recession

The World Bank’s latest Global Economic Prospects report:

Global growth is projected to decelerate sharply this year, to its third weakest pace in nearly three decades, overshadowed only by the 2009 and 2020 global recessions. This reflects synchronous policy tightening aimed at containing very high inflation, worsening financial conditions, and continued disruptions from the war in Ukraine.

The WB said:

Investment growth in emerging market and developing economies (EMDEs) is expected to remain below its average rate of the past two decades. Further adverse shocks could push the global economy into yet another recession. Small states are especially vulnerable to such shocks because of their reliance on external trade and financing, limited economic diversification, elevated debt, and susceptibility to natural disasters.

Global Outlook

According to the WB, Global growth is expected to decelerate sharply to 1.7 percent in 2023 — 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. This is 1.3 percentage points below previous forecasts, reflecting synchronous policy tightening aimed at containing very high inflation, worsening financial conditions, and continued disruptions from the war in Ukraine. 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 (EMDEs). The combination of slow growth, tightening financial conditions, and heavy indebtedness is likely to weaken investment and trigger corporate defaults. Further negative shocks — such as higher inflation, even tighter policy, financial stress, deeper weakness in major economies, or rising geopolitical tensions — could push the global economy into recession.

The WB said:

Given fragile economic conditions, any new adverse development—such as higher-than-expected inflation, abrupt rises in interest rates to contain it, a resurgence of the COVID-19 pandemic, or escalating geopolitical tensions—could push the global economy into recession. This would mark the first time in more than 80 years that two global recessions have occurred within the same decade.

The global economy is projected to grow by 2.7% in 2024. The sharp downturn in growth is expected to be widespread, with forecasts in 2023 revised down for 95% of advanced economies and nearly 70% of emerging market and developing economies.

Over the next two years, per-capita income growth in emerging market and developing economies is projected to average 2.8% — a full percentage point lower than the 2010-2019 average.

Sub-Saharan Africa

In Sub-Saharan Africa — which accounts for about 60% of the world’s extreme poor — growth in per capita income over 2023-24 is expected to average just 1.2%, a rate that could cause poverty rates to rise, not fall.

World Bank Group President David Malpass said:

“Emerging and developing countries are facing a multi-year period of slow growth driven by heavy debt burdens and weak investment as global capital is absorbed by advanced economies faced with extremely high government debt levels and rising interest rates. Weakness in growth and business investment will compound the already-devastating reversals in education, health, poverty, and infrastructure and the increasing demands from climate change.”

The WB said:

Growth in advanced economies is projected to slow from 2.5% in 2022 to 0.5% in 2023. Over the past two decades, slowdowns of this scale have foreshadowed a global recession.

U.S., Euro Area, China

The WB said:

In the U.S., growth is forecast to fall to 0.5% in 2023 — 1.9 percentage points below previous forecasts and the weakest performance outside of official recessions since 1970.

In 2023, euro-area growth is expected at zero percent — a downward revision of 1.9 percentage points.

In China, growth is projected at 4.3% in 2023 — 0.9 percentage point below previous forecasts.

Emerging Market

Excluding China, growth in emerging market and developing economies is expected to decelerate from 3.8% in 2022 to 2.7% in 2023, reflecting significantly weaker external demand compounded by high inflation, currency depreciation, tighter financing conditions, and other domestic headwinds.

By the end of 2024, GDP levels in emerging and developing economies will be roughly 6% below levels expected before the pandemic. Although global inflation is expected to moderate, it will remain above pre-pandemic levels.

The report offers the first comprehensive assessment of the medium-term outlook for investment growth in emerging market and developing economies. Over the 2022-2024 period, gross investment in these economies is likely to grow by about 3.5% on average — less than half the rate that prevailed in the previous two decades. The report lays out a menu of options for policy makers to accelerate investment growth.

Small States

The report also sheds light on the dilemma of 37 small states — countries with a population of 1.5 million or less. These states suffered a sharper COVID-19 recession and a much weaker rebound than other economies, partly because of prolonged disruptions to tourism.

In 2020, economic output in small states fell by more than 11% — seven times the decline in other emerging and developing economies.

The report finds that small states often experience disaster-related losses that average roughly 5% of GDP per year. This creates severe obstacles to economic development.

South Asia Region

The WB said:

The economies of the South Asia region (SAR) continue to be adversely affected by shocks emanating from the war in Ukraine, including higher food and energy prices, and by the tightening of global financial conditions as central banks in the region and elsewhere act to fight high inflation.

Several economies, however, maintained resilient growth despite the global economic backdrop.

In India, which accounts for three-fourths of the region’s output, growth expanded by 9.7 percent on an annual basis in the first half of fiscal year 2022/23 (April-March), reflecting strong private consumption and fixed investment growth.

In Maldives, tourism rebounded robustly in 2022, returning its GDP to its pre-pandemic levels more quickly than previously expected; growth for the year is expected to be 12.4 percent.

Other economies faced difficult domestic developments and global spillovers.

