World Bank warns global economy on ‘razor’s edge’ of recession

The global economy is “on a razor’s edge” and risks falling into recession this year, World Bank officials have warned as the institution unveiled its latest projections for global growth.

The Washington-based organisation expects the world economy to grow by just 1.7 per cent this year, a sharp fall from an estimated 2.9 per cent in 2022, according to the latest edition of its twice-yearly Global Economic Prospects report, published on Tuesday.

“The risks that we warned of six months ago have materialised and our worst-case scenario is now our baseline scenario,” said Ayhan Kose, the World Bank economist responsible for the report. “The world’s economy is on a razor’s edge and could easily fall into recession if financial conditions tighten.”

If the World Bank’s gloomy prognosis was realised, the current decade would become the first since the 1930s to experience two global recessions.

The report follows similarly stark forecasts from the IMF. Kristalina Georgieva, the fund’s managing director, said last week that a third of the global economy would be marred by recession this year.

The World Bank has lowered its growth forecasts for 95 per cent of advanced economies and more than 70 per cent of emerging market and developing economies, compared with six months ago.

“There is a lot of debate about whether the US and the eurozone will go into recession,” Kose said. “But whether they do or not in technical terms, they are going to feel like they are experiencing a recession.” 

Advanced economies will grow by just 0.5 per cent this year, down from an estimated 2.5 per cent last year, the bank warned. In the rest of the world, growth is expected to be unchanged at 3.4 per cent. However, excluding China, developing countries will grow by 2.7 per cent this year, down from 3.8 per cent in 2022.

The report blamed high inflation, high interest rates, reduced investment and disruptions caused by Russia’s invasion of Ukraine in late February for the downward revisions in its outlook.

The recent fall in energy prices will provide some relief, Kose said. Thanks partly to a warm European winter, natural gas is trading below its level before the war caused prices to surge. While headline inflation would fall back as a result of lower energy costs, core inflation — which excludes changes in volatile items such as energy and food — remained a concern.

“There is a large menu of risks confronting our new baseline,” Kose said. The biggest threat to growth was that central banks would raise interest rates further to tackle inflation, and keep them high until inflation was “persistently” under control.

Global interest rates average 5 per cent, he said. A 1 percentage point increase would reduce global growth this year from 1.7 per cent to 0.6 per cent, with per capita output contracting by 0.3 per cent — once changes in population are taken into account. That, he said, met “the technical definition of a global recession”.

Of even greater concern in the long term is a significant fall in the rate of growth in investment in emerging markets and developing economies. This fell from 11 per cent in 2010 to 3.4 per cent in 2019, with an outright contraction in 70 per cent of these economies during the coronavirus pandemic — a far steeper decline than the one in 2009 following the global financial crisis. The bank expects the rate to remain at 3.5 per cent until at least 2024, limiting future growth prospects.

“With that rate of investment growth, you are not going to have any upgrade in the rate of economic output,” Kose said. “It will be simply impossible to meet the challenges of climate change, poverty and inadequate health and education systems.”