World Bank lowers 2015 global growth forecast

Jun 11, 2015

 

The World Bank downgraded its outlook for global economic growth this year amid a broad-based slowdown in emerging markets and softer output in the U.S.

The development institution on Wednesday said that it now expects the world economy to grow by 2.8%, 0.2 percentage point slower than it estimated in January. “Global growth has yet again disappointed,” said World Bank Chief Economist Kaushik Basu.

Sharp contractions in Brazil and Russia, alongside weaker growth in Turkey, Indonesia and scores of other developing economies are offsetting healthier growth in Europe and Japan, the bank said in its Global Economic Prospects report.

The bank expects global economic growth in 2016 to accelerate to 3.3%, barring trouble in emerging markets as the U.S. Federal Reserve moves toward raising rates. The forecast also assumes recoveries in the eurozone and Japan take hold.

Although the U.S. economy is gathering steam, a brutal winter sapped output in the first quarter and prompted the bank to downgrade prospects for this year by 0.5 percentage point to 2.7%.

A host of challenges are weighing on growth in many of the world’s largest emerging-market economies, countries that helped drive the global recovery in the wake of the financial crisis.

“There is a structural slowdown under way,” said Ayhan Kose, the lead author of the report. “Increasingly, they have difficult growth prospects going forward.”

Many of those economies are reaching the limits of their capacity to grow without major policy overhauls that would open up markets, improve the business environment and increase productivity. Trillions of dollars are needed to expand the arteries of economic growth: roads, railways, ports and other infrastructure.

 

These emerging-market economies also relied on international sales to power growth over the past decade. But now those export-reliant developing countries are struggling to cope with weak demand across the globe as rich nations continue to struggle to recover from the ravages of the financial crisis.

China, the world’s No. 2 economy and a primary export market for much of the world, is slowing after two decades of breakneck growth as a faster clip than expected. Commodity prices have plunged in the past year amid anemic consumption and resource oversupply.

Adding to their economic headaches, emerging markets are facing dangerous mix of headwinds, having borrowed heavily to finance their decadelong expansions.

Borrowing costs are expected to rise as the Fed prepares to raise interest rates for the first time in nearly a decade. That prospect has also sparked a strong dollar rally, tightening the squeeze on developing-country governments and corporations that borrowed dollars but whose income is denominated in local currency. Investors are increasingly questioning their ability to pay for ballooning obligations amid slowing growth.

The bank’s forecast for a pickup in global growth to 3.3% next year assumes that there is no repeat of the type of volatility that struck emerging markets in mid-2013. Then, former Fed chief Ben Bernanke set off the so-called taper tantrum that triggered emerging-market bond, equity and currency selloffs when he signaled a pullback in the central bank’s stimulus.

But the World Bank said the Fed’s liftoff and long-term tightening cycle combined with domestic uncertainties could fuel major swings in financial markets, capital outflows and contagion throughout emerging economies.

“Our baseline is that it’s going to be smooth sailing,” said Mr. Kose in an interview. “But it still is a realistic concern and with all of these combined, the question is: ‘Is there a perfect storm outcome?’ ”

A pickup in growth next year also assumes that recoveries in Europe and Japan prove durable, a prospect that is still questionable, he said.

Those risks are why governments across the globe are the reason World Bank economists are redoubling their calls for economic overhauls.

“We often repeat that countries must complete ’structural reforms’ again and again,” Mr. Kose said. “But in the context of Fed tightening, these reforms are critical.”

Investors are growing increasingly wary. The Institute of International Finance—an industry group representing around 500 of the world’s largest banks, insurance firms, hedge funds and other financial institutions—forecasts capital flows into emerging markets will fall to their lowest level this year since the financial crisis.

Falling oil prices and sanctions against Russia for its Ukraine interventions have forced the country into a deep recession. Brazil, where a corruption scandal is reaching the highest levels of the government, is contracting as commodity prices fall and the country struggles rekindle growth prospects. Turkey’s recent elections, instead of cementing the ruling party’s power, has cast a cloud over the country’s political fate and is fueling investor worries that the government won’t enact much-needed economic overhauls.

Such structural reforms—such as opening up long-closed sectors, overhauling outdated or overly burdensome regulations and other policies that help markets work more efficiently—are often painful and politically controversial in the short term. The outcomes often don’t bear fruit for years.

But in the context of all the challenges facing those economies and their need for investment, “there is a very valuable signaling effect associated with those reforms during this transition period of lower commodity prices and higher interest rates,” Mr. Kose said.

India is one example. The government has promised, and enacted, a series of policies that have galvanized investor confidence, including trimming bureaucratic hurdles, slashing fuel subsidies and allowing more foreign investment in some industries.

Although many investors say that work is yet unfinished, the country has now surpassed China as the world’s fastest-growing large emerging market, and economists, including the World Bank, are raising forecasts for India’s growth.

Source: The Wall Street Journal