World Bank says global growth stabilizing but well below pre-pandemic levels

By David Lawder

WASHINGTON (Reuters) - The World Bank on Tuesday said the U.S. economy's stronger-than-expected performance has prompted it to lift its 2024 global growth outlook slightly but warned that overall output would remain well below pre-pandemic levels through 2026.

The World Bank said in its latest Global Economic Prospects report that the global economy would avoid a third consecutive drop in real GDP growth since a major post-pandemic jump in 2021, with 2024 growth stabilizing at 2.6%, unchanged from 2023.

That's up 0.2 percentage point from the World Bank's January forecast, largely on the strength of U.S. demand.

"In a sense, we see the runway for a soft landing," World Bank Deputy Chief Economist Ayhan Kose told Reuters in an interview, noting that sharply higher interest rates have brought down inflation without major job losses and other disruptions in the U.S. or other major economies.

"That's the good news. What is not good news is that we may be stuck in the slow lane," Kose added.

The World Bank forecast global growth of 2.7% in both 2025 and 2026, a level well below the 3.1% global average in the decade prior to COVID-19. It also is forecasting that interest rates in the next three years will remain double their 2000-2019 average, keeping a brake on growth and adding debt pressure to emerging market countries that have borrowed in dollars.

Countries representing 80% of the world's population and GDP output will see weaker growth through 2026 than they had prior to the pandemic, the report said.

"Prospects for the world's poorest economies are even more worrisome. They face punishing levels of debt service, constricting trade possibilities and costly climate events," said World Bank Chief Economist Indermit Gill, adding that those countries will continue to require international assistance to fund their needs.

The report contains an alternative "higher-for-longer" interest rate scenario, in which persistent inflation in advanced economies keeps interest rates about 40 basis points above the lender's baseline forecast, cutting 2025 global growth to 2.4%.

U.S. BUOYANT

Strong demand and higher inflation readings in the U.S. have delayed expectations for Federal Reserve rate cuts, and the U.S. economy is defying predictions of a downturn for the second year in a row, according to the report. The World Bank is now forecasting 2.5% U.S. growth for 2024 - matching the 2023 pace - and up sharply from the January forecast of 1.6%.

Kose said the U.S. upgrade accounts for about 80% of the added global growth since the January forecast.

The World Bank also upgraded China's 2024 growth forecast to 4.8% from 4.5% in January, largely on the back of increased exports that have offset soft domestic demand. But it forecast China's growth will fall to 4.1% in 2025 amid weak investment and consumer confidence and an ongoing property-sector downturn.

India also saw a forecast upgrade for 2024 to 6.6% from 6.4% in January amid strong domestic demand.

The World Bank cut Japan's 2024 growth forecast to 0.7% from 0.9% due to weak consumption growth and slowing exports and stabilizing demand for tourism. It left its 2024 eurozone forecast unchanged at 0.7% amid the bloc's continued difficulties with high energy costs and weaker industrial output.

CONFLICT RISKS

In addition to the higher-for-longer rate scenario, the World Bank said the biggest downside risks to the global outlook included greater spillovers from armed conflicts in Gaza and Ukraine.

A wider war in the Middle East could cause further disruptions to shipping and push up oil prices and inflation. Likewise, more uncertainty about the path of Russia's invasion in Ukraine could also disrupt markets for oil and grains, while choking investment into neighboring countries, the bank said.

Increasing trade restrictions driven by geopolitical rivalries also could hamper the recovery of global trade volume growth, which was barely perceptible last year at about 0.1%. The World Bank forecast a rebound to 2.5% in 2024, up from 2.3% in the January forecast.

But it said rising protectionism and industrial policies in many countries could lead to more inefficiencies in global supply chains and reduce investment into emerging market and developing countries.

The World Bank also said a deeper downturn in China, the world's second-largest economy, would hamper growth, especially in commodity exporters and trade-intensive economies.

On the upside, the World Bank said that the U.S. could continue to surpass expectations, boosting global growth with lower inflation if elevated productivity and labor supply due to immigration prove persistent. Lower inflation globally, supported by productivity gains, improved supply chains and easing commodity prices, could prompt central banks to cut interest rates more quickly than now expected, boosting credit growth, the bank added.

(Reporting by David Lawder; Editing by Andrea Ricci)