Global Economic Prospects

In his Foreword, WBG Senior Vice President and Chief Economist Indermit Gill emphasizes that the world economy remains hobbled—far short of the strength that will be necessary to make substantial progress on global ambitions to eliminate extreme poverty, counter climate change, and replenish human capital. He notes that, by the end of 2024, per-capita income growth in about a third of EMDEs will be lower than it was on the eve of the pandemic. In low-income countries—especially the poorest—the damage is even larger: in about one-third of these countries, per capita incomes in 2024 will remain below 2019 levels by an average of 6 percent.

Global growth is set to slow in 2023 to 2.1 percent. Tight global financial conditions and subdued external demand will weigh on growth across emerging market and developing economies. Downside risks include more widespread banking stress and tighter monetary policy. Global cooperation is needed to bolster financial regulatory reform, mitigate climate change, and provide debt relief. Central bank credibility remains critical for macroeconomic stability. Fiscal space can be gradually rebuilt through increased spending efficiency and domestic revenue mobilization. Reversing slowing potential growth will require reforms to foster physical and human capital, labor supply, productivity of services, and trade.

Growth in the East Asia and Pacific (EAP) region is projected to strengthen to 5.5 percent in 2023 from 3.5 percent in 2022, as a recovery in China offsets slowing activity in most other regional economies. Projected growth in China this year has been revised upward following a faster-than-expected reopening of the economy, which is bolstering near-term consumer spending, particularly on services. Growth in the region excluding China is set to slow to 4.8 percent in 2023 from 5.8 percent in 2022, as the boost from earlier reopening fades in several large economies. Regional trade growth will remain subdued amid weak global demand and domestic services-led growth in China. In 2024, growth in EAP is projected to ease to 4.6 percent as the effects of China’s reopening fade. Downside risks to the outlook include tighter-than-expected global financial conditions; stubbornly high inflation; protracted weakness in China’s property sector; geopolitical tensions; and, particularly for smaller economies, natural disasters, including climate-change-related extreme weather events.

Economic prospects in Europe and Central Asia (ECA) continue to be held back by the Russian Federation’s invasion of Ukraine. Growth in ECA is projected to remain weak in 2023, edging up to a modest 1.4 percent, as the effects of the invasion, high inflation, tight monetary policies, and subdued external demand weigh on activity. Regional growth is forecast to pick up to 2.7 percent in 2024, as inflation gradually recedes and demand firms. Risks to the outlook are tilted to the downside and include an intensification of Russia’s invasion in Ukraine, rising geopolitical tensions elsewhere in the region, higher and more sustained inflation, a sharper economic slowdown than expected in the region’s main trading partners, and further financial sector turmoil.

Growth in Latin America and the Caribbean is expected to slow sharply from 3.7 percent in 2022 to 1.5 percent in 2023. With core and headline inflation above most central bank targets across the region, monetary policy is likely to remain tight in the near term, dampening growth. Policy uncertainty in some countries is damaging business and consumer confidence. Downside risks to the baseline forecast include slower growth in major trading partners, as well as tighter monetary policies and renewed financial stress in advanced economies, which would have adverse spillovers in the region through weaker trade or more restrictive financial conditions. Climate change poses a significant risk as well given the increasing frequency of extreme weather events.

Following a solid recovery in 2022, growth in the Middle East and North Africa (MNA) is forecast to slow to 2.2 percent in 2023, 1.3 percentage points below the January forecast, with growth revised downward for both oil exporters and oil importers. Growth in oil exporters is expected to slow sharply to 2.0 percent this year, reflecting lower oil prices and production, whereas growth in oil importers is projected to edge down to 3.4 percent due to high inflation, dollar shortages, and fiscal and monetary policy tightening. Risks to the outlook remain predominantly to the downside and include falling external demand due to banking stress or further policy tightening; rising violence and social tensions, perhaps arising from the high levels of unemployment in much of the region; a greater incidence of financial crises; and adverse weather events stemming from climate change.

Growth in South Asia is expected to slow marginally in 2023, to 5.9 percent, and more significantly in 2024, to 5.1 percent. Unexpected resilience in private consumption and investment, and robust growth in the services sector in India, underlie an upward revision to growth in 2023. The lagged impact of tightening domestic policy and global financial conditions, and the aftermath of crises and natural disasters in several economies, are expected to temper growth in 2024. Risks to the outlook are mainly to the downside and include adverse spillovers from possible further advanced-economy monetary policy tightening or banking sector stress, sharper-than-expected tightening of domestic macroeconomic policies to anchor inflation expectations or stabilize foreign exchange reserves, social tensions arising from food insecurity, and extreme weather events related to climate change. The materialization of such risks could worsen economic and humanitarian crises in Afghanistan and Sri Lanka and/or give rise to crises in other economies in the region.

Growth in Sub-Saharan Africa is projected to slow to 3.2 percent in 2023, as external headwinds, persistent inflation, higher borrowing costs, and increased insecurity weigh on activity. Recoveries from the pandemic remain incomplete in many countries, with elevated costs of living tempering the growth of consumption. Fiscal space has narrowed further, while surging import bills and higher debt burdens have heightened financing needs. Although the baseline projection for 2024-25 envisions a pickup in growth, per capita incomes are expected to expand much more slowly than needed to make progress in reducing extreme poverty. Risks to the baseline remain tilted to the downside. These include a deeper-than-expected global economic slowdown, deteriorating terms of trade, higher inflation along with further domestic and international monetary policy tightening, renewed financial distress in advanced economies, and more adverse weather events. Materialization of these risks would not only dampen growth, but also exacerbate poverty and limit the ability of many countries to strengthen climate resilience.

The rapid rise in interest rates in the United States poses a significant challenge to emerging market and developing economies (EMDEs). As the Federal Reserve has pivoted toward a more hawkish stance to rein in inflation, a substantial part of the sharp increases in U.S. interest rates since early 2022 has been driven by shocks that capture changes in perceptions of the Fed’s reaction function. These reaction shocks are associated with especially adverse financial market effects in EMDEs, including a higher likelihood of experiencing a financial crisis. Their effects also appear to be more pronounced in EMDEs with greater economic vulnerabilities. These findings suggest that major central banks can alleviate adverse spillovers through proper communication that clarifies their reaction functions. They also highlight that EMDEs need to adjust macroeconomic and financial policies to mitigate the negative impact of rising global and U.S. interest rates.

The room for fiscal policy to maneuver has narrowed in low-income countries (LICs) over the past decade: LIC debt has grown rapidly as sizable and widening deficits have offset the debt-reducing effects of growth. Fiscal deficits have reflected growing spending pressures, including pressures on debt service, amid persistent revenue weakness, especially for grants and income tax revenues. As a result, 14 out of the 28 LICs were assessed as being in debt distress or at a high risk of debt distress as of end-April 2023. Creating room for fiscal policy requires generating higher revenues, making spending more efficient, and improving debt management practices. These measures need to be embedded in improvements to domestic institutional frameworks and need to be supported by well-coordinated global policies both to improve fiscal policy management and to address debt challenges.