The World Bank recently enhanced its global growth outlook for 2023, indicating a more resilient performance than anticipated by significant economies like the United States and China. The revised forecast, however, points towards higher interest rates and tighter credit conditions exerting a more profound impact on the subsequent year’s economic performance.
Unexpected Resilience Fuels 2023 Projections
According to the World Bank’s latest Global Economic Prospects report, the Real global gross domestic product (GDP) is likely to surge by 2.1 percent this year, marking a revision from the previously predicted 1.7 percent in January. However, this growth remains substantially lower than the 2022 GDP growth rate of 3.1 percent.
Central Banks’ Actions and the Forecast Trim for 2024
The forecast for the 2024 global growth rate was reduced to 2.4 percent from the initial 2.7 percent. This change stems from the impacts of monetary tightening by central banks and stricter credit conditions, affecting business and residential investment. Consequently, growth is expected to decelerate in the latter half of 2023 and into 2024. However, the World Bank also introduced a new 3 percent growth projection for 2025.
The Economic Landscape: Indermit Gill’s Perspective
World Bank’s Chief Economist, Indermit Gill, expressed a rather pessimistic view on these updated projections, stating that 2023 could likely be one of the slowest growth years for developed economies over the past five decades. He also noted that two-thirds of the developing economies would witness lower growth rates than those in 2022. This situation, Gill believes, poses a considerable hindrance to recovery from the COVID-19 pandemic and poverty alleviation, while escalating sovereign debt stress.
According to Gill, “By the end of next year, nearly one-third of the developing world would still not surpass the per-capita income levels they enjoyed at the end of 2019. This essentially translates to five lost years for almost one-third of the world’s nations.”
Surprising Strength in US and China
Contrary to its January warning that the global GDP was teetering on the edge of recession, the World Bank now acknowledges the resilience of the labour market and consumption in the US, and China’s recovery from COVID-19 lockdowns (World Bank). As a result, the US and China’s growth for 2023 is forecasted at 1.1 percent and 5.6 percent, respectively. This presents a significant leap from the January predictions of 0.5 percent for the US and 4.3 percent for China.
Effects on the Banking Sector
However, stress within the banking sector contributes to the predicted tighter financial conditions persisting until 2024. Under one potential downside scenario, banking stress could result in a severe credit crunch and broader financial market stress in advanced economies, slashing 2024 growth by almost half.
Another potential outcome could see the world economy plunge into recession in 2024 if financial stress proliferates globally. Nevertheless, the bank predicts inflation to edge down gradually as growth decelerates and labour demand in various economies softens, and commodity prices stabilize.
