According to the latest Global Economic Prospects report by the World Bank, global growth has significantly slowed, and emerging market and developing economies (EMDEs) face an escalating risk of financial stress.
The report projects a deceleration of global growth from 3.1% in 2022 to 2.1% in 2023, with EMDEs, excluding China, experiencing a slowdown to 2.9% this year from 4.1% in the previous year.
World Bank Group President Ajay Banga highlighted the importance of job creation in reducing poverty and promoting prosperity, emphasizing that growth forecasts are not definitive and require collective efforts to reverse the trend.
While most EMDEs have seen limited damage from banking stress in advanced economies thus far, they are now navigating treacherous waters. With global credit conditions becoming increasingly restrictive, one in every four EMDEs has lost access to international bond markets.
The situation is especially critical for EMDEs with underlying vulnerabilities, such as low creditworthiness, with growth projections for these economies in 2023 being less than half of what they were a year ago, leaving them highly susceptible to additional shocks.
Indermit Gill, the World Bank Group’s Chief Economist and Senior Vice President, described the global economy as being in a precarious position. He highlighted the inadequacy of growth outside of East and South Asia to address poverty, climate change, and human capital replenishment.
Trade is projected to grow at less than a third of its pre-pandemic pace in 2023, and emerging markets and developing economies are grappling with growing debt pressures due to higher interest rates.
Fiscal weaknesses have already pushed many low-income countries into debt distress, while the financing required to achieve sustainable development goals exceeds even the most optimistic projections for private investment.
The report suggests that the overlapping shocks of the pandemic, the Russian invasion of Ukraine, and the significant slowdown amidst tight global financial conditions have dealt a lasting blow to development in EMDEs, leading to an economic activity shortfall of approximately 5% by the end of 2024 compared to pre-pandemic projections.
Per capita incomes in more than one-third of low-income countries will still be below 2019 levels in 2024, contributing to the persistence of extreme poverty in these nations.
Ayhan Kose, Deputy Chief Economist of the World Bank Group, expressed concerns about the struggles faced by developing economies due to weak growth, high inflation, and record debt levels. He warned that new hazards, such as potential spillovers from renewed financial stress in advanced economies, could exacerbate their situations.
Kose called for prompt action from policymakers in these economies to prevent financial contagion and reduce domestic vulnerabilities in the near term.
In advanced economies, the report predicts a deceleration of growth from 2.6% in 2022 to 0.7% in 2023, with continued weakness in 2024. The U.S. economy is expected to grow by 1.1% in 2023 before decelerating to 0.8% in 2024 due to the lingering effects of rising interest rates.
Similarly, the euro area is projected to experience a slowdown to 0.4% in 2023 from 3.5% in 2022, primarily due to the impact of tightened monetary policy and increased energy prices.
The report also examines the effects of U.S. interest rate increases on EMDEs, highlighting the adverse financial consequences, including a higher likelihood of financial crises. Such effects are more pronounced in countries with greater economic vulnerabilities, particularly in frontier markets with limited access to international capital.
Frontier markets tend to face significantly higher borrowing costs, with sovereign risk spreads rising more than three times as much as other EMDEs.
Moreover, the report comprehensively assesses the fiscal policy challenges faced by low-income economies, emphasizing their dire circumstances. Rising interest rates have exacerbated the deterioration of their fiscal positions over the past decade, with public debt averaging about 70% of GDP.
Interest payments consume a growing share of limited government revenues, and 14 low-income countries are already in or at high risk of debt distress. These economies also face increased spending pressures, and adverse shocks like extreme climate events and conflicts disproportionately impact vulnerable households due to inadequate social safety nets.
On average, low-income countries allocate only 3% of GDP to support their most vulnerable citizens, significantly below the developing economies’ average of 26%.
The World Bank’s report underscores the urgent need for coordinated actions to address the challenges facing global and emerging market economies. Policymakers are encouraged to take proactive measures to prevent financial contagion, reduce vulnerabilities, and stimulate inclusive growth.
A full copy of the original report can be read here.
Sources: THX News & World Bank.