Global economy faces decade of ‘wasted opportunity’, warns World Bank

By Alan Rappeport

The global economy is at risk of a “wasted” decade and the weakest stretch of growth in 30 years, the World Bank warned overnight, saying a sluggish recovery from the pandemic and crippling wars in Ukraine and the Middle East are expected to weigh heavily on output.

In its semiannual Global Economic Prospects report, the World Bank projected that the growth in world output will slow further in 2024, declining to 2.4 per cent from 2.6 per cent.

Although the global economy has been surprisingly resilient, the report warned that its forecasts were subject to heightened uncertainty because of the two wars, a diminished Chinese economy and the increasing risks of natural disasters caused by global warming.

Destroyed buildings in Gaza City: The war between Israel and Hamas is threatening to become a broader conflict weighing on the world economy.
Destroyed buildings in Gaza City: The war between Israel and Hamas is threatening to become a broader conflict weighing on the world economy.Credit: AP

The converging crises in recent years have put the world economy on track for the weakest half-decade in 30 years.

“Without a major course correction, the 2020s will go down as a decade of wasted opportunity,” said Indermit Gill, the World Bank Group’s chief economist.

Global growth is projected to slow for the third straight year in 2024. Developing countries are bearing the brunt of the slowdown, with high borrowing costs and anemic trade volumes weighing on their economies.

Although policymakers have made progress in bringing inflation down from its 2022 high, the war in the Gaza Strip between Israel and Hamas is threatening to become a broader conflict that could spur a new bout of price increases by causing the cost of oil and food to spike.

‘Without a major course correction, the 2020s will go down as a decade of wasted opportunity.’

Indermit Gill, the World Bank Group’s chief economist

“The recent conflict in the Middle East, coming on top of the Russian Federation’s invasion of Ukraine, has heightened geopolitical risks,” the report said. “Conflict escalation could lead to surging energy prices, with broader implications for global activity and inflation.”

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The recent drone and missile attacks in the Red Sea by the Iranian-backed Houthi militia have already affected international commerce by pushing up oil prices and freight and insurance rates while diverting maritime traffic to a much longer and costlier route around Africa.

Economists at Capital Economics wrote in a report this month that the redirecting of trade ships away from the Red Sea is unlikely to lead to a resurgence of global inflation, but they suggested that if the war became a broader regional conflict it could pose inflationary risks.

The disruptions to shipping routes follow a year in which, other than during worldwide recessions, global trade growth was the slowest in the past 50 years, according to the World Bank.

If the conflict in the Middle East does not widen, the World Bank expects that global oil prices will edge lower this year as growth weakens and production of oil increases.

Beyond the ongoing wars, signs of fragility in the Chinese economy also remain a worry. World Bank economists pointed to lingering weakness in China’s property sector and lacklustre consumer spending as evidence that the world’s second-largest economy will continue to underperform this year. They suggested that could pose headwinds for some of China’s trading partners in Asia such as Australia.

Chinese growth is expected to slow to 4.5 per cent this year from 5.2 per cent in 2023. Outside the pandemic-induced downturn, that would be China’s slowest expansion in 30 years.

Europe and the United States are also poised for another year of weak output in 2024.

The World Bank projects that economic growth in the euro area will rise to 0.7 per cent in 2024 from 0.4 per cent in 2023. Despite easing inflation and rising wages, tight credit conditions are expected to constrain economic activity.

Growth in the United States is expected to slow to 1.6 per cent this year from 2.5 per cent in 2023. The World Bank attributes the slowdown to elevated interest rates — which are at their highest level in 22 years — and a pullback in government spending. Businesses are expected to be cautious about investing because of economic and political uncertainty, including around the 2024 election.

Despite such slow growth, Biden administration officials say they deserve credit for corralling inflation while keeping the economy afloat.

“I think we’ve made tremendous progress,” US Treasury Secretary Janet Yellen told reporters on Monday. “It’s very unusual to have a period in which inflation declines as much it has while the labour market remains strong.”

“But that’s what we’re seeing, and that’s why I say we’re enjoying a soft landing.”

This article originally appeared in The New York Times.

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