World Bank cuts forecast for global growth

The World Bank has cut its forecast for global growth, warning that the world economy remained overly reliant on the “single engine” of the US recovery, saying it expected lower oil prices to provide a boost to global activity.

However, it warned that several headwinds would mitigate the effect of the falling cost of crude; these include 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.

“The global economy is running on a single engine,” said Kaushik Basu, Chief economist at the World Bank. “It is only the US economy that is forging ahead in a global economy with so much uncertainty. We need several engines,” he added.

In its twice-yearly Global Economic Prospects, the World Bank forecasts that the world economy will expand by 3 percent this year and by 3.3 percent in 2016. In June 2014, the Bank’s economists had predicted global growth this year and next to be 3.4 percent and 3.5 percent respectively.

The Bank lifted its forecasts for growth in the US this year from 3 per cent to 3.2 per cent, while slashing those for the Eurozone from 1.8 percent to 1.1 percent. The UK is expected to grow by 2.9 percent in 2015.

The Washington-based institution said it expected the 60 per cent drop in the cost of crude since June to lift growth by around 0.5 per cent over the medium run.

But the Bank struck a downbeat tone on the prospects for the world economy. “Risks to this slow-moving global recovery are significant and tilted to the downside,” the report said.

The most significant threat to the recovery listed by the Bank is the normalisation of monetary policy in the US. Last week, minutes from the December meeting of the Federal Open Market Committee showed the US Federal Reserve could raise interest rates from 0-0.25 per cent as soon as April.

The Bank fears this could lead to a sudden tightening of financial conditions for governments and corporate organisations in emerging markets, which have hitherto enjoyed low borrowing costs.

However, the Bank does not expect a repeat of the turmoil that hit developing countries in the summer of 2013, when the Federal Reserve first revealed it might pull back from its programme of quantitative easing. “The adjustment in developing countries to financial tightening is expected to proceed more smoothly,” the report said.

Mr. Basu said he did not think monetary tightening in the US would force central banks in emerging markets into sudden interest rates hikes. “Central banks in emerging markets will have to react but the reaction will not have to be any more muscular than one-and-a-half year ago,” he explained.

Last October, the International Monetary Fund (IMF) lowered its forecasts for global growth, saying the world economy would expand by 3.3 percent in 2015 instead of 3.4 percent.

The IMF’s latest batch of economic forecasts will be released next week in an update to its twice-yearly World Economic Outlook.

(Source: Bloomberg)