An auto rickshaw drives through a heavy pre-monsoon rain shower on the outskirts of Agartala, capital of India’s northeastern state of Tripura, on June 10, 2014. Developing countries are forecast by the World Bank to grow 4.8 percent this year, down from the 5.3 percent estimate in January. Reuters Photo/Jayanta Dey)
Washington. The World Bank on Tuesday trimmed its global growth forecast, saying a confluence of events, from the Ukraine crisis to unusually cold weather in the United States, damped economic expansion in the first half of the year.
The poverty-fighting institution predicted the world economy would grow 2.8 percent this year, below its prior forecast of 3.2 percent made in January, but it expressed confidence activity was already shifting to more solid footing.
In its twice-yearly Global Economic Prospects report, the World Bank said tensions between Ukraine and Russia hit confidence worldwide. The bank also cut its growth forecast for the United States to 2.1 percent from 2.8 percent to account for the toll taken on growth by the weather at the start of the year.
The US economy contracted for the first time in three years in the first quarter, but it already appears to be rebounding.
“Yes, there has been a big downgrade in 2014,” Andrew Burns, the report’s lead author, said in an interview. “But that’s mainly a reflection of stuff that’s already happened.”
The World Bank expects growth to quicken later this year as richer economies continue their recovery. It kept its global growth forecasts for the next two years unchanged at 3.4 percent and 3.5 percent, respectively.
The forecasts assume tensions in Ukraine will persist this year but won’t worsen. An escalation in the crisis could further shake global confidence, prompting firms to postpone investments and crimping growth in developing economies by as much as 1.4 percentage points under the worst-case scenario, the bank said.
“The markets, investors, don’t like uncertainty,” Burns said. “It’s also pretty clear that there’s a potential for tensions (in Ukraine) to develop, and for the situation to degrade.”
Russia and Ukraine are seeking to resolve a gas pricing dispute that is at the heart of the crisis between the two countries. Failing to do so could set back peace moves that are gaining momentum after weeks of violence in east Ukraine.
The World Bank also fretted about the possibility of financial volatility in emerging markets once the US Federal Reserve starts to raise interest rates, mopping up some of the liquidity glut in global markets.
Burns said emerging markets have not fully priced in the potential for a monetary tightening in richer economies.
“The real concern is what happens in 2015, 2016,” Burns said.
Burns also said developing countries need to do more to address structural issues that are holding back growth.
This year marks the third straight year that developing economies would expand by less than 5 percent, a factor that has contributed to rising debt-to-GDP ratios that could make those economies more vulnerable, Burns said.
“Although the situation in developing countries is pretty good … it isn’t the kind of growth they’re going to need if they’re going to make the very solid inroads into poverty that we’re hoping,” he said.
High-income countries leading growth
Most of the pick-up in growth this year will come from high-income countries, particularly the US and the 18-nation euro zone, the World Bank said.
High-income countries would see stronger growth this year of 1.9 percent from 1.3 percent in the previous year, it said, but developing countries can expect mixed challenges from the accelerating growth in the rich countries.
As high-income economies expand, their import demand should grow, boosting developing-country exports. But developing countries will be hard-pressed to find the capacity to meet that demand, because most of them already are fully recovered from the 2008 financial crisis and growing close to potential, the Washington-based development lender said.
Developing countries were projected to grow 4.8 percent this year, substantially below the 5.3 percent estimate in January.
“The outlook for developing countries is for flat growth in 2014. This marks the third year in a row of sub-five percent growth and reflects a more challenging post-crisis global economic environment,” it said.
The World Bank’s latest outlook marked a deterioration from the January report, when it had raised its growth forecasts, saying both rich and developing countries appeared to be “finally turning the corner” after the global financial crisis.
Much of the slowdown this year reflected weakness in China, the world’s second-largest economy.
First-quarter growth in Chinese gross domestic product was only a 5.8 percent annualized rate, with a sharp deceleration in industrial output and Beijing taking steps to tighten credit.
The Washington-based lender forecast growth of 7.6 percent this year, lower than China’s 7.7-percent growth rate in 2013. Beijing’s own target for this year is 7.5 percent.
GDP growth accelerated slightly in the first quarter in India, Mexico and the Philippines. But the pace of growth slowed in Indonesia, Mongolia, Malaysia and Brazil and turned negative in South Africa and Peru.
Sharp annualized contractions of between 8 percent and 12 percent occurred in Ukraine, Thailand and Morocco.
The weakness in developing countries reflected a slew of factors, including knock-on effects from the severe winter in the US; political tensions in Thailand, Ukraine and Turkey; labor unrest in South Africa; and monetary policy tightening following financial market turmoil a year ago, the Bank said.
Actual and structural fiscal deficits are much higher now than in 2007 in developing countries, and debt rose by more than 10 percentage points of GDP in half of them.
The World Bank warned that developing countries need to prepare now with structural reforms while financial conditions are easy, because they are likely to tighten over the longer term.
The president of the World Bank, Jim Yong Kim, said more robust growth was needed to create the type of jobs that can improve the lives of the world’s poorest 40 percent.
“Clearly, countries need to move faster and invest more in domestic structural reforms to get broad-based economic growth to levels needed to end extreme poverty in our generation,” Kim said in a statement.
Reuters & AFP
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