The global recovery is steady but slow and differs by region
The basic forecast is that the world economy will continue to grow at 3.2% during 2024 and 2025, at the same rate as in 2023. A slight acceleration for advanced economies – where growth is expected to increase from 1.6% in 2023 to 1.7% in 2024 and 1.8% in 2025 – will be offset by a modest slowdown in emerging markets and developing economies, from 4.3% in 2023 to 4.2% in 2024 and 2025. The forecast for global growth five years from now – at 3.1% – is at its lowest in decades.
Global inflation is expected to decline steadily, from 6.8 percent in 2023 to 5.9 percent in 2024 and 4.5 percent in 2025, with advanced economies returning to their inflation targets sooner than emerging market and developing economies. Overall, underlying inflation is expected to decline more gradually.
The global economy has been surprisingly resilient, despite significant increases in central bank interest rates to restore price stability. Chapter 2 explains that changes in the mortgage and real estate markets during the pre-pandemic decade of low interest rates have moderated the short-term impact of increases in key rates.
Chapter 3 focuses on the medium-term outlook and shows that the lower expected growth in output per capita stems, inter alia, from persistent structural frictions that prevent the transfer of capital and labor to productive enterprises. Chapter 4 also indicates how the gloomier growth prospects in China and other large emerging market economies will weigh on trading partners.
Global Perspectives and Policies
Economic activity was surprisingly resilient during the global disinflation of 2022-23. As global inflation came down from its mid-2022 peak, economic activity grew steadily, defying warnings of stagflation and global recession.
However, the pace of expansion is expected to be low in historical terms and the speed of convergence towards higher living standards in low- and middle-income countries has slowed, implying persistent global disparities.
With inflationary pressures easing faster than expected in many countries, the risks to the global outlook are now broadly balanced compared to last year.
Monetary policy must ensure that inflation falls gently. A renewed focus on fiscal consolidation is needed to restore fiscal room for maneuver and priority investments, and to ensure debt sustainability.
Stepping up supply-side reforms is crucial to raise growth towards the higher average of the pre-pandemic era and accelerate income convergence. Multilateral cooperation is needed to limit the costs and risks of geo-economic fragmentation and climate change, accelerate the transition to green energy and facilitate debt restructuring.
Feeling the pinch? Tracing the effects of monetary policy through the real estate markets
Why are some feeling the impact of higher rates and others not? Chapter 2 investigates the effects of monetary policy across countries and over time through the lens of the mortgage and real estate markets.
Monetary policy has greater effects where (1) fixed-rate mortgages are not common, (2) homebuyers are more leveraged, (3) household debt is high, (4) housing supply is tight, and (5) house prices are overvalued. These characteristics vary significantly between countries and therefore the effects of monetary policy are strong in some and weak in others.
In addition, recent changes in the mortgage and real estate markets may have limited the impact of the higher key rates so far in several countries. The risk of households still feeling the pinch should be taken seriously in cases where fixed-rate mortgages have short fixation periods, especially if households are heavily indebted.
Slowing global growth in the medium term: what will it take to turn the tide?
The growth engine of the world economy is losing steam, raising questions about its medium-term prospects. Chapter 3 analyzes the factors behind the decline in growth and identifies a significant and widespread slowdown in total factor productivity as a key factor, partly driven by increasing misallocation of capital and labor between firms within sectors. Demographic pressures and a slowdown in private capital formation have further precipitated the growth slowdown.
In the absence of policy measures or technological advances, medium-term growth is expected to fall well below pre-pandemic levels. To boost growth, urgent reforms are needed to improve the allocation of resources to productive companies, increase labor force participation and leverage artificial intelligence for productivity gains. Addressing these issues is critical, given the additional constraints that high public debt and geo-economic fragmentation may impose on future growth.
Trading Places: Real Repercussions of G20 Emerging Markets
Given that the G20 emerging markets account for almost a third of world GDP and around a quarter of world trade, the repercussions of shocks originating in these economies can have important ramifications for global activity. Chapter 4 documents that, since 2000, the repercussions of shocks in the G20 emerging markets – especially China – have increased and are now comparable in size to those of shocks in advanced economies.
Trade, notably through global value chains, is a key propagation channel. Spillovers generate a reallocation of economic activity between companies and sectors in other countries.
Looking ahead, a plausible acceleration of growth in the G20 emerging markets, even excluding China, could support global growth in the medium term and spill over to other countries. Policymakers in recipient economies should maintain sufficient reserves and strengthen policy frameworks to manage the possibility of larger shocks from G20 emerging markets.
Read the full report at: WORLD ECONOMIC OUTLOOK
