World Bank expects “sharp and lasting” economic slowdown in 2023

The global economic growth may fall “dangerously close” to recession in 2023, The World Bank (WB) said on Tuesday when cutting its forecasts by high inflation, rising interest rates and the Russian invasion of Ukraine.

The organization’s economists warn on the risk of a downturn in the world economy, As countries grapple with rising costs and central banks simultaneously raise interest rates to cool demand, which, in turn, worsens financial conditions amid the disruptions caused by the war in Ukraine.

The latest WB forecasts point to a “sharp and lasting slowdown” with a global growth of 1.7%, approximately half of what was forecast in June, according to the latest report of “World Economic Outlook”.

“I am very concerned about the risk of a persistent slowdown. According to our estimates, world growth between 2020 and 2024 will be less than 2%. This is the weakest growth in five years since 1960”, explained the president of the WB, David Malpass, during a telephone press conference on Tuesday.

recession risk

This very low growth forecast for the current year is only compared to the period of recession induced by the pandemic in 2020 and the global financial crisis of 2008-2009.

“Given the fragile economic conditions, any new adverse event (…) could push the world economy into recession,” according to the World Bank. Those factors include higher-than-expected inflation, sharp jumps in interest rates to curb price rises, or a return of the pandemic.

In advanced economies like the United States, growth will likely fall to 0.5% in 2023, 1.9 points below previous forecasts. Meanwhile, the euro area is expected to stagnate. For China, the bank forecasts growth of 4.3% this year, 0.9 points less than what was calculated in June.

The outlook is “especially devastating for many of the poorest economies, where poverty reduction has already stalled,” the bank added. “Emerging and developing countries face a period of many years of slow growth weighed down by heavy debt burdens and weak investment,” Malpass warned.

Although central banks, including the US Federal Reserve (Fed), have raised interest rates over the past year to contain rising prices, the burden on economies will “get worse” as the policies take effect, according to the WB.

“The three main engines of global growth – the United States, the euro zone and China – are experiencing pronounced weakness, with adverse repercussions for emerging market and developing economies,” the bank added.

For now, inflation has risen on the back of the pandemic, supply shocks and, in some cases, currency depreciations. Although expected to decline, inflation will remain above pre-pandemic rates, according to the bank.

The weak growth does not yet mark a recession, said Ayhan Kose, director of the World Bank’s Outlook research group. “In the short term, we focus on the risk of possible financial stress, if interest rates rise further in the world,” he told AFP. If this happens and inflation persists, “it could trigger a global recession,” he said. (YO)