The World Bank expects global growth to slow in 2023 to its lowest level since the 2008 financial crisis due to higher interest rates, inflation and more restrictive credit conditions.
“The global economy is in a critical situation,” said Indremit Gill, Chief Economist and Senior Vice President of the World Bank Group.
Global growth is expected to slow to 2.1% this year from 3.1% in 2022, according to the World Bank’s new World Economic Outlook on Tuesday, with a significant slowdown in the second half of the year.
This growth rate matches the depths seen during the 2008 financial crisis, although growth in developed countries is expected to be higher than during the 2008 crisis. Growth in emerging markets will be lower.
The international group cut its forecasts for almost all advanced economies and cut growth forecasts for 70% of emerging markets.
The US economy is expected to slow down to 1.1% in 2023 from 2.1% in 2022 and then drop to 0.8% in 2024, mainly due to the continuing impact of sharply higher interest rates. In the eurozone, growth is expected to slow to 0.4% in 2023 from 3.5% in 2022, due to tightening monetary policy and higher energy prices.
The World Bank warns that global growth could be weaker than expected if banking pressures intensify or inflation persists enough to trigger higher-than-expected interest rates.
According to the report, “rising borrowing costs in advanced economies could lead to financial turmoil in more vulnerable emerging market and developing economies.”
High interest rates are a problem for emerging markets, which were already reeling from the overlapping shocks of the pandemic and Russia’s invasion of Ukraine. It makes it difficult for those economies to service debt loans denominated in US dollars.
So far, most emerging markets have seen only limited damage from recent banking stresses originating in wealthier places like the United States, but a new World Bank report notes that these markets are now “navigating dangerous waters.”
Fiscal weakness has already pushed many low-income countries into debt distress. In emerging markets other than China, growth is expected to slow to 2.9% this year from 4.1% last year.
Under increasingly restrictive global credit conditions, one in four [emerging markets] It effectively lost access to international bond markets,” according to the report.
“The pressure is particularly acute for emerging markets with underlying weaknesses such as low creditworthiness. These economies’ growth projections for 2023 are less than half that of a year ago, making them highly vulnerable to additional shocks.”
By the end of 2024, growth in developing economies is expected to be about 5% lower than levels projected at the start of the pandemic.
Growth in advanced economies is expected to slow from 2.6% in 2022 to 0.7% this year and remain weak in 2024, according to the report.
In the US, a series of recent bank failures has tightened credit, which is expected to slow growth as higher borrowing costs dampen consumer spending.
But the pace at which higher interest rates make their way through the US economy may be slower than in previous cycles, according to the World Bank. She said higher savings reserves created by consumers and higher corporate profits may serve to reduce higher borrowing costs as well.
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