World Bank Warns of Drastic Economic Slowdown

World Bank Warns of Drastic Economic Slowdown

The World Bank has issued a warning about the potential significant slowdown in economic growth. The warning was made for the largest global economies, citing higher interest rates and the lingering effects of this year’s banking crisis. According to the institution, advanced economies, including the United States, Japan, and EU countries, are expected to experience a growth rate of only 0.7% in 2023. In fact, that’s a significant decline from the 2.6% growth in 2022.

Slowing Growth in Advanced Economies: The World Bank’s projections indicate that the United States should achieve a growth rate of 1.1% in 2023, while the euro area and Japan will witness GDP growth of less than 1%. Furthermore, the bank anticipates a deceleration of U.S. GDP growth to 0.8% in 2024, partly influenced by the impact of higher interest rates.

Global Growth Outlook

According to the World Bank, the projected global growth rate for 2023 should slow down to 2.1%. It is a decline from the 3.1% in the previous year. Nevertheless, emerging and developing economies should have a modest increase in their gross domestic product. They might be reaching 4% in 2023, an increase of 0.6% compared to the bank’s January 2023 projections. However, according to Indermit Gill, the World Bank’s chief economist, if we exclude China, growth in developing economies would be below 3%, suggesting a difficult environment for these nations.

Challenges for Developing Economies

The reduced growth forecasts are a result of downgrades across various factors, including the spillover effects of the recent banking crisis in the United States and other advanced economies. As a result of the banking turmoil, credit conditions have become more stringent, effectively barring emerging and developing economies from participating in global bond markets and leaving them vulnerable to precarious situations. The World Bank expressed concern about the vulnerability of these economies and warned that they are in “dangerous waters.”

Fiscal Weakness and Debt Distress

The report also highlighted the impact of the fiscal weakness on low-income countries, with 14 out of 28 such nations currently in debt distress or at high risk of it. The World Bank predicts that one-third of these countries will experience per capita income levels in 2024 that remain stagnant at 2019 levels. These challenges further exacerbate the economic hardships faced by developing nations.

Central Banks’ Response

Despite the economic difficulties, central banks worldwide continue to raise interest rates as a measure to combat persistent inflation. However, the World Bank’s report emphasizes that the global economy remains constrained. It is facing high inflation, tight financial markets, and record levels of debt. Consequently, many countries are experiencing a decline in wealth and economic prosperity.