World Bank bearish on global outlook

Growth forecasts lowered as debt crisis in euro zone and fiscal uncertainties in US contribute to weak investment and industrial activity

PUBLISHED : Wednesday, 16 January, 2013, 9:58am
UPDATED : Thursday, 17 January, 2013, 3:22am

Warning that the global economy continues to be fragile, the World Bank yesterday sharply cut the growth outlook for this year.

The multilateral bank forecast global gross domestic product this year would edge up to 2.4 per cent from 2.3 per cent in 2012, revised down from the 3 per cent growth it predicted in June.

European economies' failure to gain momentum despite repeated measures to boost the financial markets and the fiscal uncertainties in the United States had contributed to weak investment and industrial activity, resulting in persistently slow growth that had held the global economy back, it said.

Growth in rich countries is forecast at 1.3 per cent, down from the 1.9 per cent predicted earlier, and developing countries are expected to grow 5.5 per cent rather than 5.9 per cent.

"The global economic environment remains fragile and prone to further disappointment, although the balance of risks is now less skewed to the downside," the World Bank said in its twice-yearly report.

The US is now forecast to grow 1.9 per cent. The euro zone will contract 0.1 per cent, compared with 0.7 per cent growth seven months ago. Japan will expand 0.8 per cent, slower than the 1.5 per cent pace in June.

Germany also cut its growth forecast to 0.4 per cent, compared with an earlier prediction of 1 per cent and slowing from 0.7 per cent last year.

Hans Timmer, director of the development prospects group at the World Bank, said: "Weakness in high-income countries is dampening developing-country growth. However, developing countries continue to be resilient as [their] strong domestic demand was responsible for more than half the global growth in 2012."

Last year, developing countries grew at one of their slowest rates ever, largely because of the euro-zone crisis, which deepened in May and June. The financial markets have turned around since.

Capital flows into developing countries, which fell 30 per cent in the second quarter, have recovered and bond spreads have dropped below their long-term average levels.

China's economy is estimated to have slowed to 7.9 per cent growth last year from 9.3 per cent in 2011, its weakest since 1999, mainly because of poor external demand and domestic policies to contain inflation.

It is expected to grow 8.4 per cent this year and stabilise at about 8 per cent in 2014 and 2015 as the country shifts towards an economic model driven by consumption and services.

The World Bank said the downside risks to the global economy included the stalling progress in the euro-zone crisis, fiscal issues in the US and slowing investments in China.

"Many developing countries would be well advised to gradually restore depleted fiscal and monetary buffers," the bank said.

World Bank group president Jim Yong Kim stressed the need for developing countries to make investments in infrastructure, health and education to create the foundation for stronger growth.