COMMENTARY

5 major risks confronting the global economy in 2024

Indermit Gill and M. Ayhan Kose
January 17, 2024

Let’s start with the good news: Last year, the global economy defied expectations in
potentially history-making ways. Amid wretched conditions—wars, surging inflation,
and the biggest interest-rate surge in 40 years—the global economy did not suffer a
significant downturn. It merely slowed. This was an unfamiliar plotline: It implies the
world economy has grown more resilient in ways we might not yet fully understand.

Yet it would be a mistake to think the danger has passed. The World Bank’s latest
“Global Economic Prospects ” report predicts that global growth will slow to 2.4% in
2024 before edging up to 2.7% in 2025 (Figure 1.A). That might be a reason to cheer—
if avoiding another global recession is all you care about. It could be cold comfort for
nearly everyone else. Our forecasts imply that global growth remains far short of the
strength needed to achieve the Sustainable Development Goals by the end of this
decade. In fact, the first half of the 2020s is already proving to be the weakest half-
decade of growth the global economy has registered in at least 30 years (Figure 1.B).

Figure 1. Global growth

A. Global GDP growth: 2021-24

(https://www.brookings.edu/wp-content/uploads/2024/01/Figure-1.A.png)

B. Global GDP growth over time

(https://www.brookings.edu/wp-content/uploads/2024/01/Figure-1.A.png)

Source: World Bank.

Note: Global GDP is calculated using real U.S. dollar GDP weights at average 2010-19
prices and market exchange rates.

For now, our near-term forecasts suggest a “soft landing” is becoming increasingly
likely. But watch out for wind shear. There are at least five major risks that could
threaten the global economy if they materialize:

1. Rising geopolitical tensions

Geopolitical tensions have become the single most important risk confronting the
global economy (Figure 2.A). Wars are now raging in two regions critical to the world’s
food and energy supply—Eastern Europe and the Middle East. An escalation of the
conflict in the Middle East (https://www.brookings.edu/articles/the-middle-east-
conflict-is-threatening-to-cripple-a-fragile-global-economy/) could push energy
markets into uncharted territory given that the region accounts for nearly 30% of
global oil production. Recent attacks in the Red Sea have already disrupted shipping
through the Suez Canal , which accounts for 30% of global container traffic.

Geopolitical tensions heighten uncertainty, which hurts investment and economic

growth. Conflicts and wars also tend to reduce global supply capacity—with
potentially inflationary effects. Oil prices are expected to decline this year. However, if
the conflict in the Middle East escalates, oil prices could increase by 30% above our
baseline forecast of $81 a barrel in 2024. This could stoke global inflation and reduce
global growth by 0.2 percentage point (Figure 2.B).

Figure 2. Geopolitical risks and global growth outcomes

A. Geopolitical risk index and conflicts

(https://www.brookings.edu/wp-content/uploads/2024/01/Figure-2.A.png)

B. Changes in global growth under alternative risk scenarios

(https://www.brookings.edu/wp-content/uploads/2024/01/Figure-2.B.png)

Sources: Caldara and Iacoviello (2022); Oxford Economics; World Bank. A. Last
observation is December 11, 2023; B. Panel shows the deviation in global growth
under alternative scenarios relative to the baseline.

2. China’s economic slowdown

At 4.5%, Chinese growth this year would be the slowest since 1990, outside of the
COVID-19 era. That will likely hurt the large number of advanced and developing
economies that depend on trade with China. A deeper slowdown would intensify the
pain. At the end of 2021, China was the destination for nearly 20% of all goods exports
from developing economies—roughly five times the share at the start of this century
(Figure 3.A). China has also become a much more important source of demand for
commodities—particularly those that are central to the green-energy transition. Our
growth forecast for China is subject to downside risks, particularly relating to stresses
in the property sector (Figure 3.B). If China were to grow 1 percentage point slower
than expected in 2024, global growth could be lower by about 0.2 percentage points,
with considerable harm to commodity-exporting developing economies (Figure 2.B).

Figure 3. China: Share of goods exports and property sales

A. Share of goods exports to China

(https://www.brookings.edu/wp-content/uploads/2024/01/Figure-3.A.png)

B. Property sales growth in China

(https://www.brookings.edu/wp-content/uploads/2024/01/Figure-3.B.png)
Sources: Haver Analytics; National Bureau of Statistics of China; UN Comtrade
(database); World Bank. A. EMDEs refer to emerging market and developing
economies. Figure shows the share of advanced-economy and EMDE goods exports
destined to China. Last observation is 2021.; B. Year-on-year growth of sales, by
volume, of residential building floor space. Last observation is November 2023.

