Rapid hike in interest rates leaves global economy in ‘precarious position’, World Bank warns

Weak growth, persistently high inflation and record debt levels have left the global economy in “a precarious position”, the World Bank has warned.

In its latest Global Economic Prospects report, the Washington-based bank said higher interest rates had triggered a major slowdown in global growth while intensifying the risk of financial stress, particularly in developing economies.

With increasingly restrictive global credit conditions, one out of every four emerging economies had “effectively lost access to international bond markets”, it said, noting the squeeze was especially acute for economies with underlying vulnerabilities such as low creditworthiness.

“Growth projections for these economies for 2023 are less than half those from a year ago, making them highly vulnerable to additional shocks,” the report said.

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The bank projected global growth to slow from 3.1 per cent in 2022 to 2.1 per cent this year. In the euro area, growth is forecast to ease to 0.4 per cent in 2023 from 3.5 per cent in 2022 “due to the lagged effect of monetary policy tightening and energy-price increases”, it said.

In emerging economies other than China, growth is set to slow to 2.9 per cent this year from 4.1 per cent last year. These forecasts reflect broad-based downgrades, the bank said.

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“Many developing economies are struggling to cope with weak growth, persistently high inflation and record debt levels. Yet new hazards – such as the possibility of more widespread spillovers from renewed financial stress in advanced economies – could make matters even worse for them,” said Ayhan Kose, deputy chief economist of the World Bank group. “Policymakers in these economies should act promptly to prevent financial contagion and reduce near-term domestic vulnerabilities,” he said.

The World Bank’s report assesses how increases in US interest rates are affecting emerging economies.

Most of the rise in two-year US Treasury yields over the past year and a half has been driven by investor expectations of hawkish US monetary policy to control inflation, it said.

“This particular type of interest rate increases is associated with adverse financial effects in EMDEs (emerging and developing economies), including a higher probability of financial crisis,” it said, noting these effects were more pronounced in countries with greater economic vulnerabilities.

“The world economy is in a precarious position,” said Indermit Gill, the World Bank group’s chief economist and senior vice-president.

“Outside of East and South Asia, it is a long way from the dynamism needed to eliminate poverty, counter climate change and replenish human capital. In 2023, trade will grow at less than a third of its pace in the years before the pandemic. In emerging markets and developing economies, debt pressures are growing due to higher interest rates,” he said.

“Fiscal weaknesses have already tipped many low-income countries into debt distress. Meanwhile, the financing needs to achieve the sustainable development goals are far greater than even the most optimistic projections of private investment,” he said.