In its latest flagship Global Economic Prospects (June 2023) report, the World Bank has highlighted numerous weak spots in the global economy, which if not handled promptly and properly could result in a financial crisis culminating in a deep downturn in 2024.
The report emphasizes that the global economy is far from full recovery from the impact of coronavirus induced slowdown. It severely lacks the strength necessary to make progress on “global ambitions to eliminate extreme poverty, counter climate change, and replenish human capital.”
It is further emphasized that “years before COVID-19 arrived, governments had already been turning their backs on free and fair trade. And long before the outbreak of the pandemic, governments across the world had developed an appetite for huge budget deficits. They turned a blind eye to the dangers of rising debt-to-GDP ratios. If a lost decade is to be avoided, these failures must be corrected—now, not later.”
The following are some of the noteworthy excerpts from the 186 pages report released earlier this week.
· All the major drivers of global growth—including productivity, trade, labor force and investment growth—are expected to weaken over the remainder of this decade. Potential growth—the maximum growth the global economy can sustain over the longer term without igniting inflation—is expected to fall to a three-decade low over the remainder of the 2020s.
· Emerging markets and developing economies (EMDEs) lack wherewithal to create jobs and deliver essential services to their most vulnerable citizens. These problems must be tackled promptly if the world is to establish the economic footing necessary for even a semblance of success on global development goals.
· Despite the steepest global interest-rate hiking cycle in four decades, inflation remains high; even by end-2024, it will remain above the target range of most inflation-targeting central banks. Policymakers in most economies will need to be exceptionally agile to cope with the risks that come with such rate hikes. Today, high interest rates aren’t merely crimping growth in EMDEs; they are also dampening investment and intensifying the risk of financial crises. These challenges would intensify in the event of more widespread banking-sector strains in advanced economies.
· The world economy will remain frail—and at risk of a deeper downturn—this year and in 2024. Our baseline scenario calls for global growth to slow from 3.1 percent in 2022 to 2.1 percent in 2023, before inching up to 2.4 percent in 2024. Even this tepid growth assumes that stress in the banking sector of advanced economies does not spill over to EMDEs.
· Rapid interest-rate increases of the kind that have been underway in the United States over the past year are correlated with a higher likelihood of Foreword financial crises in EMDEs. And if the current banking stress in advanced economies metastasizes into widespread financial turmoil affecting EMDEs, the worst-case scenario would have arrived: the global economy would experience a deep downturn next year.
· Interest payments are taking an ever-bigger bite out of these resources—more than one-fifth of revenues in many countries—leaving them with little fiscal space to cope with the next shock or make the investments necessary to revive growth.
Global Outlook
Growth: The global economy remains in a precarious state amid the protracted effects of the overlapping negative shocks of the pandemic, the Russian Federation’s invasion of Ukraine, and the sharp tightening of monetary policy to contain high inflation. The resilience that global economic activity exhibited earlier this year is expected to fade.
Growth in several major economies was stronger than envisaged at the beginning of the year, with faster-than-expected economic reopening in China and resilient consumption in the United States. Nonetheless, for 2023 as a whole, global activity is projected to slow, with a pronounced deceleration in advanced economies and a sizable pickup in China.
After growing 3.1 percent last year, the global economy is set to slow substantially in 2023, to 2.1 percent, amid continued monetary policy tightening to rein in high inflation, before a tepid recovery in 2024, to 2.4 percent. Growth in advanced economies is set to decelerate substantially for 2023 as a whole, to 0.7 percent, and to remain feeble in 2024. In EMDEs, aggregate growth is projected to edge up to 4 percent in 2023, almost entirely due to a rebound in China following the removal of strict pandemic-related mobility restrictions.
Global growth could be weaker than anticipated in the event of more widespread banking sector stress, or if more persistent inflation pressures prompt tighter-than-expected monetary policy. Weak growth prospects and heightened risks in the near term compound a long-term slowdown in potential growth.
Inflation: Inflation remains above target in almost all inflation-targeting economies. With supply chain pressures easing and energy prices declining, excess demand appears to be a key driver of continuing high inflation in advanced economies, though lingering impairments to supply capacity may also still play a role.
India: In India, which accounts for three-quarters of output in the South Asia region, growth in early 2023 remained below what it achieved in the decade before the pandemic as higher prices and rising borrowing costs weighed on private consumption. However, manufacturing rebounded into 2023 after contracting in the second half of 2022, and investment growth remained buoyant as the government ramped up capital expenditure. Private investment was also likely boosted by increasing corporate profits. Unemployment declined to 6.8 percent in the first quarter of 2023, the lowest since the onset of the COVID-19 pandemic, and labor force participation increased.
India’s headline consumer price inflation has returned to within the central bank’s 2-6 percent tolerance band.
Growth in India is expected to slow further to 6.3 percent in FY2023/24 (April-March), a 0.3 percentage point downward revision from January. This slowdown is attributed to private consumption being constrained by high inflation and rising borrowing costs, while government consumption is impacted by fiscal consolidation.
Growth is projected to pick up slightly through FY2025/26 as inflation moves back toward the midpoint of the tolerance range and reforms payoff. India will remain the fastest-growing economy (in terms of both aggregate and per capita GDP) of the largest EMDEs.
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