World Bank: Surprisingly strong US economy supports global outlook

The global economy is in better shape than it was at the beginning of the year, thanks largely to the performance of the United States, the World Bank said in its latest assertion on Tuesday. However, this positive outlook may be overshadowed if the most important central banks, including the US Federal Reserve, continue to keep interest rates at high levels.

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The bank said global growth is expected to reach an annual rate of 2.6 percent this year, down from a forecast of 2.4 percent in January. Bank economists said that the global economy was approaching a “soft landing” following the recent price increases and average inflation fell to its lowest level in the last three years with continued growth.

While Americans’ unhappiness with high prices remains a valuable vulnerability for Leader Biden’s re-election, the World Bank now expects the US economy to grow at an annual rate of 2.5 percent, almost a full percentage point higher than it assumed 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.

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

The bank stated that “US dynamism” helped stabilize the global economy despite the highest interest rates in recent years and wars in Ukraine and the Middle East. Bosses hired 272,000 people in May, exceeding analysts’ expectations, the Labor Department reported last week.

However, the expected global growth this year and next year will continue to remain below the pre-pandemic average of 3.1 percent. While three out of four developing countries are expected to grow slower than the bank predicted in January, hopes of narrowing the income gap between them and powerful countries are diminishing.

While they often struck an optimistic tone, bank officials warned that central banks, including the Fed, would likely move slowly to begin reversing the interest rate hikes that have continued over the past two years. This means global interest rates will remain high at around 4 percent on average for the next two years, nearly double the average recorded over the two decades before the pandemic.

Global inflation is expected to fall to 2.9 percent next year, after falling to 3.5 percent this year. However, this decline will be more gradual than the bank predicts. A random deterioration that would cause monetary authorities to postpone cuts in borrowing costs could knock 0.3 percentage points off predicted growth rates.

“This is a major risk facing the global economy – that interest rates will remain higher for longer and that the already weak growth outlook will weaken further,” Gill said.

Bank officials also pointed to global trade as a source of concern, as it is on track to complete its weakest half-decade this year since the 1990s. Trading countries have implemented more than 700 restrictions on trade in goods and approximately 160 restrictions on trade in services in 2024.

“Measures restricting trade increased rapidly. It has more than doubled since before the pandemic,” says Gill.

Increasing protectionism risks dragging down the already modest growth rate of the global economy. In many countries, public support for tariffs on imported goods and industrial subsidies that support domestic production could further squeeze trade flows already under pressure from the U.S.-China rivalry and other geopolitical risks.

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

Among those likely to suffer losses if key interest rates remain high for longer, 40 percent of developing countries are at risk of debt crisis. Many borrowed heavily to finance pandemic-related healthcare and later to cover rising food and fertilizer bills in the wake of the war in Ukraine.

According to Gill, these countries have little prospect of debt relief and risk losing their trade benefits as major economies turn inward.