The World Bank predicts that global growth in 2023 will reach its slowest level since the 2008 financial crisis due to high interest rates, inflation and more restrictive credit conditions.
“The global economy is in a precarious position,” said Intermediate Gill, chief economist and senior vice president at the World Bank Group.
Global growth is forecast to slow to 2.1% this year from 3.1% in 2022, with a significant slowdown in the second half of the year, according to the World Bank’s new Global Economic Prospects report released on Tuesday.
That growth rate matches the depth seen during the 2008 financial crisis, although growth in developed countries is expected to be higher during the 2008 crisis. Growth will be lower in emerging markets.
The International Group lowered its outlook for almost all advanced economies and cut growth forecasts for emerging markets by 70%.
The US economy is forecast to shrink from 2.1% in 2022 to 1.1% in 2023 and then to 0.8% in 2024, mainly due to the lingering impact of a sharp rise in interest rates. In the euro area, growth is forecast to slow to 0.4% in 2023 from 3.5% in 2022 due to monetary policy tightening and higher energy prices.
The World Bank warns that global growth could be weaker than expected if banking pressure worsens or inflation persists enough to prompt higher-than-expected interest rates.
“Rising borrowing costs in advanced economies will lead to financial dislocations in the most vulnerable emerging market and developing economies,” the report said.
High interest rates are a problem for emerging markets, which are already reeling from the overlapping shocks of the pandemic and the Russian invasion of Ukraine. They make it difficult for those economies to issue debt loans denominated in US dollars.
So far most emerging markets have seen only limited damage from the recent banking stress that has developed in rich places like the US, but a new report from the World Bank says these markets are now “navigating perilous waters”.
Fiscal weaknesses have already pushed many low-income countries into debt crises. In emerging markets other than China, growth will slow to 2.9% this year from 4.1% last year.
“Increasingly restrictive global credit conditions, one in four [emerging markets] has effectively lost access to international bond markets,” the report said.
“The pressure is particularly acute for emerging markets with fundamental vulnerabilities such as low creditworthiness. Growth projections for these economies for 2023 are less than half of what they were a year ago, making them more vulnerable to additional shocks.”
By the end of 2024, growth in developing economies is expected to be 5% below the level predicted at the start of the pandemic.
Growth in advanced economies will slow to 0.7% this year from 2.6% in 2022 and remain weak in 2024, the report said.
A string of recent bank failures in the US has tightened credit, which is expected to dampen growth as higher borrowing costs curb consumer spending.
But the pace of higher interest rates moving through the U.S. economy may be slower than in previous cycles, according to the World Bank. It said higher savings buffers built by consumers and higher earnings for corporations could also dampen higher borrowing costs.
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