Global economy in precarious position amid high interest rates

Global growth will slow to 2.1% in 2023, with prospects clouded by financial risks

Washington, June 06, 2023Global growth has slowed sharply and the risk of financial stress in emerging market and developing economies (EMDEs) is intensifying amid high global interest rates.According to a recent report by the World Bank Global economic opportunities Report.

Global growth is forecast to slow from 3.1% in 2022 to 2.1% in 2023. In EMDEs other than China, growth will slow to 2.9% this year from 4.1% last year. These forecasts reflect broad-based downgrades.

„The surest way to reduce poverty and spread prosperity is through employment—and slow growth makes job creation more difficult” said World Bank Group President Ajay Banga. „It’s important to remember that growth forecasts are not destiny. We have a chance to turn the tide, but it will take all of us working together..”

Most EMDEs have so far seen only limited harm from recent banking stress in advanced economies, but they are now navigating dangerous waters. Due to increasingly restrictive global credit conditions, one in four EMDEs has effectively lost access to international bond markets. The contraction is particularly severe for EMDEs with fundamental vulnerabilities such as low creditworthiness. Growth projections for these economies for 2023 are less than half of what they were a year ago, making them more vulnerable to additional shocks.

„The global economy is at risk” said Intermediate Kill, Chief Economist and Senior Vice President of the World Bank Group. „Outside East and South Asia, this is far from the agility needed to eradicate poverty, combat climate change and replenish human capital. In 2023, trade will grow at less than a third of its pace in pre-pandemic years. In emerging markets and developing economies, higher interest rates will Debt pressures are mounting. Fiscal weaknesses have already pushed many low-income countries into debt crises. Meanwhile, the financing needs to meet the Sustainable Development Goals far exceed even the most optimistic projections of private investment.

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Recent projections suggest that the overlapping shocks of the pandemic, the Russian invasion of Ukraine, and a severe recession amid tighter global financial conditions have dealt a lingering drag on the growth of EMDEs, which will continue into the foreseeable future. By the end of 2024, economic activity in these economies is expected to be about 5% lower than levels predicted before the pandemic. In low-income countries—especially the poorest—the damage is stark: in more than a third of these countries, per capita income in 2024 will still be below 2019. This weak pace of income growth will perpetuate extreme poverty in many low-income countries.

„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.

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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.

Download the full report:

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Regional Perspectives:

East Asia and the Pacific: Growth is expected to increase to 5.5% in 2023 and then to 4.6% in 2024. For more, see Regional overview.

Europe and Central Asia: Growth is expected to pick up slightly to 1.4% in 2023 before picking up to 2.7% in 2024. For more, see Regional overview.

Latin America and the Caribbean: Growth is forecast to slow to 1.5% in 2023, before slowing to 2% in 2024. For more, see Regional overview.

Middle East and North Africa: Growth is expected to slow to 2.2% in 2023 and 3.3% in 2024. To see more, see Regional overview.

South Asia: Growth is projected to slow to 5.9% in 2023 and then to 5.1% in 2024. For more, see Regional overview.

Sub-Saharan Africa: Growth is expected to pick up to 3.2% in 2023 and 3.9% in 2024. For more, see Regional overview.




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