World economy is in a very delicate situation: why?

The global economy is in a precarious state and is headed for a substantial slowdown in growth as sharp interest rate increases hurt activity and exacerbate vulnerabilities in low-income countries, according to the report. World Bank.

Stronger-than-expected resilience in the first few months of 2023 is expected to fade into longer-lasting weakness as tight monetary policies compound the lingering impact of the pandemic and Russia’s invasion of Ukraine, the agency said. multilateral lending in its latest World Economic Outlook report.

Although the stronger recent push led the institution to raise its forecast for global gross domestic product (GDP) for this year to 2.1%, from the 1.7% forecast in January, it cut its outlook for 2024 from 2.7% to 2.4%. Risks to the outlook remain to the downside, he warned.

“According to projections, global growth will slow significantly in the second half of this year, with weakness continuing into 2024,” said the World Bank. “The possibility of broader banking turmoil and tightening monetary policies could lead to even lower global growth.”

The caution comes at a time when major central banks are weighing how and when to cut the biggest global monetary policy tightening since the 1980s. Next week, the Federal Reserve will examine whether to pause its rate hikes , while investors expect the European Central Bank to continue raising them, albeit at the slower pace of 25 basis points set last month.

According to the World Bank, the effect of higher borrowing costs is “more and more evident”, and the lagged effects are yet to come as credit conditions tighten.

He also noted that his analysis shows that the outlook for emerging markets and developing economies is especially “worrisomeas rising interest rates driven by the perceived tightening stance of the Federal Reserve substantially increase the likelihood that these countries will face financial crises. Amid tight credit conditions, one in four have actually lost access to bond markets, according to the World Bank.

To mitigate financial contagion risks, the Washington-based lender said central banks should communicate their intentions. “as soon and as clearly as possible” to avoid abrupt changes in perspectives.

“Global growth has slowed sharply and the risk of financial stress in emerging market and developing economy regions is intensifying amid high global interest rates”, said the World Bank.

Other highlights of the report:

• Growth in emerging markets and developing economies over the first half of the 2020s is expected to average 3.4%, making this period one of the weakest half-decades in the past 30 years.
• Growth in advanced economies is projected to slow to 0.7% in 2023 and “stay weak” in 2024
• The fiscal positions are “increasingly precarious” in low-income countries, which requires higher revenues and more efficient spending
• Policy challenges include increased focus on financial regulation in the aftermath of bank failures and increased global cooperation to mitigate climate change and provide debt relief to struggling countries.
• Global inflation is expected to ease gradually, but core prices are rising in many countries and are expected to remain above their pre-pandemic level beyond 2024.