The World Bank Warns: "The Worst-Case Scenario" for Global Growth is Approaching

SadaNews Economy - The chief economist of the World Bank, Indermit Gill, warned that escalating hostilities between the United States and Iran could ignite a new wave of inflation, push interest rates to higher levels, and reduce global economic growth to just 1.3 percent, compared to 2.9 percent last year.

Reuters reported Gill as saying that the World Bank has outlined three potential scenarios in its economic forecasts for June, due to the high level of uncertainty surrounding the war in the Middle East.

Gill, who will retire at the end of August, explained that the worst-case scenario, which involves continued fighting for six months or more, is now nearing realization. According to this scenario, the global headline inflation rate would rise to 4.5 percent.

He added that continued fighting and damage to oil infrastructure in the region would also exacerbate the food security crisis by disrupting shipments of fertilizers, helium, and sulfur necessary for the agricultural sector, which will unleash a series of indirect repercussions, including rising interest rates.

Gill's statements mark the first from a senior official at the World Bank since the sharp escalation in tensions between Washington and Tehran and the collapse of the ceasefire agreement reached in April, which had raised hopes of containing the conflict's aftermath.

The war escalated this week after U.S. forces targeted sites in southern and western Iran, while Tehran targeted American positions in Bahrain, Kuwait, and Jordan. Additionally, disruptions to maritime traffic in the Strait of Hormuz continued, while the Iran-aligned Houthi group in Yemen announced a naval blockade on Saudi shipments passing through the Bab-el-Mandeb Strait leading to the Red Sea.

Gill noted that poor countries, which have not yet recovered from the COVID-19 pandemic's effects, may face higher levels of food insecurity, while highly indebted countries will be affected by rising borrowing costs as interest rates increase, which will put pressure on spending allocated for education, healthcare, and other essential services.

He said, "My personal estimate is that we may be just a few months away from this, as we have not yet seen the rise in core interest rates."

He added that once inflation accelerates, it may only take a few months before debt-laden countries experience severe difficulties in meeting their debt service obligations.

He explained that signs of pressure are already appearing, as some cash-strapped countries have requested the International Monetary Fund to increase the size of current loan programs, and Pakistan this week requested the United States to provide a $10 billion facility to support currency stability, according to a source familiar with the matter.

The World Bank's forecasts released in June showed that 40 percent of low- and middle-income countries are already experiencing debt distress or are at high risk of falling into it.

This equates to 32 countries, but this number could rise rapidly if interest rates continue to climb, according to Gill, who also noted that other countries may see a decline in their long-term growth prospects even if they do not default on their debts.

He said, "It's like a slow-motion disaster." He explained that countries that continue serving their debts will have to deplete resources that would have been allocated for education, healthcare, and other essential sectors to support future growth.

Data from the World Bank indicates that the average debt-to-GDP ratio in emerging and developing economies is projected to reach about 74 percent by 2025, compared to levels ranging between 50 percent and 55 percent before the COVID-19 pandemic, which began in late 2019.

In low-income countries, the ratio is at 67 percent, compared to around 40 percent before the pandemic.

Gill affirmed that some countries will need debt relief, with each case evaluated separately.

He explained that the largest economies in the world, namely the United States, China, and India, have so far been relatively insulated from the direct impacts of the war, as each has different factors enhancing its resilience, while developing countries face greater challenges.

He pointed out that the G20 has made progress in reforming debt restructuring mechanisms as risks associated with them rise, but the pace of reform remains slow.

Conversely, Gill noted a positive aspect for developing countries, explaining that a new World Bank analysis of their readiness for artificial intelligence technologies showed they could be among the biggest beneficiaries of this technology and the productivity gains it offers.

He said that the percentage of the population in poor countries expected to be negatively affected by artificial intelligence is about 10 percent, compared to between 30 percent and 40 percent in wealthy countries.

He added, "For these countries, artificial intelligence can represent a tremendous gain. Developing countries should be more optimistic about the impact of artificial intelligence compared to developed countries."

He concluded by saying that artificial intelligence could help return global growth rates to levels not seen in decades, but likely not within this current decade.