World Bank Raises Outlook as Growth Hits Fastest Pace Since 2011

  • Broad recovery driven by investment, manufacturing pickup
  • Risks remain tilted to downside, development lender warns

The World Bank lifted its forecast for global growth, predicting the global recovery will continue to gain steam after reaching the fastest clip in six years.

The development lender raised its estimate for global economic growth for this year to 3.1 percent, up 0.2 percentage point from an estimate in June, it said Tuesday in its latest Global Economic Prospects report. The world economy probably expanded 3 percent last year, which would be the fastest pace since 2011.

Global growth is expected to last for at least the next couple of years, as conditions improve for commodity exporters hurt by the oil crash, said the Washington-based lender. Increased investment and manufacturing activity is driving a broad cyclical recovery, aided by benign financial conditions, loose monetary policy and improved confidence, it said.

Rosier Outlook

The World Bank boosted its GDP growth forecast for the world and major economies

Source: World Bank economic forecasts from January 2018 and June 2017

Still, the bank said risks remain tilted to the downside, warning an abrupt tightening of financing conditions or spike in market volatility could derail the expansion. The pain would be greatest for emerging markets and developing economies with big external financing needs and weak corporate balance sheets.

‘Big Picture’

“The big picture is a good one,” Ayhan Kose, director of the World Bank’s Development Prospects Group, said in a phone interview. He cautioned that “we need to get ready for the next episode, because history repeats itself.”

While policy makers fretted last year about the impact of President Donald Trump’s “America First” policies, investors have been betting the global recovery will continue. The S&P 500 Index has climbed in the first six trading days of 2018, hitting a record as investors continue to price in the impact of U.S. tax cuts.

The World Bank projects the U.S. will grow 2.5 percent this year, up 0.3 percentage point from its June forecast. Kose said the bank expects the Republican tax cuts passed last month will boost U.S. growth by 0.6 percentage point over the next three years.

The development lender lifted its outlook for the euro zone to 2.1 percent growth in 2018, up 0.6 point from June. Japan will grow 1.3 percent in 2018, compared with a June forecast of 1 percent, the bank said.

China, India

China will expand at a 6.4 percent pace this year, up 0.1 point from the June projection, the World Bank said. While Chinese policy makers have continued to rebalance the economy away from state-led investment, corporate credit continues to climb as a proportion of output, according to the lender.

The bank pared its 2018 forecast for India to 7.3 percent, down 0.2 point from June.

The World Bank projects the negative global output gap will close for the first time since 2008, meaning actual output is expected to approach potential. While that should allow central banks to continue or start raising interest rates after a decade of easing, emerging markets should guard against spillovers, the lender warned.

Potential growth has been plodding along below its long-term average, weighed down by weak rates of capital accumulation and slow productivity growth, the bank said. The World Bank sees potential growth slowing to around 2 percent between 2018-2027, compared with 2.5 percent between 2013-17. Policy makers should shift their focus to structural reforms to boost potential growth and living standards, it said.

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