One-third of the world economy will likely contract this year or next amid shrinking real incomes and rising prices
The global economy continues to face steep challenges, shaped by the
Russian invasion of Ukraine, a cost-of-living crisis caused by persistent and broadening inflation pressures,
and the slowdown in China.
Our global growth forecast for this year is unchanged at 3.2 percent, while
our projection for next year is lowered to 2.7 percent—0.2 percentage
points lower than the July forecast. The 2023 slowdown will be broad-based,
with countries accounting for about one-third of the global economy poised
to contract this year or next. The three largest economies, the United
States, China, and the euro area will continue to stall. Overall, this
year’s shocks will re-open economic wounds that were only partially healed
post-pandemic. In short, the worst is yet to come and, for many people,
2023 will feel like a recession.
In the United States, the tightening of monetary and financial conditions
will slow growth to 1 percent next year. In China, we have lowered next
year’s growth forecast to 4.4 percent due to a weakening property sector
and continued lockdowns.
The slowdown is most pronounced in the euro area, where the energy crisis
caused by the war will continue to take a heavy toll, reducing growth to
0.5 percent in 2023.
Almost everywhere, rapidly rising prices, especially of food and energy,
are causing serious hardship for households, particularly for the poor.
Despite the economic slowdown, inflation pressures are proving broader and
more persistent than anticipated. Global inflation is now expected to peak
at 9.5 percent this year before decelerating to 4.1 percent by 2024.
Inflation is also broadening well beyond food and energy. Global core
inflation rose from an annualized monthly rate of 4.2 percent at end-2021
to 6.7 percent in July for the median country.
Downside risks to the outlook remain elevated, while policy trade-offs to
address the cost-of-living crisis have become more challenging. Among the
ones highlighted in our report:
-
The risk of monetary, fiscal, or financial policy miscalibration has
risen sharply amid high uncertainty and growing fragilities.
-
Global financial conditions could deteriorate, and the dollar strengthen
further, should turmoil in financial markets erupt, pushing investors
towards safe assets. This would add significantly to inflation pressures
and financial fragilities in the rest of the world, especially emerging
markets and developing economies.
-
Inflation could, yet again, prove more persistent, especially if labor
markets remain extremely tight.
-
Finally, the war in Ukraine is still raging and further escalation can
exacerbate the energy crisis.
Our latest outlook also assesses the risks around our baseline projections.
We estimate that there is about a one in four probability that global
growth next year could fall below the historically low level of 2 percent.
If many of the risks materialize, global growth would decline to 1.1 percent
with quasi stagnant income-per-capita in 2023. According to our
calculations, the likelihood of such an adverse outcome, or worse, is 10
percent to 15 percent...
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