more the ammunition supplies go down”, limiting the firepower of economic aid.

She said: “There’s a lot of downside risks: I think for Europe, they are already more manifest, but they’re there for everyone.

“The combination of omicron and rising inflation and a lot of uncertainty about inflation is also a global concern, and it’s important in having any confidence about recovery. In other words… we’re in for more disappointments.”

Countries are imposing new restrictions on economic activity amid fears the rapid spread could force lockdowns even if omicron is less severe. England has held off on imposing fresh restrictions over Christmas and New Year’s Eve, but fresh curbs are still being considered for the new year.

Ms Reinhart said: “We’ve had less draconian measures taken than of course when Covid erupted, but certainly in that direction… it makes for a more halting double dip-like process. I think the concerns of double dips are very real.”

A double dip recession is when output falls for two consecutive quarters for a second time. Before omicron, the global economy was expected to continue a brisk recovery from the initial Covid slump with the UK and Europe previously set to claw back to pre-Covid GDP levels in early 2022.

Ms Reinhart also warned that worries over heavily indebted companies and stock markets risk tying the hands of central banks in their bid to fight rising inflation, another building pressure on economies.

Central banks are concerned the new variant could also increase inflationary pressures battering households as supply chains face more disruption. After taking on huge amounts of debt to endure lockdown, a hike in interest rates by central banks to fight inflation could ramp up the pressure on indebted firms.

Ms Reinhart said corporate indebtedness means the hands of central banks are “a lot more tied than is perhaps widely appreciated”, while inflation will be “more persistent”.

She said: “[Central banks] are also afraid of financial fragility concerns. We have a very leveraged corporate sector that has taken on a lot of high risk debt. A lot of the debt is really junk bond variety with very poor covenants. And so you have a lot of outstanding debt that is corporate debt that’s very sensitive to rate hikes.

“Also tying their [central banks] hands are concerns about what may happen with the equity market.”

The Bank of England and US Federal Reserve have started to unwind Covid stimulus to rein in price pressures. Earlier this month, the Bank hiked interest rates from a record low of 0.1pc to 0.25pc, while Fed rate-setters expect to vote for six rises in borrowing costs over the next two years.

On fighting the economic effects of omicron, Ms Reinhart said many low and middle income countries that already “didn’t have a lot of gunpowder” for stimulus are facing even greater strains if economies are hit. A number of countries are “entering a phase where doing fiscal stimulus is going to be much more challenging”.