The World Bank’s latest Global Economic Prospects report highlights a significant deceleration in global growth and escalating risks of financial stress in emerging market and developing economies (EMDEs), largely driven by elevated global interest rates. Projections indicate a decline in global growth from 3.1 percent in 2022 to 2.1 percent in 2023. In EMDEs, excluding China, growth is expected to slow to 2.9 percent this year from 4.1 percent in the previous year, reflecting widespread downgrades.
World Bank Group President Ajay Banga emphasizes the critical role of employment in poverty reduction and prosperity, stating, “It’s important to keep in mind that growth forecasts are not destiny. We have an opportunity to turn the tide, but it will take us all working together.”
The report raises concerns about the vulnerability of most EMDEs to the tightening global credit conditions. A quarter of these economies have effectively lost access to international bond markets. EMDEs with underlying vulnerabilities, such as low creditworthiness, are particularly affected, with growth projections for 2023 less than half of those from a year ago. This makes them highly susceptible to additional shocks.
Indermit Gill, the World Bank Group’s Chief Economist and Senior Vice President, warns about the precarious state of the world economy, emphasizing that it falls far short of the dynamism needed to address poverty, climate change, and human capital replenishment. He adds that trade growth in 2023 is expected to be less than a third of its pre-pandemic pace, and debt pressures are increasing in emerging markets and developing economies due to higher interest rates. The financing needs to achieve sustainable development goals surpass even the most optimistic projections of private investment.
The report highlights the lasting setbacks faced by EMDEs due to the overlapping shocks of the pandemic, the Russian invasion of Ukraine, and the significant slowdown amid tight global financial conditions. By the end of 2024, economic activity in these economies is projected to be approximately 5 percent below the pre-pandemic projections. In low-income countries, per capita incomes in 2024 will still be below 2019 levels in more than one-third of the countries, perpetuating extreme poverty.
Ayhan Kose, Deputy Chief Economist of the World Bank Group, urges prompt action by policymakers in developing economies to prevent financial contagion and reduce immediate domestic vulnerabilities. He stresses that weak growth, persistently high inflation, and record debt levels are challenging many developing economies, while new hazards, such as potential spillovers from financial stress in advanced economies, could exacerbate their situations.
The report also indicates a deceleration in growth for advanced economies, with the United States forecasted to grow at 0.8 percent in 2024, primarily due to the lingering impact of rising interest rates. In the euro area, growth is expected to slow to 0.4 percent in 2023, resulting from the lagged effect of monetary policy tightening and energy-price increases.
Moreover, the report analyzes the impact of U.S. interest rate increases on EMDEs. The rise in two-year Treasury yields, driven by expectations of hawkish U.S. monetary policy, has adverse financial effects in EMDEs and increases the probability of financial crises, particularly in countries with greater economic vulnerabilities. Frontier markets, characterized by less developed financial markets and limited access to international capital, experience significant increases in borrowing costs. Sovereign risk spreads in these markets rise more than three times as much as in other EMDEs.
The report also addresses the fiscal policy challenges faced by low-income economies, which are in dire straits.
