The World Bank stated in its latest Economic Outlook report on Tuesday that the sunshine we saw in the global economy earlier this year is fading, and gray days may be ahead. China is a clear exception to the global economic slowdown trend.
On Tuesday, the World Bank warned in its latest Economic Outlook report that the global economy is in a dangerous state. With rising interest rates, consumer spending and corporate investment will slow down, economic activity will be hit, vulnerabilities of low-income countries will be exposed, global economic growth will significantly decelerate, and the stability of the financial system will be threatened.
The World Bank expects the resilience shown by the economy in early 2023 to gradually weaken, turning into more persistent sluggishness as tight monetary policies amplify the ongoing impacts of the COVID-19 pandemic and the Russia-Ukraine conflict. Global economic growth will significantly slow in the second half of this year and continue into 2024.
The World Bank mentioned lag effects, stating that the drag from rising interest rates is becoming "increasingly apparent," and as credit conditions become more restrictive, more lag effects will emerge.
Given the recent strong economic momentum, the World Bank has raised its global GDP growth forecast for this year from 1.7% in January to 2.1%, although it is still lower than last year's growth rate of 3.1%; it has lowered next year's GDP forecast from 2.7% to 2.4%. The World Bank anticipates continued downside risks to the economy.
Ayhan Kose, Deputy Chief Economist at the World Bank, said that the sunshine we saw in the global economy earlier this year is fading, and gray days may be ahead. The global economy is undergoing a rapid, synchronized slowdown, with growth expected to be lower this year than last in 65% of countries.
The World Bank also warned that more widespread banking turmoil and tighter monetary policies are possible, which would further weaken global growth. The World Bank noted that recent pressure on the banking industry in Europe and America has dampened optimistic sentiments for this year's economic rebound. Concerns about the health of the banking sector have prompted many lenders to stop providing credit to businesses and individuals, which could further drag on economic growth.
The World Bank expects growth to generally slow in developed economies, projected to fall to 0.7% this year and continue to weaken in 2024; the U.S. economy, for example, is expected to grow 1.1% this year and 0.8% in 2024.
China is a clear exception in the trend of global economic slowdown. The World Bank expects China's economic reopening to be supporting global growth, with China's economy projected to grow 5.6% this year.
The World Bank expects global inflation to gradually decline, but core inflation in many countries is expected to remain above pre-COVID-19 levels, a situation that will persist until 2024.
Currently, central banks in Europe and America are assessing the next phase of monetary policy actions. The Federal Reserve is expected to pause interest rate hikes at the June meeting, but many signs indicate a possible hike again in July. Investors expect the European Central Bank to continue to raise interest rates, with a rise of 25 basis points. The World Bank calls for central banks to communicate their intentions as early and as clearly as possible to avoid sudden changes in outlook, in order to mitigate the risk of financial contagion.
The World Bank also stated that with the sharp slowdown in global economic growth, financial pressure risks for emerging markets and developing economies are intensifying under the condition of global interest rate increases, making the prospects for emerging markets and developing countries particularly "worrisome". Hawkish interest rate hikes by the Federal Reserve significantly increase the likelihood of these countries facing a financial crisis. Under restrictive credit conditions, a quarter of countries have essentially lost access to the bond market.
The World Bank expects that in the first five years of the 2020s, economic growth in emerging markets and developing countries will average 3.4%, implying that this period could be the weakest five years in the past three decades.
The World Bank pointed out that poor fiscal management in low-income countries and reliance on borrowing have further complicated their problems. The financial condition of low-income countries is "increasingly unstable" and they need to increase revenue and spend more efficiently. According to World Bank data, 14 out of 28 low-income countries are in debt distress or at high risk of falling into debt distress.
Current global policy challenges include focusing more on financial regulation after bank failures, and enhancing global cooperation to alleviate climate change and provide debt relief to countries in difficulty.
