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.
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.
(Full
report is available here)
