The World Bank has warned that the global economy is in “a precarious position” due to weak growth, rising inflation, and record debt levels.
According to the Washington-based bank’s annual Global Economic Prospects report, increased interest rates have caused a significant slowdown in global growth while increasing the danger of financial stress, particularly in developing nations.
One out of every four emerging economies had “effectively lost access to international bond markets,” it added, noting that the strain was more intense for economies with underlying vulnerabilities such as low creditworthiness.
Growth projections for these economies for 2023 are less than half of those from a year ago, making them highly vulnerable to additional shocks, according to the research.
The bank projected global growth to slow from 3.1 per cent in 2022 to 2.1 per cent this year.
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.
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 added.
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