Global economy in precarious position amid high interest rates

„Many developing economies are struggling to cope with weak growth, persistently high inflation and record debt levels. Yet new risks, such as the possibility of widespread spillovers from renewed financial stress in advanced economies, could make things worse for them. said Ayhan Ghose, Deputy Chief Economist, World Bank Group. „Policymakers in these economies must act immediately to prevent financial contagion and mitigate near-term domestic impacts.”

In advanced economies, growth will slow from 2.6% to 0.7% in 2022 and remain weak in 2024, the report said. After growing by 1.1% in 2023, the US economy will slow to 0.8% in 2024, mainly due to the lingering impact of the sharp rise in interest rates over the past year and a half. In the euro area, growth is forecast to slow to 0.4% in 2023 from 3.5% in 2022, due to the lagged effect of monetary policy tightening and rising energy prices.

The report also provides analysis of how increases in US interest rates affect EMDEs. Much of the rise in two-year Treasury yields over the past year and a half has been driven by investor expectations of a hawkish US monetary policy aimed at curbing inflation. According to the report, this particular type of interest rate increase is associated with adverse financial consequences for EMDEs, including a higher probability of financial distress. Moreover, these effects are more pronounced in countries with high economic vulnerability. In particular, frontier markets – those with less developed financial markets and less access to international capital – tend to see larger increases in borrowing costs; For example, sovereign risk spreads in frontier markets are three times higher than in other EMDEs.

In addition, the report provides a comprehensive assessment of fiscal policy challenges facing low-income economies. These countries are in dire straits. Rising interest rates have compounded the decline in their financial positions over the past decade. Public debt now averages 70% of GDP. Interest payments eat up a rising share of limited government revenue. 14 low-income countries are already in debt crisis or at high risk. Cost pressures have increased in these economies. Adverse shocks such as extreme climate events and conflicts are more likely to push families into distress in low-income countries because of limited social safety nets elsewhere. On average, these countries spend only 3% of GDP on their most vulnerable citizens – less than the 26% average for developing economies.