World Bank Says Global Economy in Precarious State as Rates Rise

(Bloomberg) — The global economy is in a precarious situation and heading for a substantial growth slowdown as sharp interest-rate increases hit activity and stir vulnerabilities in lower-income countries, the World Bank said.

Greater-than-expected resilience in the early months of 2023 is predicted to fade into more enduring weakness as tighter monetary policy compounds lingering shocks from the pandemic and Russia’s invasion of Ukraine, the lender said in its latest Economic Prospects report.

While stronger recent momentum led the institution to raise its world gross domestic product forecast for the year to 2.1% from the 1.7% predicted in January, it cut its outlook for 2024 to 2.4% from 2.7%. Risks to the outlook remain tilted to the downside, it said.

“Global growth is projected to slow significantly in the second half of this year, with weakness continuing in 2024,” the World Bank said. “The possibility of more widespread bank turmoil and tighter monetary policy could result in even weaker global growth.”

The caution comes as major central banks assess how and when to pare back the fastest global monetary policy tightening since the 1980s. Next week, the Federal Reserve will examine the possibility of taking a pause in rate increases, while investors expect the European Central Bank will keep hiking, although at the slower 25-basis-point pace it set last month.

The World Bank said the drag from higher borrowing costs is “increasingly apparent,” with more lagged effects still to come as credit conditions become more restrictive.

It also said its analysis shows the outlook for emerging market and developing economies is particularly “worrisome” as increases in rates driven by the perceived hawkishness of the Fed substantially boost the likelihood that those countries could face a financial crisis. Amid restrictive credit conditions, one in four has effectively lost access to bond markets, the World Bank said.

To mitigate the risks of financial contagion, the Washington-based lender said central banks should communicate their intentions “as early and as clearly as possible” to avoid abrupt changes in the outlook.

“Global growth has slowed sharply and the risk of financial stress in emerging market and developing economies is intensifying amid elevated global interest rates,” the World Bank said.

Other highlights from the report:

• Growth in emerging markets and developing economies over the first half of the 2020s is expected to average 3.4%, making the period one of the weakest half-decades in the past 30 years
• Growth in advanced economies is set to decelerate to 0.7% in 2023 and “remain feeble” in 2024
• Fiscal positions are “increasingly precarious” in low-income countries, requiring higher revenues and more efficient spending
• Policy challenges include greater focus on financial regulation after bank failures and greater global cooperation to mitigate climate change and provide debt relief to countries in distress
• Global inflation is projected to gradually edge down, but core price increases in many countries and is expected to remain above its pre-pandemic level beyond 2024

–With assistance from Zoe Schneeweiss and James Regan.

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