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Sat. Jun 15th, 2024

A World Bank report shows that the US economy is improving global prospects

By meerna Jun11,2024

The global economy is in better shape than at the start of the year, thanks largely to U.S. performance, the World Bank said in its latest forecast on Tuesday. However, the sunnier outlook could become cloudy if major central banks – including the Federal Reserve – keep interest rates elevated.

Global economic growth is expected to hit an annual rate of 2.6 percent this year, up from a January forecast of 2.4 percent, the bank said. Banking economists say the global economy is heading for a soft landing after recent price spikes, with average inflation falling to a three-year low on sustained growth.

While American dissatisfaction with high prices remains a major weakness in President Biden’s re-election bid, the World Bank now expects the U.S. economy to grow at an annual rate of 2.5 percent, almost a full percentage point higher than expected in January. The United States is the only advanced economy that is growing significantly faster than the bank predicted at the beginning of the year.

“Overall, the situation around the world is better today than it was just four or five months ago,” said Indermit Gill, chief economist at the World Bank. “A lot of it has to do with the resilience of the U.S. economy.”

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The bank credited “US dynamism” with helping stabilize the global economy despite years’ high interest rates and wars in Ukraine and the Middle East. As the Department of Labor reported last week, employers added 272,000 jobs in May, which was better than analyst estimates.

However, global growth this year and next is expected to remain below the pre-pandemic average of 3.1%. Three of the four developing countries are now expected to grow slower than the bank’s January forecast, leaving them with little hope of narrowing their income gap with richer countries.

Despite the mostly upbeat tone, banking officials warned that central banks, including the Fed, will likely take slow steps to begin reversing the interest rate hikes of the past two years. This means global interest rates will remain high, averaging around 4 percent over the next two years, roughly double the average recorded over the two decades earlier. pandemic.

Global inflation is expected to fall to 3.5 percent this year and fall to 2.9 percent next year. However, this decline turns out to be more gradual than the bank expected. And any deterioration that causes monetary authorities to delay reductions in borrowing costs could reduce the projected growth rate by 0.3 percentage points.

“This is the main risk facing the global economy – interest rates will remain higher for an extended period of time and the already weak economic growth prospects will weaken,” Gill said.

Bank officials also worried about global trade, which this year will end its weakest half-decade since the 1990s. In 2024, trading countries implemented over 700 restrictions on trade in goods and almost 160 barriers on trade in services.

“Trade restrictive measures have increased dramatically. They have more than doubled since pre-pandemic,” Gill said.

Growing protectionism may become a brake on the already modest growth rate of the world economy. Widespread support in many countries for tariffs on imported goods and industrial subsidies that favor domestic production could further restrict trade flows already under pressure from U.S.-China rivalry and other geopolitical threats.

“The world may be stuck in the slow lane,” said Ayhan Kose, the bank’s deputy chief economist.

Those who could be harmed if higher interest rates continue for longer include the 40 percent of developing countries at risk of a debt crisis. Many of them took out large loans to finance pandemic-related health care and then cover food and fertilizer bills that skyrocketed after the war in Ukraine.

They have little immediate prospects for debt relief and currently risk losing trade gains as larger economies turn inward, Gill said.

By meerna

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