World Bank downgrades 2023 global economic outlook

The World Bank has downgraded its 2023 outlook on the global economy. Ayhan Kose, World Bank Group Deputy Chief Economist breaks down how slowdowns in global growth have impacted worldwide economic health.

Video Transcript

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BRAD SMITH: A new report from the World Bank is projecting that the global growth will slow this year, matching the lows of the 2008 financial crisis. We're going live to Washington DC where Yahoo Finance's Jennifer Schonberger has more to share on this. Jennifer.

JENNIFER SCHONBERGER: Good morning, Brad. And for more on the World Bank's latest global economic outlook, I want to bring into the program Ayhan Kose, deputy chief economist of the World Bank who co-authored this report. Ayhan, it's great to have you on the program. Thanks so much for being here.

AYHAN KOSE: Thank you.

JENNIFER SCHONBERGER: You're now projecting that global growth will expand just 2.1% this year. That's down from just over 3% last year, and the same level seen during the 2008 financial crisis. Is the global economy essentially poised for recession territory here?

AYHAN KOSE: Jennifer, we don't see a recession this year and next year in the global economy. But as you mentioned, growth remains weak, and there is this unfortunate parallel with the 2008 growth number. The big story is the following. Global growth rebounded significantly in 2021, slowed down in 2022, and that slowdown continues this year. In fact, from 2022 to 2023, 70% of countries will see weaker growth, and that is troubling to say the least.

JENNIFER SCHONBERGER: You say in the report there's the possibility for more widespread tremors from the banking turmoil that was seen earlier this year, and thus credit tightening, which could push global growth even lower than the 2% level projected right now. Does the World Bank not believe that the banking issues are contained at this point?

AYHAN KOSE: I think the initial banking stress has been largely contained in the way policymakers acted aggressively and comprehensively. But when you look at credit surveys, when you look at the latest credit numbers, you definitely see that credit has been tightening and financial conditions are getting more and more difficult.

And from the perspective of emerging market developed economies, especially those with larger vulnerabilities in terms of their deficits and debt levels, this is not good news. Yes, in a nutshell, if banking stress gets intensified, we might end up seeing even weaker growth next year.

JENNIFER SCHONBERGER: You mentioned emerging markets. Certainly higher interest rates in many of the advanced economies, stresses in the global banking system that we just talked about are spilling over or have the potential to spill over into emerging markets and particularly be troublesome for those countries that are having to service larger debt loads denominated in US dollars. What is the prospect for an emerging market crisis, something on perhaps the level seen during the Asian financial crisis in 1997?

AYHAN KOSE: We do not see a systemic emerging market debt crisis in horizon unless these financial conditions really get tighter and we end up with a credit crunch in advanced economies. The big challenge in emerging developed economies center around frontier markets, and you see some frontier markets having difficulties and low income countries.

The big picture is that, prior to the pandemic, these two decades from 2000 to 2019, we had around, you know, 19 default episodes. Since 2020 we experienced 15 sovereign defaults. Obviously, we are facing a debt distress in frontier markets, and half of low income countries are in debt distress or high likelihood of falling into debt distress.

When you have weak growth, when you have high interest rates, it is becoming more difficult to, of course, service the debt. And in some cases, you end up unable to paying the debt. Is this a systemic crisis? No. Is it a big problem, especially for frontier markets and low income countries? Yes. No question about that.

JENNIFER SCHONBERGER: And is that really why-- even absent a crisis, why do you see significantly lower growth in the second half of this year? And if you look at that growth number and you break out the different parts of it, you see emerging markets growing at just 4%, below the 6% level that they grew in 2008 versus advanced economies which are also going to be seeing slower growth but perhaps not as slow as what was seen during the 2008 era. What's really driving all of this?

AYHAN KOSE: There are three important reason. The first reason is that you have high interest rates. We are experiencing the steepest and fastest monetary policy tightening cycle at the global level over the past 40 years. The second reason is that inflation, as much as it is coming down, it is still high. So it is having an impact on the demand side.

And the third reason, which we have already discussed, recent banking stress translated into tighter credit conditions, and that will-- that is already having a big impact on activity. And when you think about most emerging market developed economies, including advanced economies that rely on trade, trade has been slowing very sharply around the world. When you put all of these together, you end up with this slowdown that has been underway during the past two years.

JENNIFER SCHONBERGER: You say in the report that inflation is expected to remain higher for longer. What is your outlook for inflation in the second half of this year, especially taking into account those new OPEC oil cuts that we saw announced yesterday? And how do you think that bodes for Fed monetary policy? Should they be hitting the pause button here in June, or are more rate hikes required to bring inflation down?

AYHAN KOSE: So in the context of inflation, there are some good news and there are some, I think, worrying signs still there. The good news is that, in many countries, inflation has peaked and global inflation has been coming down. Our projections suggest debt will continue this year and next year. But still, by the end of next year, we will have inflation at the global level above 3%, implying that, in many countries, inflation is going to be above central bank target rate. That means central banks are going to be on the defensive.

So when you think about core inflation, there are worrying signs there. Core inflation appears to be quite persistent, is picking up actually in some advanced economies. And unless we see a sustained decline in core inflation, we do not expect central banks to change their monetary policy stance.

With respect to OPEC recent cuts, in the big scheme of the slowdown we are seeing, it's difficult to imagine that will have a material impact on oil price. Our oil price forecast is around $80 this year and the next year, so we see the oil price is range-bound on the upside due on this dominant slowdown at the global level.

JENNIFER SCHONBERGER: I will have to leave the conversation there. Thank you so much for your insight. So appreciate it. Hope to speak with you again soon.

AYHAN KOSE: Thank you, Jennifer.