Bangladesh was priced out of global energy markets and unable to meet the energy needs of households and businesses leading to blackouts and factory closures.

In Sri Lanka, output is estimated to have fallen by 9.2 percent in 2022 as the government ran out of the foreign exchange needed to cover food and fuel imports, and to service external debt.

In Afghanistan, the sudden pause of international aid in August 2021 — the foundation of economic activity for much of the preceding two decades — is estimated to have an accumulated contraction of output between 2021 and 2022 of about one-third, leading to a large increase in poverty.

According to the WB, outlook in the region is: Growth in SAR is projected to slow to 5.5 percent in 2023, from 6.1 percent the previous year, on slowing external demand and tightening financial conditions, before picking up slightly to 5.8 percent in 2024. Growth is revised lower over the forecast horizon and is below the region’s 2000-19 average growth of 6.5 percent. This pace reflects still robust growth in India, Maldives, and Nepal, offsetting the effects of the floods in Pakistan and the economic and political crises in Afghanistan and Sri Lanka.

Growth in India is projected to slow to 6.9 percent in FY2022/23, a 0.6 percentage point downward revision since June, as the global economy and rising uncertainty will weigh on export and investment growth.

India is expected to be the world’s fastest growing major economy.

Pakistan is forecast to grow at 2.0 percent in FY2022/23 (July-June), half the pace that was anticipated last June, and faces challenging economic conditions, including the repercussions of the recent flooding and continued policy and political uncertainty.

In Bangladesh, growth is expected to slow to 5.2 percent in FY2022/23 (July-June) due to rising inflation and its negative impact on household incomes and firms’ input costs, as well as energy shortages, import restrictions, and monetary policy tightening.

As risks, the WB said:

Risks to the regional growth outlook remain to the downside.

Food insecurity is rising in the region which consumes about one-fifth of its calories from wheat products, houses more than one-third of the global poor, and where food accounts for a greater share of its consumption basket compared to other emerging and developing economies. Although global food price inflation appears to have subsided, risks of increased deprivation and inadequate nutrition remain elevated.

Climate change is a significant threat in the region. The recent floods in Pakistan are estimated to have caused damage equivalent to about 4.8 percent of GDP. Extreme weather events can exacerbate food

deprivation, cut the region off from essential supplies, destroy infrastructure, and directly impede agricultural production.

Europe and Central Asia

The WB said:

As a result of the war in Ukraine, growth in Europe and Central Asia (ECA) is estimated to have slowed sharply in 2022, to 0.2 percent. This reflects contraction in Russia and a deep recession in Ukraine. Excluding these two countries, growth in ECA nearly halved in 2022, to an estimated 4.2 percent, with broad-based deceleration across the region. The economic slowdown in ECA was less pronounced than initially anticipated. Instead of contracting in 2022, output grew at a meager pace. In many economies, an upward revision for 2022 reflected stronger than-projected growth in the euro area in the first half of the year, a quicker-than-expected rebound in international travel as economies reopened, and additional government measures that helped shield households and firms from sharp increases in food and energy prices. The improvement in 2022, however, varied across ECA. The WB said:

A surge in capital and migrants from Russia, as well as a possible rerouting of some trade and financial flows, helped fuel domestic demand and services exports in several economies, particularly in the South Caucasus. In energy exporters, higher energy prices supported activity and fiscal balances. In other economies, however, upward revisions for 2022 were more modest amid large spillovers from the invasion of Ukraine.

Median headline inflation in ECA surged in 202 — more sharply than in any year since 1998 — as rising commodity prices, particularly for energy and food, and currency depreciations passed through to consumers in many economies. High energy and food prices carved into incomes, especially for the poorest households. Inflation continued to significantly exceed central bank targets throughout the region.

As outlook, the WB said:

Output in ECA is projected to remain virtually flat in 2023, with growth of only 0.1 percent — a downward revision of 1.4 percentage points since June 2022. Although much of the projected weakness in regional growth this year emanates from a further output decline in Russia, forecasts for 2023 growth have been downgraded for over 80 percent of ECA’s economies. The deterioration in the near-term outlook mainly reflects the impact from Russia’s cutoff of energy supplies to the European Union and additional monetary policy tightening in the euro area. These developments have adversely affected ECA’s economies through high natural gas prices and weaker external demand for its goods and services.

Recession in Russia and subdued growth in China are anticipated to weigh on activity, especially in the South Caucasus and Central Asia.

Regional activity is also expected to continue to be dampened by tightening financing conditions as central banks grapple with above-target inflation. Output in 2023 is expected to fall 5.7 percent below pre-pandemic trends.

In Ukraine, growth is projected to resume in 2023, at a subdued rate of 3.3 percent, assuming that the war does not escalate further. Targeted attacks on critical infrastructure over the last few months have damaged half of Ukraine’s power grid, with the country facing a sharp deficit in electricity and blackouts.

