The world economy is slowing "perilously close" to a recession, the World Bank warned Tuesday, slashing its 2023 global growth forecast, as the impact of central bank rate hikes intensifies, Russia's war in Ukraine continues and the world's major economic engines sputter.
In an annual report, the World Bank, which lends money to poorer countries for development projects, said it had slashed its forecast for global growth this year by nearly half to just 1.7%. In its previous Global Economic Prospects report in June 2022, the lender had forecast 2023 global growth at 3%.
If the latest forecast that points to a "sharp, long-lasting slowdown" proves accurate, it would be the third-weakest annual expansion in three decades, behind only the deep recessions that resulted from the 2008 global financial crisis and the coronavirus pandemic in 2020.
"Given fragile economic conditions, any new adverse development ... could push the global economy into recession," the Washington-based development lender said. These include higher-than-expected inflation, sudden spikes in interest rates to contain price increases, a pandemic resurgence or escalating geopolitical tensions.
"I'm concerned, deeply concerned that the slowdown may persist," World Bank President David Malpass told reporters Tuesday.
The World Bank forecasted global growth in 2024 to pick up to 2.7% – below the 2.9% estimate for 2022 – and said average growth for the 2020-2024 period would be under 2% – the slowest five-year pace since 1960.
The bank said significant slowdowns in advanced economies, including sharp cuts to its forecast to 0.5% for the United States and the eurozone, could foreshadow a new global recession less than three years after the last one.
Though the U.S. might avoid a recession this year, global weakness will likely pose another headwind for America’s businesses and consumers, despite high prices and more expensive borrowing rates. The U.S. also remains vulnerable to further supply chain disruptions if COVID-19 continues or Russia’s war in Ukraine worsens.
And Europe, long a major exporter to China, will likely suffer from a weaker Chinese economy.
The bleak outlook will be especially hard on emerging markets and developing economies, the World Bank said, as they struggle with heavy debt burdens, weak currencies, income growth and slowing business investment that is now forecast at a 3.5% annual growth rate over the next two years – less than half the pace of the past two decades.
The World Bank projects that the European Union’s economy won’t grow next year after expanding by 3.3% in 2022.
China's growth in 2022 slumped to 2.7%, its second slowest pace since the mid-1970s after 2020, as zero-COVID restrictions, property market turmoil and drought-hit consumption, production and investment, the World Bank report said.
It predicted a rebound to 4.3% for 2023, nearly a percentage point lower than the June forecast due to the severity of COVID-19 disruptions and weakening external demand.
Türkiye's growth
The bank expects developing countries to fare better, growing 3.4% this year, the same as in 2022, though only about half the pace of 2021. It forecasts Brazil's growth slowing to 0.8% in 2023, down from 3% last year.
The lender sees growth in Türkiye slowing to 2.7% this year, versus its previous forecasts of 3.2%. It expects the economy that is expected to have expanded by 5% in 2022 to grow by 4% in 2024.
Pakistan expects the economy to expand just 2% this year, one-third of last year's pace.
The World Bank noted that some inflationary pressures started to wane as 2022 drew to a close, with lower energy and commodity prices, but warned that risks of new supply disruptions were high, and elevated core inflation may persist. It added that this could cause central banks to respond by raising policy rates by more than currently expected, worsening the global slowdown, it added.
It said that rising interest rates in developed economies like the U.S. and Europe would attract investment capital from poorer countries, thereby depriving them of crucial domestic investment. It said those high-interest rates would slow growth in developed countries at a time when Russia’s invasion of Ukraine has kept world food prices high.
"Russia's invasion of Ukraine has added major new costs," Malpass said on a call with reporters. "The outlook is particularly devastating for many of the poorest economies where poverty reduction is already ground to a halt and access to electricity, fertilizer, food and capital is likely to remain limited for a prolonged period."
The impact of a global downturn would fall particularly hard on poorer countries in such areas as Saharan Africa, which is home to 60% of the world's poor. The World Bank predicts per capita income will grow just 1.2% in 2023 and 2024, which is such a tepid pace that poverty rates could rise.
"Weakness in growth and business investment will compound the already devastating reversals in education, health, poverty and infrastructure and the increasing demands from climate change," Malpass said. "Addressing the scale of these challenges will require significantly more resources for development and global public goods."
The report follows a similarly gloomy forecast a week earlier from Kristina Georgieva, the head of the International Monetary Fund (IMF), the global lending agency. Georgieva recently estimated that one-third of the world will fall into recession this year.
"For most of the world economy, this is going to be a tough year, tougher than the year we leave behind," Georgieva said. "Why? Because the three big economies – U.S., EU, China – are all slowing down simultaneously."
Other economists have also issued bleak outlooks, though most are not quite as dire. Economists at JPMorgan are predicting slow growth this year for advanced economies and the world, but they don’t expect a global recession. Last month, the bank predicted that slowing inflation would bolster consumers’ ability to spend and power growth in the U.S. and elsewhere.
"The global expansion will turn into 2023 bent but not broken," the JPMorgan report said.
Along with seeking new financing so it can lend more to poorer countries, Malpass said, the World Bank is, among other things, seeking to improve its lending terms that would increase debt transparency," especially for the rising share of poor countries that are at high risk of debt distress."
The bank called for increased support from the international community to help low-income countries deal with food and energy shocks, people displaced by conflicts and a growing risk of debt crises. It said new concessional financing and grants are needed along with the leveraging of private capital and domestic resources to help boost investment in climate adaptation, human capital and health, the report said.
The report comes as the World Bank's board is expected to consider a new "evolution road map" for the institution to vastly expand its lending capacity to address climate change and other global crises. The plan will guide negotiations with shareholders, led by the U.S., for the biggest revamp in the bank's business model since its creation at the end of World War II.