The World Bank cut its global growth forecast for this year after emerging markets from China to Brazil slowed more than projected, while budget cuts and slumping investor confidence deepened Europe’s contraction.
The world economy will expand 2.2 percent, less than a January forecast for 2.4 percent growth and slower than last year’s 2.3 percent, the bank said in a report released yesterday in Washington. It lowered its prediction for developing economies and sees the euro region’s gross domestic product shrinking 0.6 percent. In contrast, forecasts were raised for the U.S. and Japan, which was helped by fiscal and monetary stimulus.
“Hard data so far this year point to a global economy that is slowly getting back on its feet,” the Washington-based lender said in its twice-yearly report. “However, the recovery remains hesitant and uneven.”
Efforts by European policy makers to stem the region’s debt crisis have alleviated the main risk to global growth and financial-market stability, according to the lender. The bank now sees smaller threats, including lower commodity prices and the impact of unwinding unprecedented monetary stimulus in advanced economies including the U.S., the talk of which has sent currencies from India to Thailand lower and Mexican bond yields higher in recent weeks.
Asian equities tumbled today, with the region’s benchmark index headed toward a correction, and the yen rose to the strongest in two months against the dollar after the World Bank cut its growth forecast amid concern central banks may pare monetary stimulus.
The MSCI Asia Pacific Index dropped as much as 3 percent, erasing this year’s gains. Bond risk in Asia climbed, and emerging-market stocks slid to a nine-month low, led by Chinese and Thai shares.
Debate among U.S. policy makers over when and how to dial back the Federal Reserve’s $85 billion-a-month program of asset purchases has shaken financial markets in developing nations. More than $2.5 trillion has been erased from the value of global equities since Fed Chairman Ben S. Bernanke said May 22 that the Fed could scale back stimulus efforts if the employment outlook shows “sustainable improvement.”
“In the short run, if the U.S. becomes a little more attractive, there will be some marginal movement of money,” World Bank Chief Economist Kaushik Basu said in an interview yesterday. “I don’t think this is the kind of fluctuation that will last past two months or so.”
The withdrawal of accommodative policy may have consequences in the longer run as interest rates in developing countries rise more than in their industrial counterparts, slowing investment and growth, according to the report.
The Bank of Korea kept its benchmark interest rate unchanged today after a surprise cut in May aimed at boosting an economy hit by a yen drop that gives Japanese companies an edge over Korean exporters. New Zealand’s central bank left its Official Cash Rate at 2.5 percent and cut its growth forecast for the year through March 2014 to 3 percent from 3.3 percent.
For next year, the World Bank said it expects 3 percent growth worldwide, compared with a 3.1 percent advance in its January forecast.
The World Bank predicts the U.S. will grow 2 percent this year compared with a forecast in January for a 1.9 percent expansion, though fiscal tightening is holding it back. The new forecast for the 17-country euro area compares with a 0.1 percent contraction seen in January.
Developing countries collectively were forecast by the World Bank to expand 5.1 percent, less than the 5.5 percent estimated in January.
China’s growth outlook was cut to 7.7 percent from 8.4 percent, according to the World Bank’s report. The 6.1 percent forecast for India was reduced to 5.7 percent and Brazil’s was lowered to 2.9 percent from 3.4 percent.
While China’s slowdown was expected, “it is the timing, that it happened a bit quickly that caught people by surprise,” Basu said. “Given that China used to grow at 10 percent and it was pulling so much of the world along with that, that is indeed a concern,” especially in regions that benefited from Chinese investment such as sub-Saharan Africa, he said.
The effects could be neutralized if growth picks up in Europe or Japan, which the bank now sees expanding 1.4 percent this year from 0.8 percent in its January forecasts, he said.
Japan’s monetary and fiscal stimulus is the right policy for the country, even if it’s pushed up the currencies of some nations as the yen depreciated, Basu told reporters yesterday. The bank estimates higher Japanese exports could also benefit countries such as Thailand and the Philippines, which supply parts and components to Japan.
“For growth to remain strong through 2015, however, Japan will have to implement a robust set of productivity enhancing policy changes,” according to the report.