3. Surging financial stress

It’s remarkable that the sharpest increase in global interest rates in 40 years so far
hasn’t caused the type of havoc we saw in the 1980s. Policy interest rates will likely
come down this year, but it might not be fast enough for some countries. After staying
negative for an extended time, global real interest rates—nominal rates adjusted for
inflation—are now positive and will likely remain elevated for the foreseeable future
(Figure 4.A). Against the backdrop of weak growth, that will mean a continuing
pressure-cooker environment for developing economies with weak credit ratings. At
the end of 2023, the number of developing economies in debt distress was at the
highest level since 2000. The combination of weak growth, high real interest rates,
and elevated debt levels (https://www.brookings.edu/articles/government-debt-has-
declined-but-dont-celebrate-yet/) could make servicing debt more difficult in
vulnerable developing economies and push more of them into financial stress (Figure
4.B). A flare-up in financial stress in developing economies could reduce global growth
by about 0.2 percentage point this year (Figure 2.B). It would reduce growth in
developing economies by 0.6 percentage point.

Figure 4. Real interest rates and debt

A. Global real interest rates

(https://www.brookings.edu/wp-content/uploads/2024/01/Figure-4.A.png)
B. Total debt in EMDEs

(https://www.brookings.edu/wp-content/uploads/2024/01/Figure-4.B.png)

Sources: Haver Analytics; Kose et al. (2021); U.S. Federal Reserve System; World Bank.
A. Figure shows U.S. real interest rates, as calculated using federal fund target rate
minus CPI inflation. For 2024-25, the rates are calculated using the projections by the
Federal Open Market Committee in December 2023; B. EMDEs refer to emerging
market and developing economies. The aggregate is calculated using nominal GDP in
U.S. dollars as weights. Total debt is defined as a sum of government and private debt.
Data for 2023 are estimates.

4. Trade fragmentation
The number of policy measures restricting trade increased sharply last year (Figure
5.A). Trade restrictions and “friend-shoring” and “near-shoring” might seem like logical
policy responses to national security concerns. However, such policies could postpone
the rebound that is much needed in global trade. In 2023, global trade growth all but
ground to a halt—at 0.2%, it was the weakest performance outside of a global
recession in 50 years (Figure 5.B). Global trade growth is expected to rebound this
year, but it will be only half the average in the decade before the pandemic. Some
businesses in advanced economies are retreating from global value chains and
diverting investment instead to domestic or regional supply chains. These trends bode
ill for developing economies, for whom trade has been a key force for greater
productivity and improved living standards.

Figure 5. Trade policy measures and global trade growth

A. New trade measures

B.(https://www.brookings.edu/wp-content/uploads/2024/01/Figure-
5.A.png) Global trade growth

(https://www.brookings.edu/wp-content/uploads/2024/01/Figure-5.B.png) Sources:
Global Trade Alert; World Bank. A. Number of implemented trade policy interventions
since November 2008. Restricting (Liberalizing) measures are interventions that
discriminate against (benefit) foreign commercial interests. Reporting-lag adjusted
statistics as of December 31, 2023; B. Trade is measured as the average of export and
import volumes of goods and services.

5. Climate change

Conflict in the Middle East has constricted one key chokepoint for global trade.
Climate change has squeezed the other . Because of drought-depleted water levels
in the Panama Canal, the number of ships transiting through the canal has declined
significantly over the past year. That illustrates the degree to which climate change
has become a near-term risk, not just a medium-term hazard. 2023 was the hottest
year on record . A series of droughts, floods, and wildfires also made the impact of
climate change more visible around the world last year. Climate change is increasing
the frequency and cost of natural disasters, which tend to crimp economic growth,
aggravate poverty, and lower agricultural yields (Figure 6). Damages and risks
associated with climate change will cast a long shadow over the global economy this
year and next.

Figure 6. Natural disasters and impact of climate change on poverty

A. Natural disasters

(https://www.brookings.edu/wp-content/uploads/2024/01/Figure-6.A.png)
B. Impact of climate change on extreme poverty by 2030

(https://www.brookings.edu/wp-content/uploads/2024/01/Figure-6.B.png)

Sources: EM-DAT (database); Jafino et al. (2020); World Bank. A. Figure shows total
number of disasters per year across all countries in the world; B. Number of additional
people in extreme poverty in 2030 owing to climate change.

Each of these risks could amplify others. Intensifying conflict could spark a surge in oil
prices that could result in a financial crisis in some countries.

And yet—there is also room for a sweet surprise: The U.S. economy, which almost
single-handedly staved off a global recession last year, could outperform yet again in
2024. Our forecasts call for the U.S. economy to grow 1.6% in 2024 and 1.7% in 2025.
But if the U.S. labor market merely remains as resilient as it has been since late 2020,
U.S. growth could be half a percentage point stronger in 2023 and 0.7 point stronger
in 2025. The result would be much stronger global growth as well. If this happens
without reigniting inflationary pressures , that would be the icing on the cake.

AUTHORS

Indermit Gill Nonresident Senior Fellow - Global Economy and Development

@IndermitGill

M. Ayhan Kose Deputy Chief Economist - World Bank Group, Nonresident Senior
Fellow - Global Economy and Development

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