World Bank cuts 2024 global growth forecast as rate hikes bite

The World Bank has raised its 2023 global growth outlook as the United States, China and other major economies have proven more resilient than forecast, but said higher interest rates and tighter credit will take a bigger toll on next year’s results.

Real global gross domestic product (GDP) is set to climb 2.1 percent this year, the World Bank said in its latest Global Economic Prospects report on Tuesday. That’s up from a 1.7 percent increase forecast that was issued in January, but well below the 2022 growth rate of 3.1 percent.

The development lender cut its 2024 global growth forecast to 2.4 percent from 2.7 percent in January, citing the lagged effects of central bank monetary tightening and more restrictive credit conditions that were reducing business and residential investment.

These factors will slow growth further in the second half of 2023 and into 2024, but the bank released a new 2025 global growth forecast of 3 percent.

World Bank Chief Economist Indermit Gill put a gloomy spin on the new forecasts, saying that 2023 would still mark one of the slowest growth years for advanced economies in the last five decades.

Two-thirds of developing economies will see lower growth than in 2022, dealing a major setback to coronavirus pandemic recovery and poverty reduction and increasing sovereign debt distress, he added.

“Even by the end of next year, a third of the developing world will not beat the per-capita income levels that they had at the end of 2019,” Gill told reporters. “That’s five lost years for nearly a third of the world’s countries.”

In January, the World Bank had warned that global GDP was slowing to the brink of recession, but since then, strength in the labour market and consumption in the US had exceeded expectations, as has China’s recovery from COVID-19 lockdowns.

US growth for 2023 is now forecast at 1.1 percent, more than double the 0.5 percent forecast in January, while China’s growth is expected to climb to 5.6 percent, compared to a 4.3 percent forecast in January after COVID-reduced growth of 3 percent in 2022.

The bank, however, halved its previous 2024 US growth forecast to 0.8 percent, and cut China’s forecast by 0.4 percentage point to 4.6 percent.

The eurozone got a forecast increase to 0.4 percent growth for 2023 from a flat outlook in January, but the forecast for next year was also cut slightly.

Banking stress

Recent banking sector stress is also contributing to tighter financial conditions that will continue into 2024, the lender said.

It cited one potential downside scenario where banking stress results in a severe credit crunch and broader financial market stress in advanced economies. This would likely cut 2024 growth by nearly half to just 1.3 percent – the slowest pace in 30 years outside of the 2009 and 2020 recessions.

“In another scenario where financial stress propagates globally to a far greater degree, the world economy would fall into recession in 2024,” the World Bank added.

The bank said inflation is expected to gradually edge down as growth decelerates and labour demand in many economies softens and commodity prices remain stable. But it added that core inflation is expected to remain above central bank targets in many countries throughout 2024.