World Bank sees major economies growing at much slower pace thanks to higher rates and banking stress

The World Bank says global growth has sharply slowed amid ongoing high inflation and overhangs of the banking crisis result in worsening credit conditions.

Growth forecasts for advanced economies project just 0.7% increase this year, down from 2.6% estimated growth in 2022. This marks “one of the weakest growth rates in the last five decades,” Gill told reporters on Tuesday.

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The U.S. is projected to grow 1.1%, while the Euro area and Japan are projected to see GDP growth of less than 1% in 2023. U.S. GDP growth is expected to decelerate in 2024 to 0.8% as high interest rates further weigh on growth.

“The world economy is in a precarious position,” Indermit Gill, the World Bank Group’s Chief Economist and senior vice president said in a press statement.

The bank estimates overall global growth will decelerate to 2.1% in 2023, down from 3.1% in 2022, as stated in its 2023 Global Economic Prospects report released Tuesday. Emerging and developing economies are forecasted to see a slight uptick in GDP to 4%, up 0.6% from the bank’s projections made in January 2023. However, Gill said excluding China, growth in developing economies would be less than 3%.

The reduced forecasts for growth reflect broad-based downgrades stemming several overlapping shocks, most recent of which include spillover effects from the recent banking crisis seen in the U.S. and advanced economies. Increasingly restrictive credit conditions resulting from the banking turmoil have effectively shut out emerging and developing economies from global bond markets, putting them “in dangerous waters” said the bank.

Fiscal weakness has dealt a further blow to low-income countries, 14 out of 28 of which are now in debt distress or at high risk of debt distress, according to the report. One-third of these countries are expected to see per capita incomes in 2024 still remain 2019 levels.

On top of that, central banks around the world continue raising rates to fight off persistent inflation.

“The world economy remains hobbled,” the bank said in the report. “Besieged by high inflation, tight global financial markets, and record debt levels, many countries are simply growing poorer.”