12.06.23 Review

Better than worse: the World Bank predicts that the global economy will see accelerated growth by 2025, but Russia’s economy will not

Analysts at the World Bank have slightly improved their forecast for global GDP in 2023, but have worsened their predictions for 2024 slightly. The most gloomy predictions for 2022 did not materialise, but the recovery of the global economy from the pandemic has been delayed amid a spike in inflation, and Russia's invasion of Ukraine. Inflation remains too high for central banks to begin easing monetary policy. According to the World Bank, the Russian economy may contract by as little as 0.2% this year, which is noticeably better than the forecast made in January. The main reasons for this are the unexpected resilience of oil production and a stronger than expected adjustment to the shocks of 2022 than anticipated. By 2025, the global economy will achieve a growth rate of 3% per year, while the Russian economy will grow by no more than 1%. As a result, the Russian economy will grow 2.5% by 2025 compared to 2019, while the global economy will grow by 14% over the course of the same period. Thus, by 2026, the losses of the Russian economy as a result of the war and sanctions will amount to approximately 10% of its potential GDP, not counting the transfer of resources to the military-industrial complex and the construction of excessive transport and logistics infrastructure.

The World Bank has improved its forecast for the global economy in 2023. Growth may reach 2.1%, following a 3.4% increase in 2022 and 5.9% in 2021 when the global economy was recovering from the pandemic, according to the June edition of the World Bank's 'Global Economic Prospects' report. In January, the organisation's experts expected growth to slow to 1.7%, which would have been its worst performance in about 30 years, excluding the global recessions of 2009 and 2020. The reason for the change in this year's forecast was the slightly better-than-expected condition of the Chinese, American, and European economies. However, the few positive factors will cease to operate in the second half of this year, leading to a downgrade in the forecast for global GDP for 2024 from 2.7% to 2.4%. Forecasts for the world’s leading economies have been revised along the same lines: in 2023, the dynamics will be slightly better than expected, while in 2024, they will be worse.

'The global economy is in a precarious position: all regions, except East and South Asia, are far from the development dynamics necessary to eradicate poverty, counter climate change, and develop human capital,' warns the Senior Vice President of the World Bank's Development Economics Group, Indermit Gill, in the preface to the report. The consequences of the pandemic and Russia's invasion of Ukraine have dealt a 'double blow' to the global economy. The effects of COVID-19 and the related measures taken to support the economy have led to an acceleration of inflation in developed countries, and the tightening of monetary policy by central banks has compounded the instability in commodity markets triggered by Russia's invasion of Ukraine.

In the group of developed economies, growth will slow down to 0.7% in 2023 (compared to 2.6% in 2022) and will accelerate to just 1.2% in 2024. In the United States, the economy will grow by 1.1% in 2023 and only 0.8% in 2024. This is a consequence of the sharp increase in interest rates over the past year and a half, the experts at the World Bank explain. Although inflation has decreased in recent months, it is still noticeably higher than it was prior to the pandemic. Troubles in the banking sector (the spring bankruptcy of Silicon Valley Bank was the second largest in U.S. history) complicate the fight against inflation. In the countries of Western Europe, growth is expected to slow down to 0.4% in 2023 (compared to 3.5% in 2022). This is again due to the tightening of monetary policy as well as persistently high energy prices.

In the group of developing countries, excluding China, growth is expected to slow to 2.9% in 2023, down from 4.1% in 2022. According to the report, the Chinese economy will start to slow down in the second half of the year as the effect of lifting anti-COVID restrictions gradually fades. The forecast for China's economy for 2023 has been revised from 4.3% to 5.6%, but it has been lowered for 2024. High interest rates pose a threat of a financial crisis for less successful developing countries, one in four countries has effectively lost access to international bond markets.

According to the World Bank, the Russian economy is expected to contract by 0.2% in 2023. This is the same as the estimate made in the organisation’s April interim forecast, with a decline of 3.3% forecasted in January. A 1.2% growth is expected in 2024 and an increase of 0.8% in 2025. By comparison, the IMF raised its forecast for Russia's GDP growth in 2023 from 0.3% to 0.7% in the spring, while the Ministry of Economic Development expects growth of 1.2%, and the Russian Central Bank predicts changes within the range of -1% to +1%. Thus, the World Bank's forecast remains one of the most pessimistic outlooks for the future of the Russian economy. The main reasons cited by World Bank experts for the slight improvement in their forecast are the unexpected resilience of oil production and a stronger than expected adaptation to the shocks of 2022. However, the continued decline in exports, weak domestic demand, and pressure from sanctions  will prevent the Russian economy from accelerating further.

However, by 2025, the negative effects of higher interest rates will weaken, and the global economy is projected to reach the 3% annual growth threshold, according to the World Bank. Developing countries are expected to grow by 4%, while developed countries will grow by 2.2%. Russia, on the other hand, will find itself on the outside with an annual growth rate of just 1% (among major economies only Japan is expected to see slower growth than Russia). The effect of sanctions will be evident in the fact that, by 2025, the Russian economy will only grow by 2.4% compared with 2019, while the global economy as a whole will increase by 14%. Thus, in this scenario, the losses of the Russian economy from the war and sanctions will amount to approximately 10% of potential GDP by 2026, not accounting for the losses associated with resource transfers to the military-industrial complex, the construction of excessive transport-logistics infrastructure oriented towards the east, and the extension of transportation routes.

World Bank forecasts for the dynamics of the global economy and individual countries, 2020-2025, with 2019 as 100%