MercoPress. South Atlantic News Agency

World Bank warns 2023 could be close to global recession

The war in Ukraine will keep adding a dose of uncertainty to all economic projections, the WB found

According to the World Bank's “Global Economic Prospects: Latin America and the Caribbean” report, a “sharp and lasting” economic slowdown is to be expected this year, its effects falling “dangerously close” to recession.

With China forecast to grow by 4.3% this year (0.9 points below previous expectations), lower than estimated in June, economists warned of a slump as countries struggle with rising costs amid increasing interest rates to cool demand, which in turn worsens financial conditions in a global context overshadowed by the war in Ukraine. The WB now foresees global growth at 1.7%, about half of what was forecast in June.

It would be one of the world's poorest economic performances since the 2008-2009 global financial crisis and the pandemic-induced recession of 2020.

“Given fragile economic conditions, any further adverse developments... could push the global economy into recession,” the WB report warned. In advanced economies such as the U.S., growth will likely slow to 0.5% in 2023, 1.9 points below previous forecasts. Meanwhile, the euro area is expected to stagnate, the document also showed. The outlook is “especially devastating for many of the poorest economies, where poverty reduction has already stalled,” the bank added. “Emerging and developing countries face a period of many years of sluggish growth weighed down by heavy debt burdens and weak investment,” WB President David Malpass warned.

Although central banks, including the U.S. Federal Reserve (Fed), raised interest rates over the past year to contain rising prices, the burden on economies “will worsen” as the policies take effect, according to the WB. “The three main engines of global growth - the United States, the euro area, and China - are experiencing pronounced weakness, with adverse repercussions for emerging market and developing economies,” the bank added.

For the time being, inflation rose on the back of the pandemic, supply shocks, and, in some cases, currency depreciations relative to the strength of the U.S. dollar. Inflation will remain above pre-pandemic rates, the bank also announced.

“In the short term, we focus on the risk of possible financial stress, if interest rates rise further in the world,” WB Chief Economist Ayhan Kose told AFP. If this happens and, in addition, inflation persists, “a global recession could be triggered,” he said.

The same agency also forecast that Argentina's economy will grow 2% in 2023, after reaching 5.2% in 2022. In this sense, the WB's projections for the South American country are above the region's average. Despite an adverse international context, “continued growth in Argentina for 2023 and 2024” is expected to be around 2% while growth in Latin America will decelerate sharply, from 3.6% in 2022 to 1.3% in 2023 and recover to 2.4% in 2024. Regarding Argentina, “the context is highly challenging given the need to reduce inflation from levels above 80%, and to let the peso depreciate and reform energy subsidies,” the WB heralded.

According to the WB, ”Latin America and the Caribbean (LAC) has grown by 3.6% in 2022, where the solid expansion in the first half of the year was driven mainly by consumption, supported by recovering labor markets.“ However, ”activity weakened late last year as slowing global growth and tightening financial conditions began to take effect, with inflation rising in 2022, reaching multi-decade highs in many countries.“

The World Bank also said that the situation in Ukraine was adding further uncertainty to the global economy. ”It is estimated that world growth will fall to 1.7%, below the 3% expected six months ago,” the study also pointed out.

These forecasts are in line with projections made recently by the International Monetary Fund (IMF), whose managing director Kristalina Georgieva foresaw that a “third of the world economy” will be in recession, including “half of the European Union.”