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The World Bank on Tuesday raised its 2023 global growth forecast as the U.S. and other major economies have proven more resilient than predicted but said higher interest rates would cause a larger-than-expected drag next year.

Real global GDP is set to climb 2.1% this year, the World Bank said in its latest Global Economic Prospects report. That’s up from a 1.7% forecast issued in January but well below the 2022 growth rate of 3.1%.

The development lender cut its 2024 global growth forecast to 2.4% from 2.7% in January, citing the continuing effects of tighter monetary policy, particularly in reducing business and residential investment.

“Growth over the rest of 2023 is set to slow substantially as it is weighed down by the lagged and ongoing effects of monetary tightening, and more restrictive credit conditions,” it said.

“These factors are envisaged to continue to affect activity heading into next year, leaving global growth below previous projections.”

The bank predicted global growth rebounding to 3.0% in 2025.  

In January, the World Bank had warned that global GDP was slowing to the brink of recession, but since then, strength in the labor market and consumption in the U.S. had exceeded expectations as has China’s recovery from COVID-19 lockdowns.

U.S. growth for 2023 is now forecast at 1.1%, more than double the 0.5% forecast in January, while China’s growth is expected to climb to 5.6%, compared to a 4.3% forecast in January after COVID-reduced growth of 3% in 2022.

The bank, however, halved its previous 2024 U.S. growth forecast for the U.S. to 0.8%, and cut China’s forecast by 0.4 percentage point to 4.6%.

The euro zone got a forecast increase to 0.4% growth for 2023 from a flat outlook in January, but the forecast for next year was also cut slightly.

Recent banking sector stress is also contributing to tighter financial conditions that will continue into 2024, the lender said.

It cited one potential downside scenario where banking stress results in a severe credit crunch and broader financial market stress in advanced economies. This would likely cut 2024 growth by nearly half to just 1.3% – the slowest pace in 30 years outside of the 2009 and 2020 recessions.

“In another scenario where financial stress propagates globally to a far greater degree, the world economy would fall into recession in 2024,” the bank added.

The bank said inflation is expected to gradually edge down as growth decelerates and labor demand in many economies softens and commodity prices remain stable. But it added that core inflation is expected to remain above central bank targets in many countries throughout 2024.

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The labor market in the United States continued to defy expectations in May, adding 339,000 new jobs. The figure was far above what economists had expected and signals that ongoing efforts to cool the economy and lower inflation are having, at best, only mixed success.

The increase in jobs came along with steadily rising wages. The figures released Friday show a 4.3% year-over-year increase in workers’ pay. The new jobs were also spread over various sectors of the economy, with professional services, government, health care, construction and transportation all showing significant increases.

The data also showed an upward revision of previous estimates of job growth for March and April, indicating another 93,000 jobs were added over those months.

“For all the talk of recession coming, you’d never know it by looking at the job market,” Greg McBride, senior vice president and chief financial analyst for Bankrate.com told VOA. “Another month of strong payroll growth, upward revisions to both March and April, and payroll growth that tended to be concentrated in higher paying jobs. You don’t see that very often … and that speaks to the robustness of the labor market.”

Unemployment ticks up

Counterintuitively, the Labor Department also reported an uptick in the unemployment rate from 3.4% to 3.7%. The number remains near historic lows, and it is not uncommon for the unemployment rate to increase even as the number of jobs increases. This is because the “establishment” survey, which the government uses to count jobs, and the “household” survey, which it uses to measure unemployment, are different.

The disparity was largely because many people previously listed as self-employed are now seeking work in the regular workforce, temporarily skewing the unemployment figures.

The numbers point to an American economy that has remained resilient through a period of sharp interest rate increases by the Federal Reserve, which has raised rates from near zero to between 5% and 5.25% in the 14 months since March 2022.

The aim of the Fed’s rate hikes has been to lower inflation, which spiked in 2022, hitting an annual rate of 9.1% in June of last year.

The rate of inflation has slowed markedly since then, to 4.9% in May, the latest data available. That figure is still outpacing wage growth, which leaves many workers feeling as though they are losing ground even with higher take-home pay.

Unalloyed good news

Joseph E. Gagnon, a senior fellow with the Peterson Institute for International Economics, told VOA that while there were many nuances to the report, one piece of what he called “unalloyed good news” is that the U.S. labor force is continuing to grow.

Friday’s data showed a seasonally adjusted U.S. labor force of 168.8 million, well above pre-pandemic levels, which Gagnon said is good for the economy as a whole and for those concerned about inflation.

“It means people are getting more income and more employment opportunities,” Gagnon said. “But it also means that there’s less inflation pressure, because if there’s more workers out there, they can produce more, and that can actually hold prices down.”

Biden celebrates

In Washington, Democrats and Republicans elected to view the jobs report through their preferred lenses.

In a statement released after the report, President Joe Biden celebrated the news, while noting that he had recently negotiated a deal with Republicans in the House of Representatives to raise the nation’s debt ceiling and avoid the potential for a catastrophic default on the nation’s debts.

“We have now created over 13 million jobs since I took office,” he said. “That is more jobs in 28 months than any President has created in an entire 4-year term.”

He added, “In short, the Biden economic plan is working. And due to the historic action taken by Congress this week, my economic plan will continue to deliver good jobs for the American people in communities throughout the country.”

GOP counters

Republicans were quick to point out that the rosy jobs report belies the fact that many Americans continue to feel that they are struggling economically.

“Real wages are down as 60 percent of workers report living paycheck-to-paycheck and 83% say the economic situation of the nation is negative,” the Republican National Committee tweeted. “Biden’s inflation is killing the financial well-being of American families.”

The Republicans’ claim that the strong economy is not benefiting all Americans appears to have some resonance with the public. On Tuesday, The Conference Board, which tracks consumer sentiment, reported that its consumer confidence index had dropped from 103.7 to 102.3 in May. (The Conference Board uses a scale that sets consumer confidence measured in 1985 as 100.)

“Consumer confidence declined in May as consumers’ view of current conditions became somewhat less upbeat while their expectations remained gloomy,” Ataman Ozyildirim, senior director of economics at The Conference Board, said in a statement.

Ozyildirim reported that consumers’ experience of the economy seems to be at odds with official numbers. Survey respondents estimated job availability to be lower than the government reports it to be and said that they expect higher inflation over the next six months, even as the official rate falls.

Impact on Fed

It is unclear, at this point, how the larger than expected jobs numbers for last month will affect the thinking of policymakers at the Federal Reserve, who had been signaling that they might be prepared to pause interest rate increases while they assess the impact current rates are having on inflation.

The Fed has been attempting to engineer what economists call a “soft landing.” That is, policymakers are attempting to slow the economy enough to push inflation down to a more manageable level, but not so much that the country is tipped into a recession. One expected effect of a cooling economy was supposed to have been slower, or even negative, job growth.

Gagnon said that it’s possible the central bank might consider another small rate increase this month but said much of the urgency that marked large rate increases a year ago no longer applies.

“I think the Fed is not in an ideal place, but it’s not horrible,” he said. “It can be patient, or slow. It’s a close call as to whether they might want to raise rates a bit more, but I don’t see the urgent need that we had a year ago of raising 75 basis points every meeting. We’re not there now.”

President Joe Biden delivered remarks Friday evening on the Fiscal Responsibility Act, bipartisan legislation achieved following weeks of tough negotiations that suspends the government’s debt limit and avoids a potentially disastrous default. For the first time Biden spoke from the Oval Office, signifying the occasion’s importance. White House Bureau Chief Patsy Widakuswara has this report.