The global lender has slashed its growth forecast for the world’s leading economies – the United States, China and Europe. The economic downturn added with high inflation levels, interest rate hikes by central banks, reduced income growth, and the prospect of a war breaking out between Russia and Ukraine, is a recipe for global recession.
On Tuesday, the World Bank released its annual ‘Global Economic Prospects’ report. The monetary authority, which lends money to poorer nations, says that global GDP is set to drop down to its third-weakest level in nearly three decades, coming only behind prior recessions caused by the 2009 financial crisis and Covid-related economic shutdowns in 2020.
According to the international lender, given the fragile economic conditions faced by many nations, any new adverse development such as inflation, continued interest rate hikes by central banks to control rising inflation, reemergence of the COVID-19 pandemic, reduced investments, or a possibility of a war between Russia and Ukraine, could lead to the global economy entering a period of recession.
The World Bank expects global GDP (gross domestic product) growth rate to slow down to 1.7% in 2023, down from 3% forecasted six months ago in its Global Economic Prospect report. The bank stated that it had to revise growth projections in 2023 for 95% of advanced economies and nearly 70% of the emerging market and developing economies.
The lender expects the rate of growth in advanced economies including the United States, Europe and China to slow down from 2.5% in 2022 to 0.5% in 2023. In the United States, economic growth is forecast to drop to 0.5% in 2023, which is 2% below last year’s estimate – this will be the weakest the US economy has been since the recession in 1970. GDP growth in the Eurozone is expected to drop 1.9% to zero percent this year, while China’s growth is projected at 4.3% in 2023 – which is 0.9% below previous forecasts. This is mainly due to China’s zero-Covid policies, turmoil in the real estate market, and reduced consumption, productions and investment levels.
The interesting fact here is that in the past such high levels of economic slowdowns have foreshadowed a recession. This would also mark the first time in over 80 years that two global recessions have occurred within the same decade.
The World Bank expects growth in emerging markets and developing economies to decelerate as they struggle with circumstances such as, high inflation, weaker currencies, low income growth, interest rate tightening by central banks, and reduced business investments. GDP rates in these countries are expected to drop by over a percent from 3.8% in 2022 to 2.7% in 2023. Annual growth in these economies in the 2022-2024 period is now forecast at 3.5% on average – which is less than half the rate achieved in the past two decades. With inflation levels expected to remain moderate but above pre-pandemic levels going into 2024, GDP levels in emerging and developing economies will be 6% below pre-pandemic rates.
Meanwhile, the global growth forecast for 2024 is expected to rise to 2.7% – which is still lower than the 2.9% estimated for 2022.
The report noted that 37 countries with a population of 1.5 million or less, which are considered small states, were hit the hardest by the Covid-19 recession. These nations had a much weaker rebound than other economies due to travel disruptions which impacted tourism, their biggest industry. In 2020, economic output in small states fell by over 11%, seven times more than the decline in emerging and developing economies. The World Bank has called on global leaders to help small states boost their economies by providing them with capital and resources in the form of investment grants.
In the East Asia and Pacific regions, growth is expected to be at 4.3% in 2023 and increase by 0.6% to 4.9% in 2024. Europe and Central Asia will see a reduced growth rate of 0.1% this year before recovering to 2.8% in 2024. GDP growth in Latin America and the Caribbean is projected to slow down to 1.3% in 2023 before rising to 2.4% next year. Economic growth in the Middle East and North Africa will be at 3.5% in 2023 and drop further down to 2.7% in 2024. In Sub-Saharan Africa, growth rate is forecast to be at 3.6% in 2023 and then rise to 3.9% in 2024. Meanwhile, in South Asia, GDP growth is expected to slow to 5.5% in 2023 before rising up to 5.8% in 2024.
“National Policies to boost investment growth need to be tailored to country circumstances but they always start with establishing sound fiscal and monetary policy frameworks and undertaking comprehensive reforms in the investment climate,” said Ayhan Kose, World Bank’s Director for the Prospects Group.
The report comes as the World Bank is set to introduce a new “evolution road map” which will be the biggest revamp to the global development lender’s business model since its founding at the end of World War Two. The financial institution is in discussions with its shareholders, led by the United States, to expand its lending capacity in order to address the ongoing global financial and economic crisis.