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Global Economy Expected to Slow to its Lowest Level Since 2008 Crisis

The World Bank warns of a global economic slowdown, with growth expected to reach its lowest level since the 2008 financial crisis.
The World Bank warns of a global economic slowdown, with growth expected to reach its lowest level since the 2008 financial crisis. Credit: UKinUSA / Wikimedia Commons / CC BY-SA 2.0

The World Bank, a global financial institution, predicts the world’s economic growth will slow in 2023. This means that the global economy will not expand as quickly as it has in previous years. The projected growth rate for this year is 2.1%, which is lower than the 3.1% growth seen in 2022.

Factors contributing to this slowdown

First, interest rates are expected to increase. When interest rates go up, it becomes more expensive to borrow money, which can discourage businesses and individuals from investing and spending. Second, there is an issue of inflation.

Inflation refers to the increase in prices of goods and services over time. When inflation is high, people’s purchasing power decreases, as their money buys less than before. This can hurt economic growth. Lastly, credit conditions are becoming more restrictive.

This means it is becoming harder for businesses and individuals to access loans and credit, limiting their ability to invest and expand.

Indermit Gill, the Chief Economist and Senior Vice President of the World Bank Group, expressed concern about the current state of the global economy. He described it as precarious, suggesting that some risks and uncertainties could further worsen the situation.

The slowdown in global growth is expected to be more pronounced in the latter part of the year. This means that the rate of economic expansion will decrease significantly in the second half of 2023 compared to the first half.

Similarly, the euro area is also facing a slowdown in economic growth. The World Bank forecasts a growth rate of 0.4% in 2023, compared to the 3.5% growth experienced in 2022. The tightening of monetary policy and the rise in energy prices are cited as the primary factors contributing to this slower growth.

It is worth noting that while the projected growth rate matches the levels observed during the 2008 financial crisis, the situation in developed countries is expected to be slightly better than it was back then.

On the other hand, emerging markets are likely to experience even lower growth rates than during the 2008 crisis.

World Bank’s revised expectations

The World Bank has revised its expectations for the economic performance of most advanced economies and emerging markets. They have lowered their projections for nearly all advanced economies and reduced the growth forecasts for 70% of emerging markets

The World Bank cautions that global growth could be weaker than initially anticipated. They highlight two key factors that could exacerbate this situation.

First, if there is a worsening of stress in the banking sector, it could have detrimental effects on economic stability and growth. Second, if inflation persists at high levels, it may lead to unexpectedly higher interest rates, further dampening economic expansion.

These projections and warnings from the World Bank underline the challenges and potential risks for the global economy. It is essential for policymakers and financial institutions to carefully monitor these developments and take appropriate measures to mitigate the potential negative impacts.

Effects of recent banking stress

So far, the effects of the recent banking stress that originated in wealthier countries like the US have been relatively limited in most emerging markets.

However, the World Bank’s latest report paints a worrisome picture, describing these markets as “sailing in dangerous waters.” This suggests that these economies’ risks and potential negative impacts are growing.

Many low-income countries have already been pushed into debt distress due to their fiscal weaknesses. In addition, emerging markets, excluding China, are projected to experience a slowdown in economic growth. Their growth rate is expected to decrease to 2.9% this year, down from 4.1% in the previous year.

The combination of higher interest rates, overlapping shocks, and existing vulnerabilities poses a significant threat to emerging markets’ economic stability and progress.

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