‘The world might become stuck in the slow lane’—World Bank warns of the consequences of sustaining elevated interest rates

The bank’s latest outlook marks an increase from the 2.4% growth for 2024 it had predicted in January. And it would match the global economy’s 2.6% expansion in 2023.

But the agency cautioned that global growth remains sluggish by past standards, that the poorest countries are struggling under the weight of heavy debts and high interest rates and that increased trade barriers endanger prosperity worldwide. The brutal wars in Ukraine and Gaza are inflicting further pressures on regional economies.

Stronger-than-expected growth in the United States — the world’s biggest economy — accounted for 80% of the World Bank’s upgraded outlook. The agency now expects the U.S. economy to expand 2.5% in 2024, the same as in 2023 but up sharply from the 1.6% the bank had predicted in January.

“U.S. growth is exceptional,’’ Ayhan Kose, the bank’s deputy chief economist, told The Associated Press ahead of the release of its latest Global Economic Prospects report.

The World Bank, made up of 189 member nations, seeks to reduce poverty and boost living standards by providing grants and low-rate loans to developing economies.

From January through March, the U.S. economy expanded at just a 1.3% annual rate, the slowest pace in nearly two years, and Kose said the World Bank forecast took the first-quarter slowdown into account. The pullback was due largely to factors that economists view as temporary: A surge in imports and a reduction in business inventories. By contrast, the core components of economic growth — consumer spending and business investment — remained solid in the first three months of the year.

The global and especially the U.S. economies have proved unexpectedly resilient in the face of high interest rates engineered by the Federal Reserve and other central banks to curb the high inflation that flared up in 2021.

But even after the World Bank’s upgrade, global growth looks sluggish — a half percentage point below the 2010-2019 average. Inflation has cooled significantly — from 7.2% in 2022 to 4.9% last year to a forecast 3.5% in 2024 — but remains above where central banks want it. That means central bank policymakers may be cautious about reducing rates from today’s high levels.

That approach, though, carries risks of its own, notably the danger that high borrowing rates will cause economic growth to slow too much.

“There are consequences of keeping interest rates elevated for a longer period,” Kose said. “You end up with slower growth. We need to avoid lower-for-longer economic growth around the world.’’

“The world,’’ he warned, “might become stuck in the slow lane.’’

Many countries are already under strain. The World Bank expects emerging market and developing countries to collectively grow 4% this year, down from 4.2% in 2023. In many cases, their populations are outpacing their economies, reducing their annual income growth per person to 3% this year through 2026 — far below the average 3.8% in the decade before the pandemic struck.

China, the world’s second-largest economy after the United States, is struggling with the collapse of its real estate market and with weak consumer confidence. The Chinese economy is expected to decelerate to 4.8% this year from 5.2% in 2023.

Growth in Latin America is forecast to slow from 2.2% last year to 1.8% in 2024. The World Bank expects the economy of sub-Saharan Africa to grow 3.5%, modest but up from 3% last year.

The 20 European countries that share the euro currency, hurt by the consequences of Russia’s war against Ukraine, are expected to eke out 0.7% growth in 2024, though that would be nearly twice their 0.4% growth in 2023.

The World Bank expects Japan’s economic growth, hobbled by sluggish consumer spending and flagging exports, to slow to 0.7% this year from 1.9% in 2023.

Countries around the world last year imposed a record number of measures to restrict trade, partly a consequence of geopolitical tensions, especially between the United States and China. Measured by volume, world trade barely grew last year — 0.1% — and is forecast to expand by a still-meager 2.5% in 2024.

The World Bank says it worries that faltering trade will hold back global growth.

“We would like to solve those problems,” Kose said, “by talking to each other and finding common ground,” rather than by erecting barriers to trade.