World Bank cuts growth forecasts

Report cites slowdowns in emerging markets, budget cuts and falling investor confidence

PUBLISHED : Friday, 14 June, 2013, 12:00am
UPDATED : Friday, 14 June, 2013, 3:49am

The World Bank cut its global growth forecast for this year after emerging markets from China to Brazil slowed more than projected, while budget cuts and slumping investor confidence deepened Europe's contraction.

The world economy will expand 2.2 per cent, less than the forecast made in January for 2.4 per cent growth and slower than last year's 2.3 per cent, the bank said in a report released yesterday in Washington.

It lowered its prediction for developing economies and saw the euro region's gross domestic product shrinking 0.6 per cent. In contrast, forecasts were raised for the United States and Japan, which was helped by financial and monetary stimulus.

"Hard data so far this year points to a global economy that is slowly getting back on its feet," the Washington-based lender said in its twice-yearly report. "However, the recovery remains hesitant and uneven."

Efforts by European policymakers to stem the region's debt crisis have alleviated the main risk to global growth and financial-market stability, according to the lender. The bank now sees smaller threats, including lower commodity prices and the impact of unwinding unprecedented monetary stimulus in advanced economies, the talk of which has sent currencies from India to Thailand lower.

Debate among US policymakers over when and how to dial back the Federal Reserve's US$85 billion-a-month programme of asset purchases has shaken financial markets in developing nations. More than US$2.5 trillion has been erased from the value of global equities since the chairman of the Federal Reserve, Ben Bernanke, said on May 22 that the Fed could scale back stimulus efforts if the employment outlook shows "sustainable improvement".

The World Bank's chief economist, Kaushik Basu, said yesterday: "In the short run, if the US becomes a little more attractive, there will be some marginal movement of money. I don't think this is the kind of fluctuation that will last past two months or so."

The withdrawal of accommodative policy may have consequences in the longer run as interest rates in developing countries rise more than in their industrial counterparts, slowing investment and growth, according to the report.

For next year, the bank said it expected 3 per cent growth worldwide, down from the rise of 3.1 per cent it forecast in January.

The World Bank predicted the US would grow 2 per cent this year, better than the 1.9 per cent growth it forecast in January, though the bank said financial tightening was holding growth back. The new forecast for the 17-country euro area is a worsening of the 0.1 per cent fall the bank predicted in January. Developing countries collectively were forecast by the World Bank to expand 5.1 per cent, less than the 5.5 per cent it estimated in January.

China's growth outlook was cut to 7.7 per cent from 8.4 per cent. The 6.1 per cent growth forecast for India in January was reduced to 5.7 per cent and Brazil's growth forecast was lowered to 2.9 per cent from 3.4 per cent.