World Bank lifts 2023 global growth forecasts but cuts next year's outlook

The World Bank on Tuesday raised its 2023 global growth forecast as the US and other major economies have proven more resilient than forecast, but said higher interest rates would cause a larger-than-expected drag next year.

Real global GDP is set to climb 2.1 per cent this year, the World Bank said in its latest Global Economic Prospects report. That's up from a 1.7 per cent forecast issued in January but well below the 2022 growth rate of 3.1 per cent.

The development lender cut its 2024 global growth forecast to 2.4 per cent from 2.7 per cent in January, citing the continuing effects of tighter monetary policy, particularly in reducing business and residential investment.

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"Growth over the rest of 2023 is set to slow substantially as it is weighed down by the lagged and ongoing effects of monetary tightening, and more restrictive credit conditions," it said.

"These factors are envisaged to continue to affect activity heading into next year, leaving global growth below previous projections."

The bank predicted global growth rebounding to 3.0 per cent in 2025.

In January, the World Bank had warned that global GDP was slowing to the brink of recession, but since then, strength in the labour market and consumption in the US had exceeded expectations as has China's recovery from Covid-19 lockdowns.

US growth for 2023 is now forecast at 1.1 per cent, more than double the 0.5 per cent forecast in January, while China's growth is expected to climb to 5.6 per cent, compared to a 4.3 per cent forecast in January after Covid-reduced growth of 3 per cent in 2022.

The bank, however, halved its previous 2024 US growth forecast for the US to 0.8 per cent, and cut China's forecast by 0.4 percentage point to 4.6 per cent.

The eurozone got a forecast increase to 0.4 per cent growth for 2023 from a flat outlook in January, but the forecast for next year was also cut slightly.

Banking stress

Recent banking sector stress is also contributing to tighter financial conditions that will continue into 2024, the lender said.

It cited one potential downside scenario where banking stress results in a severe credit crunch and broader financial market stress in advanced economies. This would likely cut 2024 growth by nearly half to just 1.3 per cent - the slowest pace in 30 years outside of the 2009 and 2020 recessions.

"In another scenario where financial stress propagates globally to a far greater degree, the world economy would fall into recession in 2024," the bank added.

The bank said inflation is expected to gradually edge down as growth decelerates and labor demand in many economies softens and commodity prices remain stable. But it added that core inflation is expected to remain above central bank targets in many countries throughout 2024.