Global Economic Prospects

Global Economic Prospects

A Second Year of Sharply Slowing Growth

Global growth is projected to slow to its third-weakest pace in nearly three decades, overshadowed only by the 2009 and 2020 global recessions. Investment growth in emerging market and developing economies is predicted to remain below its average rate of the past two decades. Any additional adverse shocks could push the global economy into recession. Small states are especially vulnerable to such shocks because of their reliance on external trade and financing, limited diversification, elevated debt, and susceptibility to natural disasters. Immediate policy action is needed to bolster growth and investment, including redirecting existing spending, such as agricultural and fuel subsidies.

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    In his Foreword, WBG President David Malpass emphasizes that the crisis facing development is intensifying. He notes that the latest growth forecasts indicate a sharp, long-lasting slowdown, with global growth declining to 1.7 percent in 2023—roughly half the rate expected just six months ago. The deterioration is broad-based: in virtually all regions of the world, per-capita income growth will be slower than it was during the decade before COVID-19. The setback to global prosperity will likely persist: By the end of 2024, the level of GDP in emerging market and developing economies will be about 6 percent below the level expected on the eve of the pandemic.

Global and Regional Outlooks

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    Global growth is projected to slow to 1.7 percent in 2023—the third-weakest pace in nearly three decades, overshadowed only by the global recessions of 2009 and 2020. This slowdown is partly due to policy tightening aimed at reining in high inflation. Negative shocks, such as higher inflation, tighter policy, or financial stress, could push the global economy into recession. Immediate action is needed to mitigate the risks of global recession and debt distress. It is also essential that policy makers ensure that any support is focused on vulnerable groups, that inflation expectations remain well anchored, and that financial systems remain resilient.

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    East Asia and Pacific

    Growth in the East Asia and Pacific region is projected at 4.3 percent in 2023—a pickup from last year’s estimated 3.2 percent pace, and almost entirely on account of a projected rebound in China. As mobility restrictions ease, growth in China is forecast to firm from 2.7 percent in 2022 to 4.3 percent this year, still below its potential growth rate owing to continued pandemic-related disruptions. Growth in the rest of the region is expected to slow from 5.6 percent in 2022 to 4.7 percent in 2023, as pent-up demand dissipates and declining goods export growth outweighs recovery in tourism and travel. Downside risks to the outlook predominate, including the possibility of recurrent pandemic-related disruptions and a prolonged drag from the real estate sector in China, additional tightening of financial conditions, weaker-than-expected global growth, and extreme weather events.

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    Europe and Central Asia

    Growth in Europe and Central Asia is estimated to have sharply decelerated in 2022, to 0.2 percent, and is projected to remain essentially unchanged at 0.1 percent in 2023. This weakness largely reflects contraction in the Russian Federation in both years and a deep recession in Ukraine in 2022. Excluding these two economies, output in ECA is forecast to grow by a modest 2.1 percent in 2023. Disruptions to the supply of energy in Europe, related to the Russian invasion of Ukraine, and synchronous monetary policy tightening have dampened economic activity, affecting ECA’s economies both directly and through spillovers from the euro area. The near-term economic outlook remains especially uncertain, with risks to the baseline forecast tilted to the downside. These risks include an additional tightening of global financial conditions, financial turmoil, and worsening energy shortages.

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    Latin America and the Caribbean

    Growth in Latin America and the Caribbean is forecast to slow to a meager 1.3 percent in 2023 before recovering somewhat to 2.4 percent in 2024. Decelerating global demand will dampen the external drivers of near-term growth in the region, while domestic demand will be curbed by monetary policy tightening and persistent policy uncertainty in some countries. The main downside risks to the outlook are external: tightening global financial conditions could precipitate capital outflows and currency depreciations, and the global economy could slow more than predicted, leading to sharp falls in commodity export prices. These or other adverse shocks could reduce growth further, which could catalyze social unrest, given stagnating living standards. Climate-related disasters also remain an ever-present threat, especially for the region’s small states.

