Global Economy
Fragile global economic recovery faces major risks says World Bank
By Michael Hennigan, Finfacts founder and editor
Jan 14, 2015 - 2:30 AM

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The World Bank in its twice-yearly report on the global economy published Wednesday, cut its forecast for global growth, warning that the fragile economic recovery faces major risks and remained overly reliant on the “single engine” of the US recovery.

The Bank said it expected lower oil prices to provide a boost to global activity but several headwinds would mitigate the effect of the falling cost of crude, including weak confidence among consumers and businesses and the inability of big central banks to cut interest rates below their record-low levels to boost inflation expectations.

Following another disappointing year in 2014, developing countries should see an uptick in growth this year, boosted in part by soft oil prices, a stronger US economy, continued low global interest rates, and receding domestic headwinds in several large emerging markets, says the World Bank Group’s Global Economic Prospects (GEP) report [pdf].

After growing by an estimated 2.6% in 2014, the global economy is projected to expand by 3% this year, 3.3% in 2016 and 3.2% in 2017*, predicts the Bank’s twice-yearly flagship report. Developing countries grew by 4.4% in 2014 and are expected to edge up to 4.8% in 2015, strengthening to 5.3 and 5.4% in 2016 and 2017, respectively.

“Worryingly, the stalled recovery in some high-income economies and even some middle-income countries may be a symptom of deeper structural malaise,” said Kaushik Basu, World Bank chief economist. “As population growth has slowed in many countries, the pool of younger workers is smaller, putting strains on productivity. But there are some silver linings behind the clouds. The lower oil price, which is expected to persist through 2015, is lowering inflation worldwide and is likely to delay interest rate hikes in rich countries. This creates a window of opportunity for oil-importing countries, such as China and India; we expect India’s growth to rise to 7% by 2016. What is critical is for nations to use this window to usher in fiscal and structural reforms, which can boost long-run growth and inclusive development.”

The report says that while activity in the United States and the United Kingdom has gathered momentum as labour markets heal and monetary policy remains extremely accommodative, the recovery has been sputtering in the Eurozone and Japan as legacies of the financial crisis linger, intertwined with structural bottlenecks. China, meanwhile, is undergoing a carefully managed slowdown. Disappointing growth in other developing countries in 2014 reflected weak external demand, but also domestic policy tightening, political uncertainties and supply-side constraints.

Several major forces are driving the global outlook: soft commodity prices; persistently low interest rates but increasingly divergent monetary policies across major economies; and weak world trade. In particular, the sharp decline in oil prices since mid-2014 will support global activity and help offset some of the headwinds to growth in oil-importing developing economies. However, it will dampen growth prospects for oil-exporting countries, with significant regional repercussions.

High-income countries are likely to see growth of 2.2% in 2015-17, up from 1.8% in 2014, on the back of gradually recovering labour markets, ebbing fiscal consolidation, and still-low financing costs. In developing countries, as the domestic headwinds that held back growth in 2014 ease and the recovery in high-income countries slowly strengthens, growth is projected to gradually accelerate, rising from 4.4% in 2014 to 4.8% in 2015 and 5.4% by 2017. Lower oil prices will contribute to diverging prospects for oil-exporting and -importing countries, particularly in 2015.

The Bank raised its forecasts for growth in the US this year from 3% to 3.2%, while cutting the Eurozone from 1.8% to 1.1%. The UK is expected to grow by 2.9% in 2015. In Japan, growth will rise to 1.2% in 2015 (0.2% in 2014) and 1.6% in 2016.

China will grow 6.9% by 2017 from 7.4% in 2014). In the rest of the region, excluding China, growth will strengthen to 5.5% by 2017 from 4.6% in 2014 supported by firming exports, improved political stability, and strengthening investment.

Russia  will contract 2.9% instead of growing by 1.5% while South Asia, growth rose to an estimated 5.5% in 2014 from a 10-year low of 4.9% in 2013. The Bank says the upturn was driven by India, the region’s largest economy, which emerged from two years of modest growth. Regional growth is projected to rise to 6.8% by 2017.

*Using 2010 purchasing power parity weights, global growth would be 3.6% in 2015, and 4.0% for each of 2016 and 2017.

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