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World Bank lowers outlook for global economic growth

By Tajuddin
Jan 13th, 2015
World Bank Headquarters

World Bank Headquarters

Washington ( Agencies + DIPLOMAT.SO) – The World Bank cut its outlook for global growth Tuesday, saying a strengthening U.S. economy and plummeting oil prices won’t be enough to offset deepening trouble in the eurozone and emerging markets.

The Washington-based development institution expects the global economy to expand 3% this year, up from 2.6% in 2014, but still slower than its earlier 2015 forecast of 3.4%.

The bank’s economists see oil prices, which have lost more than half their value in the last six months, providing uneven benefits to major oil importers.

The tumble in oil has bolstered the U.S. recovery by giving consumers more money to spend, leading the bank to revise up its growth projection for the world’s largest economy by 0.2 percentage point to 3.2%. But the price plunge is failing to spur stronger growth in importers such as Europe and Japan, while also exacerbating financial problems in major oil exporters.

Kaushik Basu, the World Bank’s chief economist, said the global economy is being pulled by a single engine—the U.S. economy.

“This does not make for a rosy outlook for the world,” he said. “It is really not enough.”

The eurozone is struggling to avert a third recession since the financial crisis as the currency union grapples with high debt and a lack of international competitiveness. The bank cut its outlook for growth in the region by 0.7 percentage point to 1.1% this year.

Growth in emerging markets, the leading drivers of the global recovery after the 2008 crisis, is slowing more than expected. Many of those economies, already straining their capacity to grow without major economic overhauls, are being hit by a raft of economic and political headwinds. The bank cut its forecast for all developing economies by more than half a percentage point to 4.8%.

Borrowing costs are set to rise in emerging economies as the Fed moves toward its first rate increase since 2006, worrying investors about the ability of many emerging-market governments and companies to pay their debt obligations. Their currencies are weakening as investors focus on a healthier U.S. recovery amid slowing emerging-market growth. And many governments haven’t been able revive potential growth through economic restructuring.

The development institution cut its outlook for the world’s second-largest economy, China, to 7.1% for the year, down from its last forecast for growth of 7.5%. China is trying to manage a shift away from credit-fueled, export-led growth to a greater reliance on domestic consumption. It is a delicate transition as Beijing tries to avoid a precipitous slowdown or an unexpected bursting of a credit bubble. China is widely expected to reduce its own growth rate target for the year to around 7%.

Other emerging economies also are struggling. The bank slashed its forecast for Brazil’s economic growth by nearly two percentage points to 1% amid falling commodity prices, weak demand from major trading partners and growing investor anxieties.

Russia is heading into a deep recession. The bank estimates the economy will contract by 2.9% this year as the oil exporter faces tumbling crude oil prices and Western sanctions for its role in eastern Ukraine. Russia’s crisis also is bleeding into neighboring states. Growth in Kazakhstan, another major oil exporter and a country that relies heavily on remittances from Kazakhs working in Russia, was cut 4.1 percentage points to 1.8%.

Besides the U.S., one of the few bright spots in the global outlook was a slight upgrade in the growth forecast for India to 6.4%. The central bank has helped stabilize the rupee and the government in New Delhi is moving ahead with economic overhauls, giving investors confidence about the country’s future growth potential.

But the bank said the overall weakness in the global economy is likely to prompt the U.S. Federal Reserve to delay an expected rate increase. Markets currently expect the Fed to act in the middle of the year.

Still, the bank warned that global growth prospects could dim further.

Trade growth could remain sluggish for longer than expected, especially if the eurozone’s troubles and Japan’s stagnation turn into prolonged recessions. If the Fed rates faster than expected, higher borrowing costs could spark another bout of capital flows out of emerging markets and fuel new debt and currency problems. And a sharper slowdown in China could trigger a financial turmoil in the country, which would have “considerable implications for the global economy,” the bank said.

“Worryingly, the weak recovery in many high-income economies and slowdowns in several large emerging markets may be a symptom of deeper structural weaknesses,” said Mr. Basu, the bank’s chief economist, said.

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