World Bank warns of sharp global slowdown if banking crisis spreads

He World Bank (WB) warned this Monday that if the banking crisis spreads it could lead to a “much sharper” slowdown in global growth, which would further lower the “speed limit” of the world economy.

“When you think about the consequences of these episodes on potential growth, what we know is that the slowdown could be much more acute,” the chief economist of the Department of Equitable Growth, Finance and Institutions, Ayhan, said in a conversation with the media on Monday. Kose.

The World Bank presented on Monday the report “Falling long-term growth prospects: trends, expectations and policies”, in which it warns that the “speed limit” of the global economy, that is, the maximum rate at In the long run, at which it can grow without causing inflation, it will plummet to a three-decade low by 2030.

Although the report was prepared before the start of the crisis unleashed by the fall of Silicon Valley in the US two weeks ago, it already spoke of possible systemic banking crises that “reduce potential growth in the medium term,” the report states.

“We are closely following the evolution of the banking sector. At the beginning of the year, we released our Global Economic Outlook report and noted that when interest rates rise, there are consequences,” Kose explained. Thus, periods of rapidly rising interest rates “have been associated with financial stress” which “in some cases translates into outright financial crisis.”

“The current uncertainty in the banking sector comes at a time when rising interest rates and tightening financial conditions have significant implications for developing economies, as they increase the cost of refinancing for corporate borrowers and sovereigns in emerging market developing economies,” he added.

The World Bank report offers the body’s first “comprehensive assessment” of long-term potential growth rates in the aftermath of the COVID-19 pandemic and Russia’s invasion of Ukraine. It documents that almost all the economic forces that have driven progress and prosperity over the past three decades are waning.

As a result, between 2022 and 2030, average global potential GDP growth is expected to decline by about a third of the rate that prevailed in the first decade of this century, to 2.2% per year.