The global economy is in better shape than it was at the start of the year, thanks largely to the performance of the United States, the World Bank said in its latest forecast Tuesday. But the sunnier outlook could cloud over if major central banks — including the Federal Reserve — keep interest rates at elevated levels.
Global growth is expected to reach an annual rate of 2.6 percent this year, up from a January forecast of 2.4 percent, the bank said. The global economy is drawing closer to a “soft landing” after recent price spikes, with average inflation dropping to a three-year low amid continuing growth, bank economists said.
While Americans’ unhappiness with high prices remains a key vulnerability for President Biden’s reelection bid, the World Bank now expects the U.S. economy to grow at an annual rate of 2.5 percent, nearly a full percentage point higher than it predicted in January. The United States is the only advanced economy growing significantly faster than the bank anticipated at the start of the year.
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“Globally, overall things are better today than they were just four or five months ago,” said Indermit Gill, the World Bank’s chief economist. “A big part of this has to do with the resilience of the U.S. economy.”
The bank’s assessment will come as news to many Americans who remain preoccupied by the cost of living. Even as the U.S. economy outpaces Europe and Japan, and hiring stays steady, voters are irked by inflation. The price of items such as rent, car insurance and beef in recent months has risen sharply.
Policymakers can point to progress. Following the Federal Reserve’s fastest interest rate increases in decades, the annual rate at which overall prices are rising cooled in April to 3.4 percent, from a mid-2022 peak of 9.1 percent.
But even as the pace of price hikes has slowed, the worst inflation since the early 1980s left prices at uncomfortably high levels. Overall, consumer prices are up almost 19 percent since Biden was inaugurated.
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These pocketbook pressures have translated into a brittle public mood.
Though public attitudes have improved over the past year as inflation declined, consumer sentiment in May slid to its lowest level in five months, according to the University of Michigan’s monthly index. Respondents said they were worried about the impact of high interest rates, saying they expected hiring to slow and income gains to ebb, according to Joanne Hsu, director of the survey.
Recognizing the political danger, the White House calls lowering costs the president’s “top priority.” Biden has criticized corporations for price gouging and for cloaking price increases by reducing package sizes, a phenomenon known as “shrinkflation.”
Last month, the White House took credit for decisions by Target and Walmart to reduce prices on thousands of everyday items, saying the moves came in response to calls for action by the president.
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In a May Gallup poll, only 38 percent of U.S. adults reported having confidence in Biden to do the right thing for the U.S. economy. That was among the lowest presidential scores the pollster reported since 2001.
The World Bank, meanwhile, credited “U.S. dynamism” with helping 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, topping analysts’ estimates, the Labor Department reported last week.
Expected global growth this year and next, however, will remain below the pre-pandemic average of 3.1 percent. Three out of four developing countries are now expected to grow more slowly than the bank forecast in January, leaving them little hope of narrowing the income gap with richer nations.
Despite their mostly upbeat tone, bank officials warned that central banks including the Fed are likely to move slowly to begin reversing the past two years of interest rate increases. That means global interest rates will remain high, averaging around 4 percent over the next two years, roughly twice the average recorded during the two decades before the pandemic.
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Global inflation should ease to 3.5 percent this year, before dropping to 2.9 percent next year. But the decline is proving more gradual than the bank anticipated. And any deterioration that causes monetary authorities to delay cuts in borrowing costs could strip 0.3 percentage points from the forecast growth rates.
“This is a major risk confronting the global economy — interest rates remaining higher for longer and an already weak growth outlook becoming weaker,” Gill said.
Bank officials also flagged global trade — which is on course this year to complete its weakest half-decade since the 1990s — as a concern. Trading nations in 2024 have implemented more than 700 restrictions on merchandise trade and nearly 160 barriers to services trade.
“Trade restrictive measures have skyrocketed. They have more than doubled since the pre-pandemic period,” Gill said.
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Rising protectionism risks becoming a drag on the global economy’s already modest pace of growth. Popular support in many countries for tariffs on imported goods and industrial subsidies that favor domestic production could further constrict trade flows that are already under pressure from the U.S.-China rivalry and other geopolitical risks.
“The world might become stuck in the slow lane,” said Ayhan Kose, the bank’s deputy chief economist.
Among those likely to suffer if key interest rates stay higher for longer are the 40 percent of developing countries at risk of a debt crisis. Many borrowed heavily to fund pandemic-related health care and subsequently to cover food and fertilizer bills that soared following the war in Ukraine.
They have little immediate prospect of securing debt relief and now risk losing out on trade gains as larger economies turn inward, Gill said.
