The World Bank’s latest Global Economic Prospects report presents a concerning picture, predicting the world’s weakest half-decade of GDP growth in 30 years. Despite the relative strength of the U.S. economy offering a buffer against a global recession, the report emphasizes the emergence of new challenges, primarily fueled by escalating geopolitical tensions, which pose immediate threats to the world economy.

The medium-term outlook for developing economies is overshadowed by slowing growth in major economies, sluggish global trade, and unprecedented financial stringency. Projections for global trade growth in the upcoming year indicate a stark contrast, with expectations set at only half of the pre-pandemic decade’s average. Developing economies, especially those with vulnerable credit ratings, are likely to grapple with elevated borrowing costs, given global interest rates remain at four-decade highs in inflation-adjusted terms.

Global growth is anticipated to decelerate for the third consecutive year, dropping from 2.6% in the previous year to a modest 2.4% in 2024, almost three-quarters of a percentage point below the 2010s average. Developing economies are expected to grow at a modest 3.9%, more than a percentage point below the prior decade’s average. Low-income countries, having experienced a lackluster performance last year, are expected to achieve a modest growth of 5.5%, falling short of initial expectations. Simultaneously, advanced economies are poised for a slowdown from 1.5% in 2023 to 1.2% in the current year.

Expressing concerns, the World Bank’s Chief Economist and Senior Vice President, Indermit Gill, remarked, “Without a major course correction, the 2020s will go down as a decade of wasted opportunity.”

Addressing Urgent Global Challenges

The report underscores the pressing need to address climate change and meet global development goals by 2030, stating that developing countries must significantly increase annual investments by approximately $2.4 trillion. The report emphasizes that without a comprehensive policy overhaul, the prospects for achieving this substantial increase in investment are grim. Per capita investment growth in developing economies is projected to average a modest 3.7% between 2023 and 2024, just over half the rate witnessed in the previous two decades.

Strategic Advice for Sustainable Growth

The report offers practical advice for governments in developing countries, particularly those reliant on commodity exports. It suggests adopting fiscal policies that not only mitigate economic fluctuations but also advocate for a fiscal framework that disciplines government spending. Flexible exchange-rate regimes and avoiding restrictions on the movement of international capital are recommended measures.

Implementing these policy measures could potentially help commodity-exporting developing economies boost their per capita GDP growth by up to one percentage point every four or five years, offering a tangible approach amid the challenging forecast. Additionally, the World Bank recommends the creation of sovereign-wealth funds and other rainy-day funds that can be swiftly deployed in emergencies, providing a financial buffer during turbulent times.

In the face of this realistic economic outlook, developing countries are urged to navigate wisely, making strategic policy decisions to weather the storm and unlock potential growth opportunities in the challenging decade ahead.
By: Montel Kamau
Serrari Financial Analyst
11th January, 2023