Economy Is in ‘Precarious State’ as New Hazards Loom, World Bank Warns

The U.S. Federal Reserve with caution tape in the foreground in Washington on Sept. 19, 2022. Stefani Reynolds/AFP via Getty Images

The World Bank has slashed its 2024 economic growth forecast for the United States by half, predicting that the resilient U.S. consumer is about to weaken “substantially” while warning of “new hazards” that threaten to “make matters worse” for the world.

The group’s latest Global Economic Prospects report paints a gloomy picture of economic growth going forward.

“The global economy remains in a precarious state amid the protracted effects of the overlapping negative shocks of the pandemic, the Russian Federation’s invasion of Ukraine, and the sharp tightening of monetary policy to contain high inflation,” Indermit Gill, the World Bank’s chief economist, wrote in the executive summary of the group’s latest Global Economic Prospects report.

Gill said in the report that 2023 would mark one of the slowest growth years for advanced economies in the past five decades.

In the United States, economic growth is expected to weaken “significantly” this year and into early 2024, the report indicates.

US Economic Forecast Slashed

After growing 1.1 percent in 2023, the U.S. economy is set to decelerate to 0.8 percent in 2024. The forecast for next year represents a significant downgrade—it has been slashed by half.

The U.S. growth forecast for next year has been cut to 0.8 percent in the current report from 1.6 percent in the January version.

The downgrade is mostly because of the lingering effect of the sharp rise in interest rates over the past year and a half, in a bid to bring down the highest inflation rates since the early 1980s, the World Bank said.

The peak effect on U.S. growth from high interest rates is expected to come at some point in 2023, although lagged effects of interest rate increases are expected to continue into next year, and the economy in 2024 will likely be “weak.”

U.S. consumption, which the World Bank said has been “resilient” so far, is expected to slow “substantially” as higher borrowing costs, tighter financial conditions, and depleted savings will weigh on household spending.

“Activity is expected to pick up toward the end of next year, as inflation eases and the effects of monetary policy tightening fade,” the World Bank stated in the report.

‘New Hazards’

The group also warned of new threats to the economic outlook.

“New hazards are threatening to make matters worse,” Gill wrote in the executive summary of the report, before detailing a number of risks.

For one, inflation remains high despite the steepest global interest rate hiking cycle in about 40 years, he wrote.

Even by the end of 2024, inflation is expected to remain above the target range of most central banks.

“Policymakers in most economies will need to be exceptionally agile to cope with the risks that come with such rate hikes,” Gill wrote.

Not only are high interest rates crimping growth in emerging economies, they’re also leading to lower investments and intensifying the risk of financial crises.

“These challenges would intensify in the event of more widespread banking-sector strains in advanced economies,” he warned.

Recent bank failures have contributed to a slowdown in credit creation, and tighter credit will also be a drag on near-term economic activity, the World Bank stated in the report.

“The possibility of more widespread bank turmoil and tighter monetary policy could result in even weaker global growth,” the group warned.

The latest projections indicate that the world economy will remain weak and at risk of a deeper slowdown in 2023 and 2024.

The group’s baseline scenario calls for global growth to slow to 2.1 percent in 2023 from 3.1 percent in 2022, before edging up to 2.4 percent in 2024.

“Even this tepid growth assumes that stress in the banking sector of advanced economies does not spill over” to emerging markets and developing economies (EMDEs), the group said in the report.

“If the current banking stress in advanced economies metastasizes into widespread financial turmoil affecting EMDEs, the worst-case scenario would have arrived: the global economy would experience a deep downturn next year,” the World Bank wrote in the report.

‘Rough Shape’

Part of why the economy is in such “rough shape,” Gill wrote, is that long before the COVID-19 pandemic arrived, governments around the world had developed an appetite for deficit spending.

“They turned a blind eye to the dangers of rising debt-to-GDP ratios. If a lost decade is to be avoided, these failures must be corrected,” he wrote.

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

The report’s prescriptions for policymakers to avoid triggering a worst-case scenario include stable and predictable communication from central banks.

“Central banks—especially those in advanced economies—can curb the risk of disruptive spillovers to global financial markets by communicating their intentions as early and clearly as possible,” Gill wrote.

Central banks should also adjust their strategies to avoid abrupt changes in their policy outlook, he said.

Another policy recommendation is to reduce domestic vulnerabilities by shoring up prudential standards and capital and liquidity buffers at banks, especially in developing countries, and so reducing the risk of financial contagion from banks in advanced economies.

Other prescriptions include boosting productivity, restoring fiscal sustainability, and strengthening the global financial safety net.