As risks, the WB said:

Risks to the baseline projections for region’s growth remain skewed to the downside. Above all, a more prolonged or more intense war in Ukraine than assumed in the baseline could, apart from its humanitarian costs, cause significantly larger economic and environmental damage and greater potential for fragmentation of international trade and investment. A further rerouting of trade could partially mitigate the negative effects of the invasion and current account pressures for some regional economies.

Output in ECA could shrink in 2023 if the energy crisis deepens and triggers an economic downturn in the euro area or steeper recession in Russia.

Tighter global financial conditions and the recent general appreciation of the U.S. dollar pose significant risks to financial stability in ECA, particularly for more indebted countries. Pandemic- and war-related increases in debt — combined with tightening global financing conditions — have sharply reduced fiscal space and amplified debt vulnerabilities, including from public debt rollovers and currency mismatches.

East Asia and the Pacific

The WB said:

After a strong rebound in 2021, growth in the East Asia and Pacific (EAP) region slowed markedly in 2022 to an estimated 3.2 percent, 1.2 percentage point below previous forecasts. The slowdown was almost entirely due to China (which accounts for about 85 percent of the region’s GDP), where growth slowed sharply to 2.7 percent, 1.6 percentage points lower than projected in June. The country faced recurrent COVID-19 outbreaks and mobility restrictions, unprecedented droughts, and prolonged stress in the property sector, all of which restrained consumption, food and energy production, and residential investment. Fiscal and monetary policy support for domestic demand and an easing of restrictions on the real estate sector have only partially offset these headwinds. In the region excluding China, the pace of growth more than doubled, rising to 5.6 percent in 2022. Activity was supported by a release of pent-up demand as many countries continued to lift pandemic-related mobility restrictions and travel bans.

Growth in the region excluding China in 2022 was 0.8 percentage point above the June forecast, reflecting upgrades for Malaysia, the Philippines, Thailand, and Vietnam, most of which also benefited from a strong rebound of goods exports.

Growth in Fiji was much stronger than expected, fueled mainly by a resumption of international tourism in response to a significant easing of travel restrictions.

The recovery in tourism in many smaller Pacific Island economies has been generally slower than in the rest of the world because of recurring COVID-19 outbreaks and remaining border restrictions.

Consumer price inflation increased across the region in 2022. Notwithstanding this increase, price pressures have been generally more muted in EAP than in other regions. This partly reflects remaining negative output gaps due to a combination of relatively high potential growth and protracted recovery as well as widespread price controls and subsidies.

As outlook, the WB said:

Growth in the EAP region is projected to firm to 4.3 percent in 2023 as easing of pandemic-related restrictions allows activity in China to gradually recover.

These projections are below those of last June, where regional growth was expected to surpass 5 percent in 2023-24. The downward revisions are broad-based and reflect COVID-related disruptions and protracted weakness in the real estate sector in China and weaker-than-expected goods export growth across the region.

Inflation is also expected to ease somewhat after peaking in 2022. In the region excluding China, growth is projected to slow to 4.7 percent in 2023 as pent-up demand dissipates and declining goods export growth outweighs belated recovery in tourism and travel. While recoveries from the pandemic remain incomplete in many countries, with output in 2023 expected to remain significantly below pre-pandemic trends, elevated prices for food, energy, and other inputs as well as further monetary policy tightening are envisaged to hold back activity this year, especially investment.

Per capita income growth in EAP is projected to slow to 3.6 percent in 2020-23 from an average of 6.2 percent in the decade before the pandemic. In Indonesia, GDP is projected to grow by 4.9 percent on average in 2023-24, only slightly slower than in 2022, reflecting softening but still robust private spending.

After the strong rebound in 2022, growth in Malaysia, the Philippines, and Vietnam is expected to moderate as the growth of exports to major markets slows.

Growth is projected at 4.0 percent in Malaysia, 5.4 percent in the Philippines, and 6.3 percent in Vietnam. By contrast, growth in Thailand is projected to accelerate to 3.6 percent in 2023, reflecting the delayed recovery of contact-intensive sectors like tourism and transport. Output growth in tourism-dependent Pacific Island economies is also expected to be boosted by the relaxation of border restrictions and increased international tourist arrivals (Palau, Samoa).

As risks, the WB said:

Downside risks to the forecast for the region include the possibility of renewed pandemic related disruptions, more prolonged real estate sector stress in China, sharper tightening of global financial conditions, weaker global growth, and more frequent disruptive weather events linked to climate change. A prolonged war in Ukraine and intensifying geopolitical uncertainty could further reduce business and consumer confidence globally and lead to a sharper slowdown than projected in the region’s export growth.

Commodity- and export-dependent economies like Cambodia, Malaysia, Mongolia, and Vietnam are particularly vulnerable to slowing export demand, including from China.

The region continues to experience an increasing frequency of highly disruptive weather events linked to climate change.

Small island countries, which lost an average of about 1 percent of GDP a year over the past 40 years to damage caused by natural disasters, remain particularly vulnerable to extreme weather events and hence to climate change.


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