The world economy faces the risk of a prolonged period of low growth as a result of legacy effects of COVID-19, the Ukraine crisis, climate change, and shifting macroeconomic conditions, even
Stubbornly high inflation in both developed and developing countries in the aftermath of the pandemic prompted the most aggressive interest rate hikes in decades. Despite rising rates, household spending and employment, especially in the developed economies, have remained resilient, making it harder for central banks to tame inflation, according to a mid-year update of the January 2023 World Economic Situation and Prospects report.
Against this backdrop, the deceleration in global growth for 2023 is likely to be less severe than previously anticipated, mainly due to persistently robust household spending in the largest economies, especially in the United States and the European Union, as well as the recovery in China, says the report.
Global growth is now projected at 2.3 percent for 2023, an uptick from the 1.9 percent forecast in the January report. The mid-year update revises down global growth for 2024 to 2.5 percent from 2.7 percent.
In the United States, resilient household spending has prompted an upward revision of growth forecast to 1.1 percent for 2023 from 0.4 percent in the January prediction. The European Union's economy is now projected to grow 0.9 percent instead of 0.2 percent. China's growth this year is revised up to 5.3 percent from 4.8 percent.
For other major economies of the world, Japan's growth is now forecast at 1.2 percent, lower than the previous forecast of 1.5 percent. Britain's economy, however, is expected to be less horrible with a contraction of 0.1 percent instead of a contraction of 0.8 percent. Russia, which is under heavy sanctions by Western countries over the Ukraine crisis, will see its economy shrink by 0.6 percent, a scenario much better than the January forecast of a contraction of 2.9 percent. The forecast for India remains a growth of 5.8 percent. Brazil will perform slightly better with a growth rate of 1.0 percent instead of 0.9 percent.
In Africa and Latin America and the Caribbean, per capita gross domestic product is projected to increase only marginally this year. The least developed countries are forecast to grow by 4.1 percent in 2023 and 5.2 percent in 2024, far below the 7 percent growth target set in the 2030 Agenda for Sustainable Development, it says.
For developed economies as a whole, this year's growth is projected at 1.0 percent, up from the January forecast of 0.4 percent. Developing economies will grow 4.1 percent in 2023, instead of 3.9 percent. For the least developed countries, however, growth is now forecast at 4.1 percent, lower than the 4.4 percent predicted in January.
The report says that the global growth rate is still well below the average growth rate of 3.1 percent in the two decades before the pandemic. For many developing countries, growth prospects have deteriorated amid tightening credit conditions and rising costs of external financing.
Global trade is expected to remain under pressure. The baseline scenario projects that the volume of global trade in goods and services will grow by 2.3 percent in 2023, higher than the previous forecast of near-zero growth. This reflects the upward revision to GDP growth projections. Furthermore, China's reopening is expected to increase domestic demand and potentially boost global trade with increased imports of goods and services, says the report.
However, the lingering effects of COVID-19, rising geopolitical tensions, and monetary tightening will continue to hold back global trade, although supply chain constraints and high shipping costs have eased, it warns.
Trade in services experienced faster growth than trade in goods, supported by a further recovery in the travel and tourism sectors. International tourism is set to consolidate its recovery in 2023, backed by pent-up demand, particularly from Asia and the Pacific as destinations and markets open up. The World Tourism Organization estimates that international tourism arrivals could reach 80 to 95 percent of pre-pandemic levels in 2023, according to the report.
Inflation has remained stubbornly high in many countries even as international food and energy prices fell substantially in the past year. Average global inflation is projected at 5.2 percent for 2023, down from a two-decade high of 7.5 percent in 2022. While upward price pressures are expected to slowly ease, inflation in many countries will remain well above central banks' targets. Amid local supply disruptions, high import costs and market imperfections, domestic food inflation is still elevated in most developing countries, disproportionately affecting the poor, especially women and children, says the report.
Labor markets in the United States, Europe and other developed economies have continued to show remarkable resilience, contributing to sustained robust household spending. Amid widespread worker shortages and low unemployment rates, wage gains have picked up. Employment rates are at record-high levels in many developed economies with gender gaps narrowing since the pandemic, it says.
Exceptionally strong labor markets are, however, making it harder for central banks to tame inflation. The U.S. Federal Reserve, the European Central Bank and central banks in other developed countries have continued to raise interest rates in 2023, but at a slower pace than last year, which saw the most aggressive monetary tightening in decades. The banking sector turmoil in the United States and Europe has added new uncertainties and challenges for monetary policy. Although swift and decisive actions by regulators helped contain financial stability risks, vulnerabilities in the global financial architecture and the measures taken to contain them will likely dampen credit and investment growth going forward, warns the report.
Rapid tightening of global financial conditions poses major risks for many developing countries and economies in transition. Rising interest rates, coupled with a shift in developed economies from quantitative easing to quantitative tightening, have exacerbated debt vulnerabilities and further constrained fiscal space. Current policy challenges call for stronger cross-border policy cooperation and concerted global actions to prevent many developing economies from becoming trapped in a vicious cycle of low growth and high debt, it says.
The current global economic outlook presents an immediate challenge to delivering on the Sustainable Development Goals, said Li Junhua, UN undersecretary-general for economic and social affairs, in a press release.
"The global community must urgently address the growing shortages of funding faced by many developing countries, strengthening their capacities to make critical investments in sustainable development and helping them transform their economies to achieve inclusive and sustained long-term growth," he said.
The mid-year update and the January report were prepared by the UN Department of Economic and Social Affairs led by Li.
