“The world could get stuck in the slow lane” – World Bank warns of the results of persistently high rates of interest

The bank’s latest outlook represents a rise from the two.4% growth forecast for 2024 in January. And it could be in step with global economic growth of two.6% in 2023.

But the agency warned that global growth remained sluggish in comparison with previous standards, that the poorest countries were struggling under the burden of high debt and rates of interest, and that increased trade barriers were threatening prosperity world wide. The brutal wars in Ukraine and Gaza are putting additional pressure on regional economies.

Stronger-than-expected growth within the United States – the world’s largest economy – accounted for 80 percent of the World Bank’s improved forecast. The agency now expects the U.S. economy to grow 2.5 percent in 2024, the identical as in 2023 but significantly greater than the 1.6 percent the bank had predicted in January.

“US growth is exceptional,” said Ayhan Kose, the bank’s deputy chief economist, The Associated Press ahead of the discharge of its latest Global Economic Prospects report.

The World Bank, which has 189 member states, goals to scale back poverty and lift living standards by providing grants and low-interest loans to developing countries.

From January to March, the U.S. economy grew by just 1.3 percent, the slowest growth in nearly two years. Kose said the World Bank’s forecast took under consideration the slowdown in the primary quarter. The decline was largely resulting from aspects economists see as temporary: an increase in imports and a discount in inventories. In contrast, the core components of economic growth – consumer spending and business investment – remained stable in the primary three months of the yr.

The global economy, and the U.S. economy specifically, have proven unexpectedly resilient given the high rates of interest that the Federal Reserve and other central banks have imposed to contain the high inflation that flared up in 2021.

Yet even after the World Bank upgrade, global growth looks sluggish – half a percentage point below the 2010-2019 average. Inflation has cooled significantly – from 7.2% in 2022 to 4.9% last yr to a forecast 3.5% in 2024 – but continues to be above the extent central banks want. That means central bank policymakers could also be cautious about cutting rates of interest from today’s high levels.

However, this approach also entails risks. In particular, there’s a danger that top lending rates will slow economic growth an excessive amount of.

“Keeping interest rates high for a prolonged period of time has consequences,” Kose said. “It leads to slower growth. We need to avoid lower economic growth around the world for a prolonged period of time.”

“The world,” he warned, “could get stuck in the fast lane.”

Many countries are already under pressure. The World Bank expects emerging and developing countries to grow by a combined 4% this yr, compared with 4.2% in 2023. In many cases, their populations are growing faster than their economies, pushing their annual per capita income growth all the way down to 3% from this yr to 2026 – well below the three.8% average in the last decade before the pandemic struck.

China, the world’s second-largest economy after the United States, is battling the collapse of its real estate market and weak consumer confidence. The Chinese economy is anticipated to contract to 4.8% this yr from 5.2% in 2023.

In Latin America, growth is forecast to slow from 2.2 percent last yr to 1.8 percent in 2024. The World Bank expects the economy in sub-Saharan Africa to grow moderately at 3.5 percent. While this isn’t particularly strong growth, it does represent a rise from last yr’s 3 percent.

The 20 European eurozone countries are affected by the results of the war between Russia and Ukraine and are expected to attain economic growth of 0.7 percent in 2024. However, this may be almost double the expansion of 0.4 percent in 2023.

The World Bank expects Japan’s economic growth, held back by sluggish consumer spending and weakening exports, to slow to 0.7 percent this yr from 1.9 percent in 2023.

Over the past yr, countries world wide have imposed a record variety of measures restricting trade, partly resulting from geopolitical tensions, particularly between the United States and China. Measured by volume, global trade barely grew last yr — 0.1 percent — and is anticipated to grow by a still-meager 2.5 percent in 2024.

The World Bank expresses concern that weakening trade will slow global growth.

“We would like to solve these problems,” Kose said, “by talking to each other and finding common ground,” reasonably than by erecting trade barriers.