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    Middle East and North Africa

    Growth in the Middle East and North Africa region is projected to slow to 3.5 percent in 2023, as the boost from the earlier increase in oil production and the recovery in services following reopening from the pandemic fade. Prospects vary substantially across the region, with some economies facing macroeconomic instability and conflict while others grow above their potential. Spillovers from further weakness in key trading partners, tighter global financial conditions, increasing climate-related risks, rising social tensions, and political instability highlight the possibility of further economic contractions and increasing poverty. A further deterioration in global and domestic financial or economic conditions could see economies with large macroeconomic imbalances fall into crisis.

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    South Asia

    South Asia continues to be adversely affected by spillovers from the invasion of Ukraine, rising global interest rates, and weakening growth in key trading partners. Regional growth is estimated to have slowed to 6.1 percent in 2022 and is projected to slow further to 5.5 percent in 2023—below previous projections on global spillovers—before picking up to 5.8 percent in 2024. Risks to the outlook continue to be tilted to the downside, including further pressure from tightening global financial conditions; higher-than-projected inflation leading to lower real incomes and spending; and the reemergence of financial sector stress. Dwindling international reserves and rising sovereign spreads increase the risk of more economies falling into crisis.

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    Sub-Saharan Africa

    Growth in Sub-Saharan Africa slowed to an estimated 3.4 percent in 2022, as weakening external demand, high inflation, and tightening global financial conditions dampened regional activity. Soaring food and energy prices, stemming partly from the war in Ukraine, triggered sharp cost-of-living increases across the region, leading to millions more people falling into food insecurity and poverty. Global demand for many nonenergy commodities softened, adversely affecting the region’s exporters of industrial metals. Fiscal space needed to protect the poor has been depleted in many countries, while rising borrowing costs and muted growth prospects have sharply worsened debt dynamics. The regional outlook for 2023-24 is for only a modest pickup in growth and a slow rise in per capita incomes, dimming prospects for a rapid reversal of recent increases in poverty. Risks are tilted to the downside. A more pronounced weakness in major economies, further increases in global interest rates, higher and persistent inflation, fragility, and increased frequency and intensity of adverse weather events could further slow growth across the region, exacerbating poverty and leading to debt distress in some countries.

Two Topical Issues

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    Investment Growth after the Pandemic

    Investment growth in emerging market and developing economies (EMDEs) is expected to remain below its average rate of the past two decades through the medium term. This subdued outlook follows a decade-long, geographically widespread investment growth slowdown before the COVID-19 pandemic. An empirical analysis covering 2000-21 finds that periods of strong investment growth were associated with strong real output growth, robust real credit growth, terms of trade improvements, growth in capital inflows, and investment climate reform spurts. Each of these factors has been decreasingly supportive of investment growth since the 2007-09 global financial crisis. Weak investment growth is a concern because it dampens potential growth, is associated with weak trade, and makes achieving the development and climate-related goals more difficult. Policies to boost investment growth need to be tailored to country circumstances, but include comprehensive fiscal and structural reforms, including repurposing of expenditure on inefficient subsidies. Given EMDEs’ limited fiscal space, the international community will need to significantly increase international cooperation, official financing and grants, and leverage private sector financing for adequate investment to materialize.

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    Small States: Overlapping Crises, Multiple Challenges

    Small states’ economies were hit particularly hard by COVID-19, largely due to prolonged disruptions to global tourism. Now facing spillovers from the Russian Federation’s invasion of Ukraine and the global monetary tightening cycle, small states are expected to have weak recoveries with large and possibly permanent losses to the level of output. Small states are diverse in their economic features, but they share attributes that make them especially vulnerable to shocks, including dependence on imports of essential goods, highly concentrated economies, elevated levels of debt, reliance on external financing, and susceptibility to natural disasters and climate change. Policy makers in small states can improve long-term growth prospects by building fiscal space, fostering effective economic diversification, and improving resilience to climate change. There is a need for intensified international cooperation to support small states in addressing their challenges. The global community can assist small states in these efforts by maintaining the flow of official assistance, helping restore and preserve debt sustainability, facilitating trade, and supporting climate change adaptation.