World Bank Projects Weak Global Growth Amid Rising Interest Rates

2023-06-06 13:30:07

The World Bank said on Tuesday that the global economy remained in a “precarious state” and warned of sluggish growth this year and next as rising interest rates slow consumer spending and business investment, and threaten the stability of the financial system.

The bank’s tepid forecasts in its latest Global Economic Prospects report highlight the predicament that global policymakers face as they try to corral stubborn inflation by raising interest rates while grappling with the followingmath of the pandemic and continuing supply chain disruptions stemming from the war in Ukraine.

The World Bank projected that global growth would slow to 2.1 percent this year from 3.1 percent in 2022. That is slightly stronger than its forecast of 1.7 percent in January, but in 2024 output is now expected to rise to 2.4 percent, weaker than the bank’s previous prediction of 2.7 percent.

“Rays of sunshine in the global economy we saw earlier in the year have been fading, and gray days likely lie ahead,” said Ayhan Kose, deputy chief economist at the World Bank Group.

Mr. Kose said that the world economy was experiencing a “sharp, synchronized global slowdown” and that 65 percent of countries would experience slower growth this year than last. A decade of poor fiscal management in low-income countries that relied on borrowed money is compounding the problem. According to the World Bank, 14 of 28 low-income countries are in debt distress or at a high risk of debt distress.

Optimism regarding an economic rebound this year has been dampened by recent stress in the banking sectors in the United States and Europe, which resulted in the biggest bank failures since the 2008 financial crisis. Concerns regarding the health of the banking industry have prompted many lenders to pull back on providing credit to businesses and individuals, a phenomenon that the World Bank said was likely to further weigh down growth.

The bank also warned that rising borrowing costs in rich countries — including the United States, where overnight interest rates have topped 5 percent for the first time in 15 years — posed an additional headwind for the world’s poorest economies.

The most vulnerable economies, the report warned, are facing greater risk of financial crises as a result of rising rates. Higher interest rates make it more expensive for developing countries to service their loan payments and, if their currencies depreciate, to import food.

In addition to the risks posed by rising interest rates, the pandemic and the conflict in Ukraine have combined to reverse decades of progress in global poverty reduction. The World Bank estimated on Tuesday that in 2024, incomes in the poorest countries would be 6 percent lower than in 2019.

“Emerging market and developing economies today are struggling just to cope — deprived of the wherewithal to create jobs and deliver essential services to their most vulnerable citizens,” the report said.

The World Bank sees widespread slowdowns in advanced economies, too. In the United States, it projects 1.1 percent growth this year and 0.8 percent in 2024.

China is a notable exception to that trend, and the reopening of its economy following years of strict Covid-19 lockdowns is propping up global growth. The bank projects that the Chinese economy will grow 5.6 percent this year and 4.6 percent next year.

Inflation is expected to continue to moderate this year, but the World Bank expects that prices will remain above central bank targets in many countries throughout 2024.

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