The World Bank projected global growth will slow in 2023 to its lowest level since the 2008 financial crisis due to higher interest rates, inflation, and more restrictive credit conditions.
“The world economy is in a precarious position,” said Indermit Gill, the World Bank Group’s Chief Economist and Senior Vice President.
Global growth is projected to decelerate to 2.1% this year from 3.1% in 2022, according to the World Bank’s new Global Economic Prospects report released Tuesday, with a significant slowdown in the second half of the year.
That growth rate matches the depths seen during the 2008 financial crisis, though growth in developed countries is expected to be higher than during the 2008 crisis. Growth in emerging markets will be lower.
The international group lowered its outlook for nearly all advanced economies and cut growth projections for 70% of emerging markets.
The US economy is projected to slow to 1.1% in 2023 from 2.1% in 2022 and then drop to 0.8% in 2024, mainly because of the lingering impact of a sharp rise in interest rates. In the euro area, growth is forecast to slow to 0.4% in 2023 from 3.5% in 2022, due to monetary policy tightening and higher energy prices.
The World Bank warns global growth could be even weaker than anticipated if banking stress worsens or inflation is persistent enough to prompt higher-than-expected interest rates.
“Rising borrowing costs in advanced economies could lead to financial dislocations in the more vulnerable emerging market and developing economies,” according to the report.
Higher interest rates are a problem for emerging markets, which already were reeling from the overlapping shocks of the pandemic and the Russian invasion of Ukraine. They make it harder for those economies to service debt loans denominated in US dollars.
So far most emerging markets have seen only limited harm from the recent banking stress that originated in wealthier places such as the US, but the World Bank's new report states that these markets are now “sailing in dangerous waters.”
Fiscal weaknesses have already tipped many low-income countries into debt distress. In emerging markets other than China, growth is set to slow to 2.9% this year from 4.1% last year.
“With increasingly restrictive global credit conditions, one out of every four [emerging markets] has effectively lost access to international bond markets,” according to the report.
“The squeeze is especially acute for emerging markets with underlying vulnerabilities such as low creditworthiness. Growth projections for these economies for 2023 are less than half those from a year ago, making them highly vulnerable to additional shocks.”
By the end of 2024, growth in developing economies is expected to be about 5% below the levels projected at the start of the pandemic.
Growth in advanced economies is estimated to decelerate from 2.6% in 2022 to 0.7% this year and remain weak in 2024, the report says.
In the US a string of recent bank failures have tightened credit, which is expected to slow growth as higher borrowing costs temper consumer spending.
But the pace that higher interest rates are making their way through the US economy may be slower than in earlier cycles, according to the World Bank. High savings buffers built up by consumers and high earnings for corporations may be muting higher borrowing costs as well, it said.