Financial circumstances - Worldwide economy remains steady in its lower state.
In a recent projection issued by the World Bank, the global economy is predicted to demonstrate stabilization for the first instance in three years, notwithstanding prevailing geopolitical tensions and substantial interest rates. The expected growth rate for this year is 2.6%, which is slightly more than what was envisaged in January (a 0.2 percentage point increase).
The Chief Economist, Indermit Gill, mentioned that the encouraging indication is the fact that the global economy is recovering faster than anticipated and that inflation is on a decline. Although this is good news, he pointed out that the average growth rate during the forecast period is approximately half a percentage point less than what occurred in the decade before the onset of the COVID-19 pandemic. Furthermore, the poorest nations in the world are still facing severe economic challenges.
The World Bank forecasts that the global economy will experience a 2.7% growth rate in 2025 and 2026. The recovery appears to be shifting towards a so-called soft landing, signifying minimal inflation without a recession and low employment levels. However, the report indicates that after more than four years have elapsed since the onset of the pandemic and the ensuing global upheaval, it is evident that the world, particularly developing countries, still struggle to locate a dependable route to prosperity.
Gill stated that the prospects for the smallest and poorest economies are not promising in terms of growth. These nations are grappling with high debt levels and catastrophic climate disasters. It is anticipated that by the end of this year, about one-fourth of all developing nations will experience an economic status that is lower than it was before the pandemic. Moreover, the nations where more than 80% of the world's population resides are expected to experience a sluggish growth rate until 2026 - considerably slower than what was observed in the decade prior to the COVID-19 pandemic. The World Bank presumes that most developing countries will not match the development progress of industrialized countries in the short term.
The World Bank depicts the US economy as a shining beacon. Despite facing stern monetary tightening measures for the past four decades, the US economy has displayed astonishing resilience. As a result, this is one of the reasons why the global economy is predicted to experience growth in the following two years.
The World Bank estimates a mixed scenario for Europe. Despite significant slowdowns in 2023, the euro area is projected to experience 0.7% growth in 2024 (which remains the same as the January forecast) and 1.4% growth the following year (previously projected to be 1.6%). It appears that the economy has plans to recover, albeit with significant variances across various sectors and member states. The service sector is hinting at a possible turnaround, albeit the industrial sector may witness a weaker performance than anticipated, particularly in the processing industry in Germany.
Despite Russia's aggressive incursion into Ukraine, the World Bank's estimates indicate that the Russian economy has proved to be surprisingly resilient. This resilience is attributed to its heavily militarized economy, subsidies, and private demand, which have all decreased with less impact than expected. According to the World Bank, the 2024 growth rate is forecasted to be 2.9%, whereas 1.4% is predicted for 2025 (January: 0.9%). The World Bank predicts that the positive effects of military production will persist, although private demand may decrease. The bank also underlines that Russia's trading partnership with China has strengthened.
Despite optimistic projections, the World Bank casts doubt on the Middle East and Ukraine. Potential interruptions in oil deliveries from the Middle East may lead to substantial price hikes, which could hinder efforts to control inflation. Furthermore, the Russian attack on Ukraine creates uncertainties for raw material markets - particularly concerning oil and grain.
The World Bank forecasts the global inflation rate to be approximately 3.5% this year, but expects a slower decline to around 2.9% for the following year. This is a decrease that is not as significant as initially envisaged. The report assumes that central banks, encountering persistent pressure from inflation, will exercise caution when considering any potential easing of monetary policies. It is estimated that the average interest rates across the next few years will be roughly double the rates observed between 2000 and 2019.
The European Central Bank (ECB) recently decided to reduce interest rates by 0.25 percentage points. Meanwhile, the US Federal Reserve is scheduled to announce its upcoming monetary policy measures on Wednesday. Experts suggest that the Fed will likely maintain high interest rates.
