The World Bank’s latest Global Economic Prospects report offers a mixed outlook. The positive news is that they predict we will avoid a third consecutive year of declining growth and a global recession. However, the bad news is that growth is expected to remain sluggish compared to pre-pandemic levels for the foreseeable future.
Soft-Landing is Weaker Than Pre-Pandemic
The World Bank now forecasts that global growth will stabilize at 2.6% in 2024, the same as in 2023, with a slight upward revision from its January forecast. This adjustment is mainly attributed to the stronger-than-anticipated performance of the U.S. economy.
Although it prevents a recession, it falls below the pre-COVID-19 decade’s average global growth of 3.1%. This period has become the benchmark by which measures of “return to normalcy” are compared.
The U.S. Is Still Beating Forecasts
For the second consecutive year, the U.S. economy has defied expectations of a downturn. Adding to the surprise, increased domestic demand and elevated inflation have pushed back the timeline for Federal Reserve rate cuts.
The World Bank now forecasts U.S. growth of 2.5% in 2024, matching 2023’s pace and significantly higher than the 1.6% predicted only six months ago. This unexpected U.S. resilience contributes significantly to the slightly improved global growth forecast.
Uneven Growth Prospects: Developed vs. Developing
While the U.S. offers a glimmer of hope in carrying other economies, the outlook for developing regions is less rosy. The report highlights that countries representing 80% of the world’s population and GDP output will see weaker growth through 2026 compared to pre-pandemic times.
These economies face the additional burden of high debt levels, limited trade opportunities, and, according to the report, the threat of climate shocks.
Emerging Market Worries
The World Bank warns that rising interest rates in developed economies could pose a significant challenge for emerging markets that have borrowed heavily in dollars.
Higher interest rates increase the cost of servicing these debts, potentially leading to financial strain. Additionally, geopolitical conflicts in Ukraine and the Middle East pose further risks by disrupting supply chains. This tends to drive up energy prices and dampen investor confidence.
Potential Upsides and Downsides
The World Bank identified a few potential upsides. U.S. strength with lower inflation could be additive to global growth. Additionally, if productivity gains and increased labor supply due to immigration persist in the US, it could further increase the global outlook.
Conversely, a deeper economic downturn in China, the world’s second-largest economy, could significantly hinder global growth, especially in commodity-exporting and trade-reliant economies.
Investors Takeaway
The World Bank’s report suggests a soft landing for the global economy, avoiding a recession but settling into a period of slow growth. While the U.S. offers some hope, significant challenges remain, particularly for developing economies. Navigating rising interest rates, geopolitical tensions, and potential debt burdens will be crucial in determining the long-term health of the global economy.
Investment strategies gleaned from the report could include prioritizing companies with a strong U.S. presence. This can help mitigate the risks associated with the global slowdown. American investors may need to be strategic in navigating this unique economic environment. While the U.S. economy offers some protection, a global slowdown presents challenges.
