World Bank report says U.S. economy is powering better global outlook

Global growth is expected to reach an annual rate of 2.6 percent this year, up from a forecast of 2.4 percent in January, the bank said. The global economy is moving closer to a “soft landing” after recent price surges, with average inflation falling to a three-year low amid continued growth, bank economists said.

While Americans’ dissatisfaction with high prices remains a major vulnerability to President Biden’s reelection, the World Bank now expects the U.S. economy to grow at an annual rate of 2.5%, or nearly one percentage point more than expected. in January. The United States is the only advanced economy growing significantly faster than the bank predicted at the start of the year.

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

The bank credits “American dynamism” with helping to stabilize the global economy, despite the highest interest rates in years and wars in Ukraine and the Middle East. Employers added 272,000 jobs in May, beating analysts’ estimates, the Labor Department reported last week.

However, expected global growth this year and next will remain below the pre-pandemic average of 3.1%. Three out of four developing countries are now expected to grow more slowly than the bank predicted in January, giving them little hope of narrowing the income gap with richer countries.

Despite their mostly optimistic tone, bank officials cautioned that central banks, including the Fed, would likely move slowly to begin reversing the past two years of rising interest rates. This means that global interest rates will remain high, around 4% on average over the next two years, about double the average recorded over the previous two decades. the pandemic.

Global inflation is expected to ease to 3.5 percent this year, before falling to 2.9 percent next year. But the decline turns out to be more gradual than the bank had expected. And any deterioration that causes monetary authorities to delay reducing borrowing costs could reduce forecast growth rates by 0.3 percentage points.

“This is a major risk facing the global economy: interest rates remain high for longer and growth prospects, already weak, weaken,” Gill said.

Bank officials also flagged global trade as a concern – which this year is on track to see its weakest half-decade since the 1990s. By 2024, trading countries have implemented more than 700 restrictions on trade. trade in goods and nearly 160 barriers to trade in services.

“Restrictive trade measures have skyrocketed. They have more than doubled since pre-pandemic times,” Gill said.

The rise of protectionism risks slowing the already modest growth rate of the global economy. Popular 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. rivalry with China and others. geopolitical risks.

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

Among those likely to suffer if policy interest rates remain high for longer are the 40% of developing countries that risk facing a debt crisis. Many borrowed heavily to finance pandemic-related health care and then to cover food and fertilizer bills that skyrocketed after the war in Ukraine.

They are unlikely to get debt relief immediately and now risk losing trade gains as major economies turn inward, Gill said.