What is the outlook for advanced economies?

After growing 1.1 percent in 2023, the U.S. economy is likely to remain weak in 2024, decelerating to 0.8 percent.

The tightness in labor markets is in part related to a slowdown in labor supply, with labor force participation rates falling (partly because of a rise in early retirements) and, in the United States, a decline in hours worked by those employed. In the first quarter of 2023, GDP expanded by 1.1 percent in the United States on a quarterly basis, supported by broadly robust consumption. Euro area GDP grew by 0.3 percent at an annualized rate, reflecting lower energy prices, easing supply bottlenecks, and fiscal policy support for firms and households.

WB said the advanced-economy growth is projected to slow to an annual average of 0.7 percent in 2023. This largely reflects the continued effect of considerable central bank policy rate hikes since early 2022. More restrictive credit conditions due to banking sector stress in advanced economies should slow domestic demand further in 2023. Past increases in energy prices and the expected softening in labor markets are also projected to weigh on activity. Growth is expected to accelerate modestly to 1.2 percent in 2024 due to a pickup in the euro area.

“Stronger-than-expected activity in early 2023 is projected to push average annual growth 0.2 percentage point above the January forecast, despite an expected weakening in the second half. In contrast, the pickup in growth in 2024 is weaker than previously forecast, owing to the more delayed impact of monetary policy rate increases, as well as additional headwinds from tighter credit conditions”, said WB.

In the United States, growth is expected to weaken significantly through 2023 and early 2024, mainly as a result of the lagged effects of the sharp rise in policy rates over the past year and a half aimed at bringing down the highest inflation rates since the early 1980s. Model-based estimates show that the peak impact on growth from this tightening is likely to take place in 2023. In addition, recent bank failures have contributed to a slowdown in credit creation. Tighter credit will also weigh on near-term activity.

Consumption has been resilient but is expected to slow substantially. Higher borrowing costs and tighter financial conditions will weigh on household spending as the large stock of savings accumulated during the pandemic is depleted, and unusually tight labor markets begin to rebalance, gradually reducing the historically high job vacancy rates. Decelerating consumption and residential investment will likely contribute to very feeble activity in the second half of 2023. “After growing 1.1 percent in 2023, the U.S. economy is likely to remain weak in 2024, decelerating to 0.8 percent. Activity is expected to pick up toward the end of next year, as inflation eases and the effects of monetary policy tightening fade”, forecasted WB.

In the euro area, growth proved more resilient than expected at the turn of the year, supported by warmer weather and lower natural gas prices. Energy price pressures have been fading, but core inflation has remained elevated, reflecting the strength of the labor market, robust wage growth, lagged effects from high gas and electricity prices, and broadening price pressures. The persistence of underlying inflation pressures, as seen in the core services component which excludes shelter, suggests that monetary policy may need to be tighter than previously expected.

In WB, Eurozone’s growth is forecast to slow to 0.4 percent in 2023, from 3.5 percent in 2022, owing mainly to the lagged effects of monetary policy tightening. The upward revision of 0.4 percentage point to growth this year relative to January mainly reflects the better-than-expected data at the beginning of the year and the downgrade to energy price projections. After bottoming out in 2023, growth is expected to firm to 1.3 percent in 2024, supported by reforms and investments funded by the Recovery and Resilience Facility. The 0.3 percentage point downward revision to the forecast for 2024 partly reflects the effects of tight monetary policy over a longer period than previously expected.

In Japan, growth is expected to slow to 0.8 percent in 2023, as the lagged effects of synchronized monetary policy tightening in major advanced economies weigh on external demand. Although price pressures are expected to subside in the second half of 2023 as the pass-through from a surge in import prices runs its course, persistent weakness in real wage growth will hold back consumer demand. “Japan’s GDP growth is anticipated to edge down further to 0.7 percent in 2024, partly as a result of the gradual unwinding of macroeconomic policy support”, said WB.

As for China, the economic activity in China bounced back in early 2023, spurred by the earlier-than-expected economic reopening, which bolstered consumer spending, including on services-related activity (figure 1.7.D). The property sector began to emerge from a protracted slump, supported by wide-ranging policies. These included liquidity provisions to developers and measures to ensure the completion of unfinished projects. Meanwhile, goods trade remained subdued.

According to GDP, Chine GDP growth is projected to rebound to 5.6 percent in 2023, as the economic reopening drives consumer spending, particularly on domestic services. Investment is expected to pick up only modestly as infrastructure-related stimulus fades, and high debt levels weigh on the property sector recovery. Weak external demand will also dampen growth. While the reopening will support services trade, subdued infrastructure and manufacturing sector activity will weigh on overall trade, as services activity tends to be less trade intensive. Inflation is expected to remain below target, allowing monetary policy to remain mildly accommodative. The fiscal policy stance is expected to be broadly neutral.

With the reopening boost fading in the second half of the year, growth will slow to 4.6 percent in 2024, as moderating consumption offsets a small pickup in exports. Key downside risks include continuing stress in the real estate sector, a sharper-than-anticipated slowdown in global growth and trade, and the lingering possibility of disruptive COVID-19 waves. On the upside, a more vigorous consumption recovery could support growth for longer than expected.