Presentation of the World Bank Global Economic Prospects report

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Short- and long-term prospects for the global economy and the impact of U.S. policy rate tightening on emerging markets

World Bank Global Economic Prospects, June 2023

Global outlook. The resilience that the global economy exhibited earlier this year is expected to fade. Global growth is set to slow substantially in 2023, amid continued monetary tightening to rein in high inflation, before a tepid recovery in 2024. Forecasts for most countries have been revised down, with upgrades due to stronger-than-expected data at the beginning of 2023 more than offset by downgrades thereafter. Inflation has been persistent but should decline as demand weakens and commodity prices moderate, provided longer-term inflation expectations remain anchored. Global economic activity could be weaker than anticipated in the event of more widespread banking sector stress, or if more persistent inflation pressures prompt tighter-than-expected monetary policy. Weak prospects and heightened risks—which compound a long-running structural weakening of growth—highlight various policy challenges. Recent bank failures call for a renewed focus on global financial regulatory reform. Global cooperation is also necessary to accelerate the clean energy transition, mitigate climate change, and provide debt relief for the rising number of countries experiencing debt distress. Fiscal space is limited in many countries, especially in low-income countries, but it can be gradually rebuilt through increased expenditure effectiveness and domestic revenue mobilization. Reversing the long-term slowdown in EMDE potential output will require an array of structural reforms to bolster physical and human capital, labor-supply growth, services, and international trade.

Falling longterm growth prospects. Across the world, a structural growth slowdown is underway: at current trends, the global potential growth rate—the maximum rate at which an economy can grow without igniting inflation—is expected to fall to a three-decade low over the remainder of the 2020s. The slowdown could be even more pronounced if financial crises erupt in major economies and spread to other countries as these types of episodes often lead to lasting damage to potential growth. A persistent and broad-based decline in long-term growth prospects imperils the ability of emerging market and developing economies (EMDEs) to combat poverty, tackle climate change, and meet other key development objectives. These challenges call for an ambitious policy response at the national and global levels. The slowdown can be reversed by the end of the 2020s—if all countries replicate some of their best policy efforts of recent decades and accompany them with a major investment push grounded in robust macroeconomic frameworks.

Implications of U.S. Interest Rate Increases for EMDEs. The rapid rise in interest rates in the United States poses a significant threat to EMDEs. This chapter examines the implications of different types of U.S. interest rate shocks, classifying them into those caused by changes in inflation expectations (inflation shocks), changes in perceptions of the Federal Reserve’s reaction function (reaction shocks), and changes in real activity (real shocks). The analysis attributes a substantial part of the sharp increases in U.S. interest rates since early 2022 to reaction shocks, as the Fed has pivoted toward more aggressive action to rein in inflation. These types of shocks are found to be associated with especially adverse financial market effects in EMDEs, including a higher likelihood of experiencing a financial crisis. These effects appear to be more pronounced in EMDEs with greater economic vulnerabilities. These findings suggest that major central banks can alleviate adverse spillovers through proper communication that clarifies their reaction functions. They also highlight that EMDEs need to adjust macroeconomic and financial policies to mitigate the negative impact of rising global and U.S. interest rates.

Franziska Ohnsorge, Manager, Prospects Group, The World Bank

Garima Vasishtha, Senior Economist, Prospects Group, The World Bank

Nikita Perevalov, Senior Economist, Prospects Group, The World Bank

Tomas Slacik, Senior Economist, Central, Eastern and Southeastern Europe Section, OeNB

Julia Wörz, Head, Central, Eastern and Southeastern Europe Section, OeNB

Date and time
Tuesday, June, 13, 2023, 15:00 (CEST)   

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