World Bank Cuts Growth Forecasts as Developed Nations Lose Steam
The World Bank cut its global growth forecast for this year as austerity measures, high unemployment and low business confidence weigh on economies in developed nations.
The Washington-based bank yesterday projected the world economy will expand 2.4 percent, down from a June forecast of 3 percent, after growing 2.3 percent in 2012. It halved its forecast for Japan, cut the U.S. projection by 0.5 percentage point and predicted a second year of contraction in the euro region. It also lowered projections for emerging markets led by Brazil, India and Mexico.
“Overall, the global economic environment remains fragile and prone to further disappointment, although the balance of risks is now less skewed to the downside than it has been in recent years,” the World Bank said in its twice-yearly report.
Developed economies failed to gain steam in 2012 even after measures to stem the European debt crisis helped boost financial markets around the world. Uncertainties surrounding a U.S. political agreement on spending cuts and Japan’s diplomatic tensions with China may weigh further on the global economy just as emerging markets recover from one of their slowest growth rates of the past decade.
“What we’re seeing is the recovery that we anticipated in June being pushed a little further back in time, beginning closer to the end of the first quarter, into the second quarter of 2013,” Andrew Burns, the World Bank’s director of global economic trends, said on a conference call.
The bank is more pessimistic than economists surveyed by Bloomberg News from Jan. 4 to Jan. 9, who see global expansion of 3.2 percent this year and 3.8 percent in 2014, according to the median of 41 forecasts. The Washington-based bank expects 3.1 percent next year, compared with 3.3 percent in its June forecast.
The MSCI All-Country World Index (MXWO) has jumped about 17 percent since the end of 2011.
In the U.S., weakness in manufacturing is damping the effects of advances in housing and household spending. Corporate investment slumped late last year as companies waited for lawmakers to resolve a debate over higher taxes and cuts in government spending slated for the end of 2012.
Industrial production unexpectedly fell in the euro area in November and in Japan the government announced a new stimulus plan to bolster growth.
“In what is likely to remain a difficult external environment characterized by slow and potentially volatile high- income country growth over the next several years, strong growth in developing countries is not guaranteed,” according to the bank.
Failure to agree on a fiscal plan for the medium term in the U.S., leading to regular political wrangling, could shave domestic growth by 2.3 percentage points and global expansion by 1.4 percentage points, the bank said. Other risks include renewed investors’ concern about Europe’s debt, an abrupt decline in China’s investment rate and an interruption to global oil supplies.
“Many developing countries would be well advised to gradually restore depleted fiscal and monetary buffers, so as to ensure that their economies can respond as resiliently as they did during the 2008/09 crisis should a further significant external shock arise,” the bank said.
The Washington-based lender now sees developed economies growing 1.3 percent this year, the same as last year, compared with a 1.9 percent forecast in June. Developing countries are projected to expand 5.5 percent, less than the 5.9 percent forecast in June.
The U.S. is now forecast to grow 1.9 percent. The euro area will contract 0.1 percent compared with a growth of 0.7 percent expected seven months ago. Japan will expand 0.8 percent, a slower pace than the 1.5 percent seen in June.
China’s growth outlook was cut to 8.4 percent from 8.6 percent, and India’s was reduced to 6.1 percent from 6.9 percent. The 3.4 percent forecast for Brazil was lowered from 4.2 percent and Mexico is now seen expanding 3.3 percent instead of 4 percent.
The price of risk reflected in financial markets declined worldwide after measures that include the creation of a permanent European bailout fund and the European Central Bank’s commitment to do whatever it takes to protect the euro, the report said.
The effect was felt in emerging markets that saw a drop in borrowing costs and a rebound in capital flows in the second half of 2012. Inflows will continue to grow this year with the bank estimating an increase to $1.13 trillion from $1 trillion in 2012.
In contrast to richer counterparts, growth in developing economies picked up in the third quarter after a second-quarter lull, with retail sales and industrial production gaining steam. Many countries are also expected to benefit from the lagged effect of interest-rate cuts enacted last year, the bank said.
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