" (...) just released the June 2023 edition of the
Global Economic Prospects
report. In a nutshell, the
global economy remains in a precarious state. Global growth is projected
to slow significantly in the second half of this year, with weakness
continuing in 2024. Inflation pressures persist,
and tight monetary policy is expected to weigh substantially on
activity. Recent banking sector stress in advanced economies will also
likely dampen activity through more restrictive credit conditions. The
possibility of more widespread bank turmoil and tighter
monetary policy could result in even weaker global growth.
Comprehensive policy action is needed at the global and national levels
to foster macroeconomic and financial stability. In addition to the
global and regional outlook chapters, the report includes
analytical pieces on financial spillovers of rising U.S. interest rates
and fiscal challenges confronting low-income countries. I summarize the
main messages of the report below (to directly download the full
report, please use this
link). (...)
Global Outlook.
After growing 3.1 percent last year, the global economy is set to slow
substantially in 2023,
to 2.1 percent, amid continued monetary policy tightening to rein in
high inflation, before a tepid recovery in 2024, to 2.4 percent. Tight
global financial conditions and subdued external demand are expected to
weigh on growth across emerging market and developing
economies (EMDEs). Inflation has been persistent but is projected to
decline gradually as demand weakens and commodity prices moderate,
provided longer-term inflation expectations remain anchored. Global
growth 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
growth prospects and heightened risks in the near term compound a
long-term slowdown in potential growth. This difficult
context highlights a multitude of 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.
At the national level, it is imperative to implement credible policies
to contain inflation and ensure macroeconomic and financial stability,
as well as undertake reforms to set the foundations
for a robust, sustainable, and inclusive development path.
Financial Spillovers of Rising U.S. Interest Rates.
The rapid rise in interest rates in the United States
poses a significant challenge to EMDEs. As the Federal Reserve has
pivoted toward a more hawkish stance to rein in inflation, a substantial
part of the sharp increases in U.S. interest rates since early 2022 has
been driven by shocks that capture changes in
perceptions of the Fed’s reaction function. These reaction shocks are
associated with especially adverse financial market effects in EMDEs,
including a higher likelihood of experiencing a financial crisis. Their
effects also 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.
Fiscal Policy Challenges in Low-Income Countries. The room for fiscal policy to maneuver has narrowed in low-income countries (LICs) over the past decade: LIC debt has grown rapidly as sizable and widening deficits offset the debt-reducing effects of growth. Fiscal deficits have reflected growing spending pressures, including on debt service, amid persistent revenue weakness, especially for grants and income tax revenues. As a result, 14 out of the 28 LICs were assessed as being in debt distress or at a high risk of debt distress as of end-April 2023. Creating room for fiscal policy requires generating higher revenues, making spending more efficient, and improving debt management practices. These measures need to be embedded in improvements to domestic institutional frameworks and supported by well-coordinated global policies both to improve fiscal policy management and to address debt challenges.
PS: For our other periodical products, please visit:
Commodity Markets Outlook
and Global Monthly. For our recent study
on long-term growth, see Falling Long-Term Growth Prospects. For our
database of inflation, see
One-Stop Source: A Global Database of Inflation.
For our work on debt challenges, see Global Waves of Debt: Causes and Consequences,
The Aftermath of Debt Surges,
and A Cross-Country Database of Fiscal Space. For
other studies on EMDEs, see Commodity Markets: Evolution, Challenges, and Policies,
The Long Shadow of Informality,
Global Productivity, and
A Decade After the Global Recession. For our other analytical work on topical
policy issues, please visit Policy Research Working Papers.
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