Economies face slower development on account of excessive rates of interest and financial institution stress

Higher interest rates and overhangs from this year’s banking crisis will drastically slow economic growth in the world’s largest economies, the World Bank said on Tuesday.

The institution said the advanced economies — the US, Japan and euro area countries — are expected to grow just 0.7% in 2023, up from 2.6% in 2022.

The US is forecast to grow by 1.1%, while the euro area and Japan are forecast to grow less than 1% in GDP in 2023. US GDP growth is likely to slow to 0.8% in 2024 on higher rates.

The bank expects global headline growth to slow to 2.1% in 2023, down from 3.1% last year. A slight increase in gross domestic product to 4% is forecast for emerging and developing countries, an increase of 0.6% compared to the Bank’s January 2023 forecasts. However, World Bank chief economist Indermit Gill said that growth in the developing world would be less than 3% without China.

This is “one of the weakest growth rates in the last five decades,” Gill told reporters on Tuesday.

The reduced growth forecasts reflect broad-based downgrades stemming from multiple overlapping shocks, most recently spillover effects from the recent banking crisis in the US and advanced economies. Increasingly tight credit conditions in the wake of the banking turmoil have effectively locked emerging and developing economies out of global bond markets and pushed them “into dangerous waters,” the bank said.

According to the report, fiscal weakness has dealt another blow to low-income countries, 14 out of 28 of which are currently in a debt crisis or at high risk of a debt crisis. In 2024, one-third of these countries are expected to have per capita incomes at 2019 levels.

Still, central banks around the world continue to raise interest rates to fight persistent inflation.

“The global economy remains paralyzed,” says the bank’s report. “With high inflation, tight global financial markets and record levels of debt, many countries are simply getting poorer.”