Why the World Bank slashed its global growth outlook

The World Bank slashed its global growth forecasts from projections it made in mid-2022 on the back of what it sees as broadly worsening economic conditions.

The international development institution downgraded almost all of its forecasts for advanced economies in the world, cutting its growth outlook for the global economy to 1.7% for 2023, it said in its latest report, Global Economic Prospects, The organization previously projected The world economy to expand by 3% in 2023.

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The adjustment was led by a significant downgrade to its prospects for the US economy — it now forecasts 0.5% growth from an earlier projection of 2.4%.

The World Bank cut its growth outlook for China for 2023 from 5.2% to 4.3%, Japan from 1.3% to 1%, and Europe and Central Asia from 1.5% to 0.1%.

“Global growth has slowed to the extent that the global economy is dangerously close to falling into recession,” the World Bank said, attributing an “unexpectedly rapid and synchronous” global monetary policy tightening behind the sluggish growth.

The downgraded estimates would mark “the third weakest pace of growth in nearly three decades, overshadowed only by the global recessions caused by the pandemic and the global financial crisis.”

Global growth has slowed to the extent that the global economy is dangerously close to falling into recession.

The World Bank said that tighter monetary policies from central banks around the world may have been necessary to tame inflation, but they have “contributed to a significant worsening of global financial conditions, which is exerting a substantial drag on activity.”

“The United States, the euro area, and China are all undergoing a period of pronounced weakness, and the resulting spillovers are exacerbating other headwinds faced by emerging market and developing economies,” it said.

The global financial organization adjusted its 2024 forecasts lower as well, to 2.7% from an earlier prediction of 3% growth.

China is the ‘key variable’

A faster-than-expected China reopening poses great uncertainty for its economic recovery, the World Bank said in its report.

“The economic recovery [in China] may be delayed if reopening results in major outbreaks that overburden the health sector and sap confidence,” the report said. “There is significant uncertainty about the trajectory of the pandemic and how households, businesses, and policy makers in China will respond.”

A pedestrian in Pudong’s Lujiazui Financial District in Shanghai, China, on Tuesday, Jan. 3, 2023.

Bloomberg | Bloomberg | Getty Images

World Bank President David Malpass said on CNBC’s “Closing Bell” on Tuesday that “China is a key variable and there may be an upside for China if they push through Covid as quickly as they seem to be doing.”

“China’s big enough by itself to really lift global demand and supply,” he said.

“One of the questions for the world would be, which does it do most — if it’s mostly putting upward pressure on global demand, then that raises commodity prices. But it also means that the Fed will be hiking for a longer period of time, he said.

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