The World Bank revised upward its forecasts for the growth of the global economy in 2023, as the US, China and other major economies exceeded forecasts. However, the estimates for the next year are grayer, as the high interest rates and the stricter rules on granting loans will leave a negative mark on the world’s economies.
Real global GDP will grow by 2.1 percent this year, the World Bank said, higher than the 1.7 percent forecast it released in January, but well below the 2022 growth rate of 3.1 percent. In the economies of developed countries as well as emerging markets outside China, growth will slow to 2.9% this year from 4.1% last year.
In January, the World Bank warned that global GDP was slowing to the brink of recession, but since then, strength in the US labor market and consumption have exceeded expectations, as has China’s recovery from lockdowns.
US growth in 2023 is now forecast at 1.1%, more than double the 0.5% forecast in January, while China’s growth is expected to climb to 5.6%, up from a forecast of 4.3% in January. after 3% growth reduced by COVID in 2022.
However, the bank halved its previous forecast for US growth in 2024 to 0.8% and cut its forecast for China by 0.4 percentage points to 4.6%.
Eurozone growth was forecast to be 0.4% in 2023 from unchanged in January, but the forecast for next year was also cut slightly.
High interest rates and tighter credit
The Bank cut its forecast for global growth in 2024 to 2.4% from 2.7% in January. The surest way to reduce poverty and spread prosperity is employment – and slower growth makes job creation much more difficult.
The more unfavorable forecasts are due to the fact that the effects of the increase in interest rates are reflected in a later time. Recently G7 central bank chiefs met in Japan and pointed out that the impact of previous interest rate hikes has not been seen.
Participants appeared to share the view that the impact of past interest rate hikes has yet to be fully felt in their economies and inflation, and could become more pronounced in the future. Many said they wanted to guide monetary policy, having this consideration in mind.
High interest rates as well as the difficulties that businesses and households will face in bank lending due to the restriction of credit conditions are the factors that will further slow down growth in the second half of 2023 and 2024. For 2025 the World Bank estimates that growth of the world economy will be 3%.
Two-thirds of developing economies will see lower growth than in 2022, which will deal a significant blow to pandemic recovery and poverty reduction and increase public debt distress.
The turmoil of the banking sector
Recent turmoil in the banking sector is also contributing to the tightening of financial conditions that will continue into 2024.
In its recent report, the World Bank presents a possible downside scenario where banking stress leads to a severe credit crunch and broader pressures on financial markets in advanced economies. That would likely cut 2024 growth almost in half to just 1.3% – the slowest pace in 30 years, excluding the recessions of 2009 and 2020. In another scenario where financial stress spreads globally to a much greater extent, the global economy would fall into recession in 2024.
The bank said inflation is expected to ease gradually as growth slows and labor demand in many economies softens and commodity prices remain flat. But he added that core inflation is expected to remain above central bank targets in many countries throughout 2024.
