Global growth has slowed sharply and the risk of financial stress in emerging market and developing economies (EMDEs) is intensifying amid elevated global interest rates, according to the World Bank’s latest Global Economic Prospects report.
In advanced economies, growth is set to decelerate from 2.6% in 2022 to 0.7% this year and remain weak in 2024, the report says. After growing 1.1% in 2023, the U.S. economy is set to decelerate to 0.8% in 2024, mainly because of the lingering impact of the sharp rise in interest rates over the past year and a half. In the euro area, growth is forecast to slow to 0.4% in 2023 from 3.5% in 2022, due to the lagged effect of monetary policy tightening and energy-price increases.
Global growth is projected to decelerate from 3.1% in 2022 to 2.1% in 2023. In EMDEs other than China, growth is set to slow to 2.9% this year from 4.1% last year.
“The surest way to reduce poverty and spread prosperity is through employment—and slower growth makes job creation a lot harder,” said World Bank Group President Ajay Banga.
Most EMDEs have seen only limited harm from the recent banking stress in advanced economies so far, but they are now sailing in dangerous waters. With increasingly restrictive global credit conditions, one out of every four EMDEs has effectively lost access to international bond markets.
“The world economy is in a precarious position,” said Indermit Gill, the World Bank Group’s Chief Economist and Senior Vice President. “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. Fiscal weaknesses have already tipped many low-income countries into debt distress.”
By the end of 2024, economic activity in EMDE economies is expected to be about 5% below levels projected on the eve of the pandemic.
“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.
Frontier markets—those with less developed financial markets and more limited access to international capital—tend to see outsized increases in borrowing costs.
Low-income economies are in dire straits. Rising interest rates have compounded the deterioration in their fiscal positions over the past decade. Public debt now averages about 70% of GDP. Interest payments are eating up a rising share of limited government revenues. Adverse shocks such as extreme climate events and conflict are more likely to tip households into distress in low-income countries than anywhere else. On average, these countries spend just 3% of GDP on their most vulnerable citizens—well below the 26% average for developing economies.
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Regional Outlooks
East Asia and Pacific: Growth is expected to increase to 5.5% in 2023 and then slow to 4.6% in 2024.
Europe and Central Asia: Growth is expected to edge up slightly to 1.4% in 2023 before increasing to 2.7% in 2024.
Latin America and the Caribbean: Growth is projected to slow to 1.5% in 2023 before recovering to 2% in 2024.
Middle East and North Africa: Growth is expected to slow to 2.2% in 2023 before rebounding to 3.3% in 2024.
South Asia: Growth is projected to edge down to 5.9% in 2023 and then to 5.1% in 2024.
Sub-Saharan Africa: Growth is expected to slow to 3.2% in 2023 and rise to 3.9% in 2024.
Middle East and North Africa
The Middle East and North Africa (MNA) region entered 2023 with solid but slowing growth momentum. Oil-exporting economies, who enjoyed decade-high growth and low unemployment last year, have announced oil production cuts.
Oil production growth has slowed rapidly from double-digit rates in late 2022. Saudi saw output growth slow from double-digit rates in mid-2022 to 3.9 percent in the first quarter of 2023, supported by non-oil activities. In Qatar, economic growth slowed in early 2023 following decade-high growth in the final quarter of 2022 assisted by the FIFA World Cup tournament.
Oil-importing economies saw adverse conditions continue into 2023 with median consumer price inflation reaching levels not seen in over a decade during the first half of the year. In Egypt, limited access to foreign currency and a shift to a more flexible exchange rate saw the pound lose about half its value between the start of 2022 and May 2023.
Growth in MNA is expected to slow to 2.2 percent in 2023, with downward revisions from January projections for both oil exporters and importers. Growth in the region is expected to rebound in 2024, to 3.3 percent, as inflation and global headwinds subside, and oil production rises.
Growth in oil exporters is forecast to slow to 2 percent in 2023 before rebounding to 3.2 percent in 2024. Announced oil production cuts in 2023 account for much of the revision.
Oil-importing economies continue to face domestic headwinds, thus, growth in these economies is projected to decelerate to 3.4 percent in 2023, a 0.7 percentage point downgrade from January. In Egypt, growth is projected to slow to 4 percent in FY2022/23 (July-June) constrained by policy tightening, severe currency depreciation, and higher production costs.
Risks
Risks to the forecast remain predominantly to the downside with the balance of risks skewed significantly more to the downside for oil importers than oil exporters. Oil-importing economies are vulnerable to significant shifts in market sentiment given their higher government debt levels and lower foreign exchange reserves. Oil-exporting economies remain highly dependent on oil revenues, and any global push to hasten the green energy transition could leave these economies exposed to an unexpected drop in fossil fuel demand.
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