Just over two years after the coronavirus pandemic triggered the deepest global recession since the second world war, the world economy continues to face a series of sharp shocks. The war in Ukraine has not only triggered a humanitarian crisis, but also severely affected commodity markets, trade, inflation and financial conditions, leading to a further exacerbation of the global growth slowdown.

The World Bank's Global Economic Prospects report, released June 7, highlights that the world economy is expected to experience its steepest deceleration in more than 80 years as it transitions from recession to tentative recovery. Global economic growth is expected to slow from 5.7 percent in 2021 to 2.9 percent in 2022, with activity in the eurozone, which is more closely linked to the Russian economy, declining significantly; U.S. economic growth is set to fall to less than half its 2021 pace, reflecting surging energy prices, tighter financial conditions, and ongoing supply chain disruptions.

The global environment in 2022 will also affect China's economic outlook, with rising geopolitical tensions sharply dragging down export growth and undermining confidence. That is expected to exacerbate an economic slowdown in parts of China caused by recurrent outbreaks and lockdown measures, which have caused supply chain disruptions that have greatly weakened household and business activity. After a strong rebound to 8.1 per cent in 2021, the World Bank forecasts China's economic growth will slow to 4.3 per cent in 2022, below its potential growth rate -- the sustainable rate at full capacity.

The forecast reflects a sharp decline in economic activity in the second quarter of 2022, despite policy measures taken to ease the downturn. China's economic growth momentum is expected to rebound in the second half of 2022 as COVID-19 controls in Shanghai and Beijing are eased, without any major outbreaks, helped by additional policy stimulus announced by The State Council last month. However, the normalization of domestic demand is expected to be a gradual process, only partially offsetting the economic losses caused by the pandemic earlier this year.

The latest edition of the World Bank's China Economic Brief argues that while China has macro policy space to deal with internal and external headwinds, policymakers face a dilemma between containing the pandemic and supporting economic growth. Indeed, where control is sustained, policy stimulus is less effective; But letting it spread could do even more damage to economic growth.

In the medium term, greater efforts are needed to move away from investment-led stimulus to boost growth, as high corporate and local government debt limits the effectiveness of policy easing and increases financial stability risks.

Faced with these balance sheet constraints, policymakers could shift more stimulus onto the central government's balance sheet and channel public investment into green infrastructure. The government's recently announced moves appear to move in that direction.

In addition to tax cuts for businesses, fiscal policy could also target measures that directly encourage consumption. For example, in areas where quarantine controls have been lifted, widespread distribution of vouchers can boost consumption in the short term. Reforms to strengthen automatic stabilisers such as unemployment insurance and other social safety nets can also help boost consumption, especially for the poor and vulnerable, who have a low marginal propensity to save.

The downturn in China's property market, which has accompanied the recent global economic slowdown, illustrates the limits of past stimulus measures. Over the past two decades, China's real estate industry has developed rapidly and become the main engine of economic growth. By the end of 2021, China's share of real estate investment in GDP was 13%, compared with 5% in OECD countries; If supply chain inputs are taken into account, the property sector accounts for about 30 per cent of China's GDP. Therefore, a disorderly adjustment in the real estate sector will have significant economic consequences.

The World Bank report makes specific recommendations to address these risks. In the short term, the key remains to maintain adequate liquidity and closely monitor financial sector health to avoid spillovers; In the medium term, structural reform will lay a more solid foundation for the development of the real estate industry.

By changing urban planning and moving away from the extensive urbanisation of the past, China's urban centres can become more compact, productive and livable. This needs to go hand in hand with fiscal reforms to help local governments broaden their revenue base beyond land transfer fees.

At the same time, there is a need to broaden financing channels for property developers, either through greater project-based financing or greater involvement of institutional investors such as real estate investment trusts. In addition, a robust and predictable framework for debt disposal and corporate bankruptcy would facilitate the reallocation of capital for distressed developers.

Finally, further liberalisation of the financial system could provide households with more investment options to reduce the propensity to buy and hold vacant properties as investment vehicles.

Despite the current challenging environment, China's policies to promote rapid economic recovery should still focus on addressing structural challenges. Raising the role of consumption in economic growth, improving capital allocation, facilitating labor mobility, and building a green development model will help China embark on a more stable, inclusive and sustainable growth path.

(Ibrahim Chowdhury is Senior Economist for China, Ekaterine T. Vashakmadze is Senior Economist for Forecasts, and Yusha Li is Economist at the World Bank.)