According to the World Bank, the fight against inflation in the United States could lead to a financial crisis in the emerging markets. The panel, which Ajay Banga has chaired since last week, has raised growth forecasts for the global economy for this year but warns that the situation is “precarious,” according to its World Economic Outlook report. The Washington-based firm pays particular attention to the impact that rising interest rates in the United States can have on developing-country finances. In the case of Latin America, the agency warns that political uncertainty in some countries is weighing on the economy.
“The lessons of economic history are compelling,” says the report. “Rapid interest rate hikes, such as those seen in the US over the past year, are associated with a higher likelihood of financial crises in emerging and developing countries,” he continues. In a special chapter devoted to it, the panel notes that raising Federal Reserve interest rates increases the likelihood of sovereign debt, currency and banking crises in emerging markets.
“And if the current banking stress in advanced economies led to widespread financial turmoil in emerging and developing countries, it would have been a worst-case scenario: the global economy would experience a deep recession next year,” he adds.
That is not the central scenario of the forecasts made by the World Bank today. Its chief economist Indermit Gill presented the new forecasts in a telephone call to journalists on Tuesday. Since its last forecast, published in January, the agency has raised its growth forecast for the global economy for this year by 0.4 points to 2.1% since the last report in January. That still represents a slowdown from 2022’s 3.1% growth, albeit a little less sharply than expected. For 2024, on the other hand, the forecast drops by three tenths to 2.4%.
“The surest way to reduce poverty and spread wealth is through employment, and slower growth makes it much more difficult to create jobs,” said Ajay Banga, the new World Bank president, in a statement. “It is important to remember that forecasting growth is not destiny. We have the opportunity to reverse the trend, but for that we must all work together.”
So far, most emerging and developing economies have suffered limited damage from recent banking tensions in advanced economies, but now they are “in dangerous waters,” says the World Bank. According to his calculations, every fourth developing country has lost access to the international bond markets due to the increasingly tight credit conditions worldwide. The pressure is particularly severe for emerging markets with underlying vulnerabilities, such as poor credit ratings. Growth projections for these economies for 2023 are less than half what they were a year ago, making them highly vulnerable to further shocks.
Gill and his team warn that global growth could be weaker than expected if there is greater strain in the banking sector or if sustained inflationary pressures lead to more tightening than expected. Weak growth prospects and higher near-term risks amplify a longer-term slowdown in potential growth, exacerbated by overlapping shocks from the pandemic, the war in Ukraine and a sharp tightening in global financial conditions. “The global economy remains in a precarious position,” says the World Bank, which also fears the resistance the economy showed earlier in the year will ease.
The sharpest slowdown will be concentrated in the advanced economies, which would surge from 2.6% growth in 2022 to just 0.7% in 2023 and recover to 1% in 2024. The share of gross domestic product of 3, 5% last year rose to 0.4%, while the US rose to 1.1% from 2.1%. This is despite the fact that the World Bank has raised growth forecasts for this year (0.6 points for the US and 0.4 for the euro zone compared to the January forecast).
Emerging markets, on the other hand, will accelerate their growth this year thanks to the strength of China. Overall, they rise from 3.7% in 2022 to 4.0% this year after the World Bank raised its forecast for 2023 by 0.6 points. China, the largest emerging market, is accelerating from 3.5% to 5.5% on the new, more optimistic forecasts.
Politics is holding Latin America back
But while Asia is accelerating, Latin America is standing still. The agency has raised the growth forecast for this year by 0.2 points to 1.5% while lowering that for 2024 by 0.4 points to 2%. But the growth forecast for this year is not even half the 3.7% of 2022. The agency notes that with core and headline inflation above most central banks’ targets in the region, monetary policy is likely to remain tight in the near term will remain, which will dampen growth. In addition, “political uncertainty in some countries is hurting business and consumer confidence.”
The expected development and the change in the growth forecast are very different from country to country. For Brazil, the report raises this year’s forecast by 0.4 points to 1.2%, while lowering next year’s forecast by 0.6 points to 1.4%. “Uncertainty about fiscal policy continues to weigh on business confidence and investment. Although agricultural exports are expected to grow strongly this year on the back of robust soybean and corn harvests, foreign demand is not expected to provide much support for growth in 2023,” says the World Bank.
For Mexico, the World Bank is raising the forecast for this year by 1.6 points to 2.5% and lowering it for 2024 by four tenths to 1.9% compared to January, although some adjustments to the report were already made in April on the Region. “Investment and consumption, which were stronger than expected at the end of 2022, are likely to be somewhat more subdued this year due to high interest rates and inflation.”
On the back of a significant improvement in Mexico’s prospects, the World Bank cuts Argentina’s forecast by 4 points from January and expects Argentina’s economy to contract by 2% this year. In the April regional report, he was already assuming stagnation. Economists are upgrading the 2024 forecast by three-tenths to 2.3% as the economy recovers from this year’s severe drought. “The drought has led to declines in soybean and corn crops – the main export products – equivalent to 3% of GDP. The drought has also severely affected wheat production. On the other hand, the economic slowdown in Brazil, Argentina’s main trading partner, will weigh on the country’s non-basic exports this year. The resulting lack of foreign exchange will create difficulties for importers, especially those in non-agricultural sectors. In addition, inflation has continued to rise and has slightly exceeded 100% in 12 months,” the report said.
Chile will accompany Argentina in recession with a 0.4% contraction in the economy in 2023, reflecting three quarters of the contraction in 2022. “This slowdown is mainly due to the abrupt withdrawal of key monetary, fiscal and fiscal policies.” quasi-fiscal. Inflation peaked last year, but core inflation has persisted, prompting the central bank to maintain tight monetary policy. In 2024, growth is likely to increase to 1.8% due to monetary easing.
Colombia will also suffer a drastic halt, going from 7.5% in 2022 to 1.7% in 2023. The central bank started raising interest rates later than other countries, which has helped the peak in underlying interest rates to delay underlying inflation. With inflation and interest rates high, consumption is expected to grow at a sluggish 0.7% in 2023.
Peru is among the countries characterized by political uncertainty that is “negatively impacting consumer and business confidence, particularly with regard to investment” but offset by higher government spending. The growth forecast for this year is 2.2%. “Growth in 2024 is expected to reach 2.6%, but this is subject to social tensions easing and investment recovering slightly,” the report said.
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