1.11 Intensifying geopolitical tensions

and policy uncertainty are anticipated to remain above historical norms but to begin to gradually wane later this year as the intensity of the war and its repercussions abate. The outlook is also predicated on a pronounced but orderly tightening of global financing conditions and the continued withdrawal of pandemic-related macroeconomic policy support. Commodity prices are expected to remain high but moderate over the forecast horizon as supply disruptions ease (World Bank 2022a). The economic impacts of new COVID-19 outbreaks are expected to be markedly less severe than earlier outbreaks due to behavioral changes, alongside improved vaccine coverage and pandemic management (Bidani et al. 2022; McCahan 2022).

Risks to the outlook

The underlying assumptions for the baseline forecast are subject to significant uncertainty (figure 1.10.D). Russia's invasion of Ukraine and its implications are increasing the probability of negative tail risks, many of which are interlinked. Widening geopolitical turmoil could further destabilize global economic activity and, in the longer term, cause global trade, investment, and financial networks to fragment. The drag on activity from persistent supply disruptions and very high commodity prices may cause the global economy to become mired in stagflation, with low growth and high inflation. Rising price pressures could require substantially more monetary tightening than currently expected. Food shortages could weigh heavily on the most vulnerable and spark social unrest. Although the economic impact of new outbreaks of COVID-19 has faded over the course of the pandemic, the appearance of new, more virulent variants could lead to the reintroduction of disruptive control measures. If several of these downside risks were to materialize simultaneously, model-based quantifications suggest that global growth could fall more sharply in 2022 and nearly halve in 2023—declining to 2.1 percent and 1.5 percent, respectively.

Intensifying geopolitical tensions

Russia's invasion of Ukraine has led to a global weakening of confidence and a rise of policy uncertainty (figure 1.11 .A). The situation could

FIGURE 1.11 Intensifying geopolitical tensions

Sustained geopolitical turmoil could weaken confidence and heighten policy uncertainty. The refugee crisis resulting from the war in Ukraine could worsen, with the sudden arrival of millions of newcomers putting pressure on public finances and the delivery of basic services in host countries.

A. Geopolitical risks

Score 1.2

-BGRI Index, 100= 1985-2019 300

—GPR Index (RHS)

B. Refugees from war

Millions of people

LI I •

Sources: Barutciski (1994); BlackRock Investment Institute; Caldara and lacoviello (2021); Matteo lacoviello (data set); United Nations High Commissioner for Refugees; World Bank. A. Figure shows the three-month moving average for the Geopolitical Risk (GPR) Index and the global BlackRock Geopolitical Risk Indicator (BGRI). The GPR, constructed by Caldara and lacoviello (2021), is based on a count of newspaper articles that discuss geopolitical tensions. The BGRI tracks the relative frequency of brokerage reports and financial news stories associated with specific geopolitical risks. B. Figure shows the number of registered refugees after each war.

worsen in a variety of ways, including through the spread of hostilities over a larger geographical area. It could also take the form of widespread statesponsored cyberattacks on public infrastructure or financial systems, which could disrupt telecommunications, power grids, water supply, oil and gas pipelines, transportation networks, and critical manufacturing sectors. Such developments could have substantial destabilizing effects on the global economy, significantly heighten uncertainty and further erode confidence, and trigger additional sanctions or major retaliatory responses.

The existing refugee crisis could worsen. Global refugee levels were already historically high in recent years (figure l.ll.B; UNHCR 2021). The invasion of Ukraine—a country with more than twice the population of the Syrian Arab Republic (44 million versus 18 million)—has already caused nearly 7 million more to seek safety abroad. The sudden arrival of a large number of newcomers in host countries will put pressure on public finances and the delivery of basic services.

Global trade and financial networks could fragment if the war and its dislocating effects persist—especially if continued hostilities prompt