Global Economy to Slow Further Amid Signs of Resilience and China Re-opening
The global economy is poised to slow this year, before rebounding next
year. Growth will remain weak by historical standards, as the fight against
inflation and Russia’s war in Ukraine weigh on activity.
Despite these headwinds, the outlook is less gloomy than in our October
forecast, and could represent a turning point, with growth bottoming out
and inflation declining.
Economic growth proved surprisingly resilient in the third quarter of last
year, with strong labor markets, robust household consumption and business
investment, and better-than-expected adaptation to the energy crisis in
Europe. Inflation, too, showed improvement, with overall measures now
decreasing in most countries—even if core inflation, which excludes more
volatile energy and food prices, has yet to peak in many countries.
Elsewhere, China’s sudden re-opening paves the way for a rapid rebound in
activity. And global financial conditions have improved as inflation
pressures started to abate. This, and a weakening of the US dollar from its
November high, provided some modest relief to emerging and developing
Accordingly, we have slightly increased our 2022 and 2023 growth forecasts.
Global growth will slow from 3.4 percent in 2022 to 2.9 percent in 2023
then rebound to 3.1 percent in 2024.
For advanced economies, the slowdown will be more pronounced, with a
decline from 2.7 percent last year to 1.2 percent and 1.4 percent this year
and next. Nine out of 10 advanced economies will likely decelerate.
US growth will slow to 1.4 percent in 2023 as Federal Reserve interest-rate
hikes work their way through the economy. Euro area conditions are more
challenging despite signs of resilience to the energy crisis, a mild
winter, and generous fiscal support. With the European Central Bank
tightening monetary policy, and a negative terms-of-trade shock—due to the
increase in the price of its imported energy—we expect growth to bottom out
at 0.7 percent this year.
Emerging market and developing economies have already bottomed out as a
group, with growth expected to rise modestly to 4 percent and 4.2 percent
this year and next.
The restrictions and COVID-19 outbreaks in China dampened activity last
year. With the economy now re-opened, we see growth rebounding to 5.2
percent this year as activity and mobility recover.
India remains a bright spot. Together with China, it will account for half
of global growth this year, versus just a tenth for the US and euro area
combined. Global inflation is expected to decline this year but even by
2024, projected average annual headline and core inflation will still be
above pre-pandemic levels in more than 80 percent of countries.
The risks to the outlook remain tilted to the downside, even if adverse
risks have moderated since October and some positive factors gained in
On the downside:
- China’s recovery could stall amid greater-than-expected economic
disruptions from current or future waves of COVID-19 infections or a
sharper-than-expected slowdown in the property sector
- Inflation could remain stubbornly high amid continued labor-market
tightness and growing wage pressures, requiring tighter monetary policies
and a resulting sharper slowdown in activity
- An escalation of the war in Ukraine remains a major threat to global
stability that could destabilize energy or food markets and further
fragment the global economy
- A sudden repricing in financial markets, for instance in response to
adverse inflation surprises, could tighten financial conditions, especially
in emerging market and developing economies
On the upside:
- Strong household balance sheets, together with tight labor markets and
solid wage growth could help sustain private demand, although potentially
complicating the fight against inflation
- Easing supply-chain bottlenecks and labor markets cooling due to falling
vacancies could allow for a softer landing, requiring less monetary
The inflation news is encouraging, but the battle is far from won. Monetary
policy has started to bite, with a slowdown in new home construction in
many countries. Yet, inflation-adjusted interest rates remain low or even
negative in the euro area and other economies, and there is significant
uncertainty about both the speed and effectiveness of monetary tightening
in many countries.
Where inflation pressures remain too elevated, central banks need to raise
real policy rates above the neutral rate and keep them there until
underlying inflation is on a decisive declining path. Easing too early
risks undoing all the gains achieved so far.
The financial environment remains fragile, especially as central banks
embark on an uncharted path toward shrinking their balance sheets. It will
be important to monitor the build-up of risks and address vulnerabilities,
especially in the housing sector or in the less-regulated non-bank
financial sector. Emerging market economies should let their currencies
adjust as much as possible in response to the tighter global monetary
conditions. Where appropriate, foreign exchange interventions or capital
flow measures can help smooth volatility that’s excessive or not related to
Many countries responded to the
by supporting people and businesses with broad and untargeted policies that
helped cushion the shock. Many of these measures have proved costly and
increasingly unsustainable. Countries should instead adopt targeted
measures that conserve fiscal space, allow high energy prices to reduce
demand for energy, and avoid overly stimulating the economy.
Supply-side policies also have a role to play. They can help remove key
growth constraints, improve resilience, ease price pressures, and foster
the green transition. These would help alleviate the accumulated output
losses since the beginning of the pandemic, especially in emerging and
Finally, the forces of
are growing. We must buttress multilateral cooperation, especially on
fundamental areas of common interest such as international trade, expanding
the global financial safety net, public health preparedness and the climate
This time around, the global economic outlook hasn’t worsened. That’s good
news, but not enough. The road back to a full recovery, with sustainable
growth, stable prices, and progress for all, is only starting.
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