US Economic Growth Seen Slowing Sharply in 2023 Amid Aggressive Fed Stance, World Bank Says

US economic growth is expected to decelerate sharply this year, lagging the pace of global expansion, as one of the most aggressive monetary tightening cycles in the country’s recent history weighs on activity, the World Bank said Tuesday.

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Real gross domestic product growth in the world’s largest economy is estimated at 0.5% in 2023, 1.9 percentage points below its previous outlook and the weakest performance outside official recessions since 1970, according to the World Bank. Economic expansion in the US is expected to have slowed to 1.9% last year — 0.6 percentage point lower than the prior estimate — from 2021’s 5.9% rate.

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Global economic growth this year is projected to slow to 1.7% from 3% expected six months ago, according to the report. In 2024, global expansion is seen improving to 2.7%, with the US rate pegged at 1.6%, with both measures reflecting downgrades from prior estimates.

The US Federal Reserve increased its benchmark lending rates seven times last year in its bid to tackle inflation, fueling concerns about an economic slowdown in 2023.

“Continued macroeconomic policy tightening to contain inflationary pressures this year is envisaged to compound the lagged effects of substantial interest-rate increases in 2022 and further weigh on US activity,” the World Bank said in its latest Global Economic Prospects report. Inflation should moderate this year as labor markets soften and wage pressures abate, it added.

With global economic conditions already “fragile,” new adverse developments such as hotter-than-expected inflation, sharp gains in interest rates and a COVID-19 resurgence could push the world economy into recession, the World Bank said. “This would mark the first time in more than 80 years that two global recessions have occurred within the same decade,” according to the report.

Slow growth, tightening financial conditions, and heavy indebtedness are expected to weaken investment and trigger corporate defaults. “Subdued investment is a serious concern because it is associated with weak productivity and trade and dampens overall economic prospects,” Ayhan Kose, director of the World Bank’s Prospects Group, said.

In China, the world’s second-biggest economy, real GDP growth this year is projected at 4.3%, 0.9 percentage point below the World Bank’s previous forecast.

“A sluggish growth outlook in the (US) and China will curtail export demand in 2023, while the increase in US interest rates is likely to also keep global financial conditions restrictive,” according to the report.

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