World Bank expects global growth to slow in 2023

However, there is some good news too. While the growth for most of the economies is estimated to be lower in 2023 compared to 2022, the estimates for 2023 are still higher than the previous estimates put out in January this year. In the last 5 months, there has certainly been an upgrade. Moreover, the growth across the world is expected to bounce back in 2024 and 2025, although these years may still be some time into the future. The table below captures the gist of the global growth estimates for the next few years.

Data Source: World Bank (# is emerging and developing markets)

How do we capture the global growth picture?

For now, if you go by the World Bank Report, the global outlook for 2023 does not look too encouraging. In fact, after growing at 3.1% in the year 2022, the global economy is expected to slow down sharply to just 2.1% GDP growth in calendar year 2023. This slowdown can be largely attributed to sustained monetary policy tightening by global central banks to rein in high levels of inflation. However, the global GDP growth is expected to recover to 2.4% in year 2024 and further to 3.0% in year 2025. 

For the year 2023, the main factors slowing growth will be the tight global financial conditions and tepid external demand, which his expected to take its toll on world trade. In fact, if you go by the World Bank estimates of total trade volumes growth; it fell from 11% in 2021 to 6% in 2022 and is expected to fall further to just 1.7% growth in 2023. That is going to be the single biggest factor slowing down the GDP growth of the world economy. Trade volume growth is expected to pick up in 2024 and 2025 but would still be way below the peak levels of trade growth attained in 2021 and 2022. 

However, the World Bank has warned that the subdued growth projections may just be the base case scenario. The actual global growth may dip more if the banking sector stress turns out to be sharper than originally anticipated. As it is the growth prospects have been hit by the lag effects of the pandemic, the Ukraine war, and the monetary tightening. This is only going to get compounded if the banking crisis worsens from here. 

The World Bank has also pointed out that central banks would not be able to give up on their battle against inflation in the coming year and pockets of hawkishness may continue. The challenge for the economies will be that they need to contain inflation without damaging the growth levers. That is going to be a rather complex affair. Amidst this challenge, the banking crisis has already resulted in some form of tightening of credit.

Will US hawkishness spill over?

One of the big concerns is whether persistent tightening will have a concomitant effect on the other economies, especially the emerging markets. What could be the possible spill over effects of persistently rising US interest rates? According to the World Bank report, the rapid rise in interest rates in the US poses a very stiff challenge to the emerging markets and the developing economies (EMDEs). What are the possible effects of the US turning more hawkish and what could be the spill over effects on other EMDEs?

The first impact is the volatility. When the US macro policy keeps the global economy on tenterhooks, it enhances the volatility in the debt markets and consequently in the equity markets too. Secondly, when the US raises rates, other EMDEs are forced to follow suit to keep their bonds attractive to global investors. For a country like India, a sharp spike in interest rates tends to quickly impact the solvency levels and interest costs of companies. That was one of the key reasons that forced the central banks to go easy on rate hikes.

The third spill over effect is the imported inflation from the developed world. Most of the EMDEs do depend on the developed world for their import needs. A spike in interest rates in these countries tends to get passed on to EMDEs through the trade route, in what is called as export of inflation to EMDEs. Lastly, the spike in rates by the US strengthens the US dollar and could have a negative impact on EMs with dollar denominated borrowings. Also, a strong dollar tends to weaken most EMDE currencies and that is a trend seen quite clearly in the last few months. Quite often, the EMDEs are required to make policy adjustments to counter US hawkishness and that has its own impact in the EMDEs.

Low income countries could face fiscal challenges

One more area of concern that the World Bank report has red-flagged is the fiscal challenges that many of the low income countries could face in the coming years. Most of the low income countries have seen a sharp spike in fiscal deficit to take care of the additional government spending in the post pandemic scenario. For instance, India’s fiscal deficit spiked from just about 3.5% to above 9% post the pandemic. Even now, the fiscal deficit remains elevated at 6.4% as of FY23 and likely to touch 5.9% of GDP in FY24. However, this persistent battle between fiscal deficit and growth will keep most of the EMDEs and low income economies on tenterhooks. 

According to the World Bank report, nearly half of the 28 low income countries are already in debt distress or at a high risk of debt distress. The challenge is that now to create room for fiscal policy requires generating higher revenues or making spending more efficient or improving the debt management practices or ideally, a combination of all of these. Fiscal deficit is normally about fiscal manoeuvring room and that is where the low income countries would face the real pressure. That is going to be the big challenge for economic growth of the global economy in the coming years.