Economies Experience Slower Growth due to Elevated Interest Rates and Banking Pressures

The World Bank stated on Tuesday that economic growth in the largest global economies will be severely hampered by higher interest rates and the aftermath of this year’s banking crisis.

The institution projected that advanced economies such as the United States, Japan, and countries in the euro area will only grow by 0.7% in 2023, a significant decrease from the 2.6% growth witnessed in 2022.

The United States is expected to experience 1.1% growth, while the euro area and Japan are expected to have GDP growth of less than 1% in 2023. The U.S. GDP growth rate is predicted to further slow down to 0.8% in 2024 due to the impact of higher interest rates.

The World Bank estimates that overall global growth will decline to 2.1% in 2023, down from 3.1% in the previous year. However, emerging and developing economies are anticipated to see a slight improvement in their gross domestic product, with a projected increase of 4% compared to the bank’s initial predictions in January 2023. Notably, excluding China, growth in developing economies is expected to be less than 3%.

“This represents one of the slowest growth rates seen in the past five decades,” remarked World Bank chief economist Indermit Gill during a press conference on Tuesday.

The downward revisions in growth forecasts reflect a combination of various negative factors, including the spillover effects from the recent banking crisis in the United States and other advanced economies. The tightening credit conditions resulting from this crisis have effectively closed off emerging and developing economies from global bond markets, placing them in a precarious position, according to the World Bank.

The report also highlights the fiscal vulnerabilities faced by low-income countries, with 14 out of 28 currently experiencing debt distress or being at high risk of it. Furthermore, one-third of these countries are expected to see per capita incomes in 2024 stagnate at 2019 levels.

Despite these challenges, central banks worldwide are persistently raising rates as a measure to combat inflation.

“The world economy remains hindered,” stated the World Bank in its report. “From high inflation and tight global financial markets to record debt levels, numerous countries are simply becoming poorer.”