World Bank raises forecast for global economic growth to 3.2 per cent in 2014

World Bank report indicates a near-doubling of growth in world trade this year as developed economies lift export-reliant emerging nations

PUBLISHED : Wednesday, 15 January, 2014, 1:23pm
UPDATED : Thursday, 16 January, 2014, 2:22am

The World Bank has raised its global growth forecasts as the easing of austerity policies in advanced economies supports their recovery, boosting prospects for developing markets' exports.

The Washington-based lender sees the world economy expanding 3.2 per cent this year, compared with a June projection of 3 per cent and up from its 2.4 per cent estimate of growth last year. The forecast for the richest nations was raised to 2.2 per cent from 2 per cent. Part of the increase reflects improvement in the 18-country euro area, while the US is forecast to perform better than its developed peers, growing twice as fast as Japan.

The report indicates a near-doubling of the growth in world trade this year from 2012, as developed economies lift export-reliant emerging nations. At the same time, the withdrawal of monetary stimulus in the United States may raise market interest rates, hurting poorer countries as investors return to assets such as Treasuries, the bank said.

"This strengthening of output among high-income countries marks a significant shift from recent years when developing countries alone pulled the global economy forward," the bank said in its Global Economic Prospects report. Import demand from the richest nations "should help compensate for the inevitable tightening of global financial conditions that will arise as monetary policy in high-income economies is normalised".

The bank's forecasts hinge on the orderly unwinding of US Federal Reserve stimulus, which is starting this month with the trimming of monthly bond purchases to US$75 billion from US$85 billion. If investors react abruptly in coming months, as they did in May when the central bank mentioned the possibility of tapering, capital inflows to developing economies could drop again, the report said.

"To date, the gradual withdrawal of quantitative easing has gone smoothly," Andrew Burns, the report's lead author, said. "If interest rates rise too rapidly, capital flows to developing countries could fall by 50 per cent or more for several months - potentially provoking a crisis in some of the more vulnerable economies."

The bank sees a global expansion of 3.4 per cent next year, compared with the 3.3 per cent predicted in June.

The 2014 forecast for developing markets was cut to 5.3 percent from 5.6 percent.

The bank lowered its forecast for China this year to 7.7 per cent from 8 per cent, saying the world's second-largest economy was shifting "to slower but more sustainable consumption-led growth."

In the US, where growth is seen accelerating to 2.8 per cent this year, unchanged from the outlook in June, the recent budget compromise in Congress will ease spending cuts previously in place and boost confidence from households and businesses, the bank said.

The bank held its forecast for Japan this year at 1.4 per cent, while cautioning that the reforms of the economy promised by the government "have disappointed thus far, raising doubts about whether the improvement in economic performance can be sustained over the medium to longer term".

The 2014 forecast for developing markets was cut to 5.3 percent from 5.6 percent.

It raised its prediction for the euro region to 1.1 per cent for this year from 0.9 per cent in June as the monetary union comes out of it debt crisis, propelled by Germany and showing improvement in fragile economies including Spain and Italy.

"The euro area is where the US was a year and a half or two years ago, where growth is starting to go positive," Burns said.