• The World Bank says the global economy is only months away from a severe slowdown scenario.
• An escalation of the Middle East conflict could reignite inflation and keep interest rates higher for longer.
• Heavily indebted developing countries are seen as the most vulnerable.

The World Bank warned that the global economy is only "a few months" away from a worst-case scenario in which global growth slows to 1.3% while inflation rises to 4.5%, according to comments by Chief Economist Indermit Gill reported by Reuters. The institution stated that a further escalation of the Middle East conflict and additional supply disruptions could intensify inflationary pressures, forcing interest rates to remain higher for longer.

Gill also said that debt vulnerabilities have built up over the years, leaving developing economies increasingly exposed, with some countries potentially requiring debt relief. At the same time, the World Bank believes these economies could benefit from productivity gains driven by artificial intelligence, which will be the focus of its upcoming Development Report.

Key takeaways

World is 'few months' away from worst-case scenario that sees global growth slowing to 1.3%, inflation rising to 4.5%.

Debt vulnerabilities have built up over years; some countries may need debt forgiveness.

US, China, India are largely shielded from impact of iran war, but developing countries with high debt levels face bigger risks.

Escalating Middle East war, supply disruptions could boost inflation, drive up interest rates.

Forthcoming development report offers first complete analysis of developing countries' readiness for AI.

Developing countries stand to benefit from AI and associated productivity gains.

Market reaction

Financial markets showed a muted reaction to the comments, with the US Dollar Index (DXY) hovering around 101.15 on Wednesday at the time of writing, little changed on the day.