Global economy ‘perilously close’ to recession in 2023, World Bank warns

Growth forecast slashed by almost half – and poorest countries could be hardest hit by credit squeeze

Shoppers crowd a clothes market in Dhaka last week (AFP via Getty Images)

The global economy will come “perilously close” to a recession this year, the World Bank warned on Tuesday as it slashed its 2023 growth forecasts.

The lender cut its estimate for global GDP growth by almost half, to 1.7 per cent, saying major slowdowns in advanced economies – including sharp cuts to its forecast to 0.5 per cent for both the United States and the eurozone – could trigger a global recession less than three years after Covid caused the last one.

In its previous Global Economic Prospects report, in June 2022, the bank had forecast 2023 global growth at 3 per cent.

“Given fragile economic conditions, any new adverse development – such as higher than expected inflation, abrupt rises in interest rates to contain it, a resurgence of the Covid-19 pandemic or escalating geopolitical tensions – could push the global economy into recession,” it said.

It is now predicting the third-weakest annual expansion in three decades.

Shoppers buy fruit at a market in Cali, Colombia last week (AFP via Getty Images)

Although the United States might avoid a recession this year, it remains vulnerable to further supply chain disruptions if Covid keeps surging or the war in Ukraine worsens.

Europe, a major exporter to China, will also suffer from a weaker Chinese economy.

The World Bank also noted that rising interest rates in developed economies such as the United States and Europe will attract investment capital from poorer countries, thereby depriving them of crucial domestic investment.

The impact of a global downturn would fall particularly hard on poorer countries in such areas as Saharan Africa, where the World Bank predicts per capita income will grow just 1.2 per cent in 2023 and 2024. That is such a tepid pace that poverty rates could rise.

“Weakness in growth and business investment will compound the already devastating reversals in education, health, poverty, and infrastructure and the increasing demands from climate change,” said David Malpass, president of the World Bank.

Pakistanis queue for wheat flour in Hyderabad, after supply disruptions caused by the Ukraine war sent prices soaring (EPA)

While some inflationary pressures are starting to abate as fuel prices ease, there are high risks from supply disruptions that could keep interest rates higher, the bank said.

It follows a similarly gloomy forecast last week from Kristalina Georgieva, the head of the International Monetary Fund (IMF), which predicted 2023 would be “tougher” than 2022.

The World Bank projects that the European Union’s economy will not grow at all next year after having expanded by 3.3 per cent in 2022. It foresees China growing 4.3 per cent, nearly a percentage point lower than it had previously forecast, and about half the pace that Beijing posted in 2021.

The organisation is this month expected to consider a new “evolution road map” to vastly expand its lending capacity, in order to address climate change and other global crises.

It could lead to the biggest revamp in the Bank’s business model since its creation at the end of World War Two.