World Bank Warns Of Global Recession Risk

Key takeaways

• The World Bank issued a bleak global growth outlook this week, revising last June’s projections down from 3% to 1.7%
• A significantly downgraded U.S. outlook hit particularly hard; the U.S. is now forecasted to see just 0.5% growth in 2023
• If predictions hold, it would be “the third weakest pace of growth in nearly three decades” behind the 2009 and 2020 downturns

A bleak report from the World Bank this week warns that 2023’s growth outlook looks ripe for recession. The U.S.-based international organization conducts research and provides financing and advice to developing nations.

In its Global Economic Prospects Report, the World Bank warns, “Global growth has slowed to the extent that the global economy is perilously close to falling into recession.”

The World Bank credits “unexpectedly rapid and synchronous” monetary tightening around the world for the sluggish growth. The situation is dire enough, it adds, that “any additional adverse shocks” could lead to a global recession.

Ayhan Kose, chief economist and director of the World Bank Group’s Prospects Group, said, “The risks that we warned of six months ago have materialized and our worst-case scenario is now our baseline scenario. The world’s economy is on a razor’s edge and could easily fall into recession if financial conditions tighten.”

The World Bank’s forecast comes after the International Monetary Fund (IMF) released a similarly stark prognosis. If a global recession comes about, it would mark the first time since the 1930s that two global downturns occurred in the same decade.

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Unpacking the World Bank recession warning

The World Bank forecasts that global growth will slow to 1.7% in 2023, down from the 3% predicted last June. This projection “largely [reflects] more aggressive monetary policy tightening, deteriorating financial conditions and declining confidence.”

These broadly-worsening conditions are expected to drag down growth worldwide. In the world’s richest economies, which surged at 5.3% in 2021 and 2.5% in 2022, growth will slow to a crawling 0.5% this year.

These projections lie a full percentage point below the IMF’s October numbers. That report also downgraded the IMF’s previous forecast due to many of the same pressures the World Bank blames now.

World Bank President David Malpass noted in the report that “The deterioration is broad-based,” affecting “virtually all regions of the world.” As such, global residents can gear up for slower per-capita income growth even compared to pre-Covid-19 numbers.

Looking further ahead, the World Bank added that around half of all countries saw trimmed growth prospects for 2024. Without major changes, the globe could see 2024 growth hit just 2.7%, down from the previous 3% projection.

World Bank recession: U.S. projections

The World Bank’s U.S. economic projections helped pave the way for such a steep global downgrade.

Last June, the institution forecast that the U.S. would see around 2.4% real GDP growth in the coming year. As of Tuesday, it sees a far more dour outlook at just 0.5% growth – a difference of 1.9 percentage points.

The World Bank credits “one of the most aggressive monetary policy tightening cycles in recent history” for the change. (I.e., the Fed’s interest rate hikes aimed at increasing borrowing costs to dampen demand and therefore – hopefully – inflation.)

The group anticipates that moderating interest rates will lower inflation as labor markets and wage pressures soften. Such low growth, if it comes to fruition, would be “the weakest performance outside official recessions since 1970.”

Kristalina Georgieva, managing director of the IMF, suggested last week that 1/3 of the global economy could see a 2023 recession. Still whether the U.S. will fall subject to an official recession remains up in the air.

“But,” she added, “whether [the U.S. does] or not in technical terms, they are going to feel like they are experiencing a recession.”

Looking beyond our borders

The World Bank also envisions global growth declining in the coming year.

Some 95% of advanced economies saw their projections slashed compared to six months ago. Overall, they’re now expected to slow from 2.5% to 0.5% growth. The EU will likely lay flat, while Japan slipped from 1.3% to 1%.

China’s growth outlook remains of particular concern as the country reopens faster than expected. The country’s projections slipped from 5.2% to 4.3% to reflect instabilities related to trade demand, real estate and ongoing pandemic disruptions.

If the country manages to pull through, Malpass told CNBC on Tuesday, it’s “big enough by itself to really lift global demand and supply.” On the downside, rising demand off China’s growth could mean that the Fed hikes interest rates for longer.

Over 70% of EMDEs also saw their projections slashed from six months ago. Collectively, they’re anticipated to see 2.7% growth. That includes 6.6% growth in India and -3.3% growth in Russia.

Unfortunately, positive growth could be dragged down as spillovers from “the world’s three major engines of growth” (the U.S., eurozone and China) exacerbate headwinds faced by EMDEs.

What’s behind all the negativity?

As in the U.S., the depression global outlook can be pinned largely to accelerated inflation and resulting government responses. As inflation has bogged down economies, countries have enacted “unexpected rapid and synchronous” responses resulting in incomplete recoveries.

While tighter monetary policies have aided price stability, they’ve also contributed to worsening financial conditions worldwide. The resulting “drag” on economic activities is likely to deepen due to the lag between enacting policies and experiencing impacts. Steadily-increasing real interest rates will also contribute.

Unfortunately, as larger economies charge forward, the ensuing “shockwaves” could pull down smaller nations with them. That’s particularly true in countries whose currencies and economies depend on the strength of the U.S. dollar.

However, the World Bank also expects some of these pressures to ease up. Higher rates should slow price increases from 7.6% to around 5.2%. The World Bank also foresees energy and crop prices moderating.

Still, inflation is expected to remain well above a “healthy” 2% target rate.

Meanwhile, the ongoing energy crisis stemming from Russia’s invasion of Ukraine further sours the pot.

World Bank recession: risks and recommendations

The World Bank warns that slow growth, tighter financial conditions, and heavy debts will likely weaken investment. In some countries, corporate defaults could start rolling in.

Altogether, the World Bank believes that growth outlook risks are tilted to the downside, while the risk of policy missteps remains elevated. If central banks hike policy rates more than expected amid softening growth and confidence, the financial stress could further contribute to a recession.

Furthermore, any additional “negative shocks” like higher inflation or rising geopolitical tensions could “push the global economy into recession.”

However, it adds, governments can still take action. The World Bank recommends boosting beneficial investments, creating jobs and tackling climate change as starting points for growth-chasing economies. Facilitating easier international trading could also ease the burden for economies of all sizes.

“The crisis facing development is intensifying,” Malpass said of the institute’s projections. But “though the world is now in a very tight spot, there should be no room for defeatism.”

So, what’s this mean for you?

As the global economy has grown tougher, investors have often faced the short end of various sticks.

The World Bank notes that globally, asset prices have declined broadly as investment and housing markets have weakened. Many commodity prices have also eased as global growth eased and recession fears abounded.

Through it all, consumer and investor confidence has fallen “precipitously.”

In other words: as the global economy has grown tougher, many investors have received the short end of the stick. And whether the U.S. suffers a recession or not, knowing where to invest at a time like this isn’t easy.

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