The world economy is on track for its weakest medium-term growth in 30 years, the IMF says. Its recovery is weighed down by central banks’ tight monetary stances to allay inflation, limited fiscal buffers amid historically high debt levels and the impact of Russia’s war in Ukraine on global financial stability.

Global Growth

After a tentative recovery in 2021, global economic activity is entering a pronounced slowdown as the effects of the COVID-19 pandemic fade and policy support is unwound. In addition, elevated inflation and debt are expected to weigh on growth in advanced economies, and the outlook is clouded by geopolitical tensions and tightening financial conditions.

In addition, the outlook is skewed by the impact of Russia’s war in Ukraine and weaker-than-expected growth in China. The world economy is far from the dynamism needed to make substantial progress on global ambitions to eliminate poverty, counter climate change and replenish human capital.

In the baseline scenario, headline global inflation is set to fall in 2023 and stabilize at a lower level in 2024, as the recovery of advanced economies gathers pace and China’s zero-COVID policies begin to lift. But even in this scenario, world output remains below pre-pandemic levels. Boosting investment in sustainable sectors, cutting trade costs, and expanding labor force participation are key to getting the world economy back on track.

Global Inflation

It’s taken a while, but global inflation may finally have peaked. But while data and indicators from around the world point to an easing of price pressures, there are still reasons to be cautious.

Inflation was relatively low before the COVID-19 pandemic began in 2020; then, flat or falling rates prevailed through most of 2021 as governments curbed economic activity; and then, rising rates started to become more widespread in mid- and late-2021, driven by supply chain disruptions and fueled by fiscal and monetary stimulus measures in many countries in response to the pandemic, the Russia-Ukraine war, and price gouging.

Inflation in emerging market and developing economies rose to its highest level since 2008, and it is exceeding inflation targets in more than half of these countries that use an inflation-targeting framework. Inflation is also high in most low- and lower-middle-income countries.

Global Interest Rates

Stubbornly high inflation is forcing major central banks to raise interest rates, which can slow economies down and choke off demand for goods. They will likely keep rates at or near their peak for longer than expected, according to Fitch Ratings.

As a result, many low-income countries are struggling with debt distress. Their burdens have been exacerbated by back-to-back global crises, including the COVID-19 pandemic and Russia’s war in Ukraine.

Interest rates affect the world economy by influencing economic facets like GDP growth, bond yields and exchange rates. The chart below shows interest rates for the world’s major economies as set by their respective Central Banks. Rising rates increase borrowing costs and instigate inflation, while lower rates stimulate economies by lowering lending costs and deflating price pressures.

Global Trade

The trade of goods and services between countries is a major part of the world economy. It allows consumers to access international products that are not produced locally and encourages competition by increasing the number of suppliers, which leads to lower prices for customers.

Global trade has increased over the past decade due to factors such as fewer regulations and easier access to the internet. This has made it easier for companies to export and import and has resulted in higher demand for international goods.

Countries benefit from trade by focusing on producing goods in which they have a competitive advantage. This improves efficiency and reduces poverty by providing income and jobs to people. In addition, it provides cheaper commodities to low-income households. The World Bank works with governments to address trade obstacles, fostering growth and shared prosperity. It helps countries open markets to foreign investment, make logistics services more reliable and streamline customs procedures.

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