Global growth has sharply slowed, and the risk of financial stress in emerging market and developing economies (EMDEs) is intensifying amid high global interest rates, according to the latest Global Economic Prospects report from the World Bank.
Global growth is expected to slow from 3.1% in 2022 to 2.1% in 2023. In EMDEs excluding China, growth is projected to fall to 2.9% this year, down from 4.1% last year. These projections reflect widespread downward revisions.
“The safest way to reduce poverty and spread prosperity is through employment — and slower growth makes job creation much more difficult,” said World Bank Group President Ajay Banga. “It’s important to keep in mind that growth projections are not an inevitable destination. We have an opportunity to turn the tide, but that will require everyone to work together.”
Most EMDEs have suffered limited damage so far from the recent banking stress in advanced economies, but they are now navigating dangerous waters. With increasingly restrictive global credit conditions, one in four EMDEs has effectively lost access to international bond markets. The pressure is especially acute for EMDEs with underlying vulnerabilities, such as low credit capacity. Growth projections for these economies in 2023 are less than half of those from a year ago, making them highly vulnerable to additional shocks.
“The global economy is in a precarious position,” said Indermit Gill, Chief Economist and Senior Vice President of the World Bank Group. “Outside of East and South Asia, it is far from the dynamism needed to eliminate poverty, combat climate change, and replenish human capital. In 2023, trade will grow at less than a third of the pace of the pre-pandemic years. In emerging market and developing economies, debt pressures are rising due to higher interest rates. Fiscal weaknesses have already driven many low-income countries into debt distress. Meanwhile, the financing needs to achieve sustainable development goals are far greater than even the most optimistic projections for private investment.”
The latest projections indicate that the overlapping shocks of the pandemic, the Russian invasion of Ukraine, and the sharp slowdown amid restrictive global financial conditions have caused a lasting setback to development in EMDEs, which will persist for the foreseeable future. By the end of 2024, economic activity in these economies is expected to be about 5% below the levels projected on the eve of the pandemic. In low-income countries — especially the poorest — the damage is stark: in more than a third of these countries, per capita incomes in 2024 will still be below 2019 levels. This weak income growth will perpetuate extreme poverty in many low-income countries.
“Many developing economies are struggling to cope with weak growth, persistently high inflation, and record levels of debt. However, new risks — such as the possibility of broader spillovers from renewed financial stress in advanced economies — could further worsen the situation for them,” said Ayhan Kose, Deputy Chief Economist of the World Bank Group. “Policymakers in these economies must act quickly to prevent financial contagion and reduce short-term domestic vulnerabilities.”
In advanced economies, growth is expected to slow from 2.6% in 2022 to 0.7% this year and remain weak in 2024, the report says. After growing 1.1% in 2023, the U.S. economy is expected to slow to 0.8% in 2024, mainly due to the persistent impact of the sharp increase in interest rates over the past year and a half. In the euro area, growth is expected to fall to 0.4% in 2023, down from 3.5% in 2022, due to the lagged effect of monetary policy tightening and rising energy prices.
Regional Outlooks:
• East Asia and Pacific: Growth is expected to increase to 5.5% in 2023 and then slow to 4.6% in 2024.
• Europe and Central Asia: Growth is expected to rise slightly to 1.4% in 2023 before increasing to 2.7% in 2024.
• Latin America and the Caribbean: Growth is expected to slow to 1.5% in 2023 before recovering to 2% in 2024.
• Middle East and North Africa: Growth is expected to slow to 2.2% in 2023 before rebounding to 3.3% in 2024.
• South Asia: Growth is expected to decline slightly to 5.9% in 2023 and then to 5.1% in 2024.
• Sub-Saharan Africa: Growth is expected to slow to 3.2% in 2023 and rise to 3.9% in 2024.
Source: The World Bank