Global Economic Outlook – January 2023 – World

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Global growth is expected to slow sharply this year, reaching its third weakest pace in nearly three decades, overshadowed only by the global recessions of 2009 and 2020. This reflects the simultaneous tightening of policies aimed at containing very high inflation, deteriorating financial conditions and ongoing disruptions from the Russian Federation’s invasion of Ukraine. Investment growth in emerging and developing countries (EMDEs) is expected to remain below the average for the last two decades. Further negative shocks could plunge the global economy into another recession. Small countries are particularly vulnerable to such shocks because of their reliance on external trade and financing, limited economic diversification, high levels of debt, and vulnerability to natural disasters. Global action is urgently needed to mitigate the risks of a global recession and debt crisis in the EMDEs. Given the limited policy space, it is crucial that national policymakers ensure that any fiscal support is focused on vulnerable groups, that inflation expectations remain well anchored and that financial systems remain resilient. Policy action is also needed to support a significant increase in EMDE investment, including new funding from the international community and from the reallocation of existing spending, such as B. Inefficient agricultural and fuel subsidies.

Global Outlook. Global growth is expected to slow sharply to 1.7 percent in 2023 – the third weakest pace of growth in almost three decades, overshadowed only by the global recessions caused by the pandemic and the global financial crisis. This is 1.3 percentage points below previous forecasts and reflects synchronous policy tightening aimed at containing very high inflation, deteriorating financial conditions and ongoing disruptions from Russia’s invasion of Ukraine. The United States, the euro area and China are all in a period of pronounced weakness, and the resulting side effects are compounding other headwinds faced by emerging and developing economies (EMDEs). The combination of slow growth, tight financing conditions and high debt is likely to weaken investment and trigger corporate defaults. Further negative shocks – such as higher inflation, even more restrictive monetary policy, financial stress, deeper weakness in major economies or increasing geopolitical tensions – could push the global economy into recession. In the near term, urgent global efforts are needed to mitigate the risks of a global recession and debt crisis in EMDEs. Given the limited policy space, it is crucial that national policymakers ensure that any fiscal support is focused on vulnerable groups, that inflation expectations remain well anchored and that financial systems remain resilient. Policies are also needed to support a substantial surge in EMDE investment, which can help reverse the slowdown in long-term growth caused by the stacked shocks of the pandemic, the invasion of Ukraine and the rapid tightening of global monetary policy is tightened. This requires new funding from the international community and the repurposing of existing spending, such as inefficient farm and fuel subsidies.

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Regional Perspectives. The forecast for growth in 2023 and 2024 combined has been revised downwards for all EMDE regions. Monetary tightening and tightening global financial conditions are slowing growth, particularly in LAC, SAR and SSA. Continued high energy prices are expected to dampen prospects for energy importers across regions, while falling metal prices will weigh on trading conditions in LAC and SSA. The projected slowdown in import demand in advanced economies is expected to have a particular impact on EAP and ECA. In addition to the pandemic recession and incomplete recovery, the outlook implies weak per capita income growth in LAC, MNA and SSA over the half decade to 2024. Risks to baseline projections are skewed to the downside in all regions. These include the possibility of financial stress and larger spillovers due to major weakness in advanced economies (particularly in EAP, ECA, LAC and SSA), commodity price shocks (particularly in ECA, EAP and SAR), conflicts (particularly in ECA, MNA and SSA) . ) and natural catastrophes (with increased risk in sub-regions in EAP, LAC and SAR).

This edition of Global Economic Prospects also includes analytical articles on post-pandemic investment prospects and the multiple challenges small countries face.

Investment growth after the pandemic. Investment growth in EMDEs is expected to remain below its average rate over the past two decades in the medium term. This muted outlook follows a geographically widespread slowdown in investment growth in the decade leading up to the COVID-19 pandemic. Over the past two decades, investment growth has been associated with strong real output growth, robust real credit growth, improvements in trade conditions, rising capital inflows and spurts in reform of the investment environment. All of these factors have experienced a downward trend since the 2007-09 global financial crisis. Weak investment growth is a concern as it dampens potential growth, is associated with weak trade and hampers development and climate goals. Policies to encourage investment growth must be tailored to country circumstances, but include comprehensive tax and structural reforms, including reallocating spending to inefficient subsidies. Given the limited fiscal space of EMDEs, the international community needs to significantly increase international cooperation and official funding and grants, and help mobilize private sector financing to attract sufficient investment.

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Small States: Intersecting Crises, Multiple Challenges. The economies of small countries have been hit particularly hard by COVID-19, largely due to ongoing disruptions to global tourism. Given the impact of the Russian invasion of Ukraine and the global monetary tightening cycle, small countries are expected to stage a weak recovery with large and potentially permanent falls in output levels. Small states vary in their economic characteristics, but they share characteristics that make them particularly vulnerable to shocks, including dependence on imports of essential goods, highly concentrated economies, high levels of debt, dependence on external finance, and vulnerability to natural disasters and climate change. Policymakers in small countries can improve long-term growth prospects by creating fiscal space, promoting effective economic diversification and improving resilience to climate change. Increased international cooperation is needed to help small states meet their challenges. The global community can support small states in these efforts by maintaining the flow of official aid, helping to restore and maintain debt sustainability, facilitating trade, and supporting climate change adaptation.

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