Update World Bank lowers 2014 global growth from 3.2% in January to 2.8% now

by **Cals** Thu 12 Jun 2014, 02:51

Update World Bank lowers 2014 global growth from 3.2% in January to 2.8% now

Business & Markets 2014

Written by Surin Murugiah of theedgemalaysia.com

Wednesday, 11 June 2014 09:56

KUALA LUMPUR (June 11): The World Bank in its latest Global Economic Prospects report has lowered its 2014 global growth forecast from 3.2% in January to 2.8% now.

In the report released Wednesday, the bank said the global economy got off to a bumpy start this year buffeted by poor weather in the United States, financial market turbulence and the conflict in Ukraine.

“As a result, global growth projections for 2014 have been marked down from 3.2% in January to 2.8% now.

“Despite the early weakness, growth is expected to pick up speed as the year progresses and world GDP is projected to expand by 3.4% in 2015 and 3.5% in 2016 – broadly in line with earlier forecasts,” it said.

The World Bank said that when expressed in 2010 Purchasing Power Parity terms, global growth was projected to accelerate from 3.1% in 2013 to 3.4%, 4.0%, and 4.2% in each of 2014, 2015 and 2016 respectively.

Meanwhile, the World Bank said the outlook for developing countries was for flat growth in 2014.

It said this marked the third year in a row of sub-5% growth and reflected a more challenging post-crisis global economic environment.

It said the flat yearly profile masked an expected firming of activity during the course of 2014, with developing country growth reaching 5.4% and 5.5% in 2015 and 2016 — broadly in line with potential.

“The outlook reflects countervailing forces. On the one hand, the high-income acceleration will supply an important tailwind, with their contribution to global growth expected to rise from less than 40% in 2013 to nearly 50% in 2015.

“As a result, high-income import demand is projected to accelerate from 1.9% growth last year to 4.2% in 2014 and as much as 5% in 2016, and developing country exports from 3.7% last year to 6.6% by 2016,” it said.

Elsewhere, the World Bank said supply-side bottlenecks would preclude stronger growth, particularly in East Asia and the Pacific; Latin America and the Caribbean; and Sub-Saharan Africa.

It said most economies in these regions had already completely recovered from the financial crisis and are growing at close to potential.

“Growth in East Asia is projected to slow modestly to 7% by 2016.

“Most countries in Latin America are operating at full capacity, but strengthening output in Argentina, Brazil and Mexico is projected to lift regional growth from a weak 1.9% this year to around 3.5% in 2016. In Sub-Saharan Africa GDP growth is projected to gradually firm toward 5.1% in 2016 from a broadly flat 4.7% in 2014,” it said.

The World Bank report said that in Europe and Central Asia, outturns would be affected by the conflict in Ukraine.

It said growth for developing countries in the region was projected to drop from 3.6% in 2013 to 2.4% this year, before firming to 3.7% and 4% in 2015 and 2016.

For the broader geographic region (including high-income countries such as Russia, Poland and other Baltic economies) growth is projected to gradually firm from a low of 1.7 percent in 2014 to 3.2 percent in 2016.

The World Bank said that while global risks had declined, prospects remained sensitive to financial market volatility.

It said high-income country based risks to the global economy have been largely eliminated, reflecting the substantial restructuring that has already occurred in both Europe and the US — although more needs to be done.

The bank said high-income challenges and risks were increasingly of a medium term nature including those related to fiscal sustainability challenges and an orderly exit from unconventional monetary policy (Europe, US and Japan), deflation risks (in Europe) and the need for structural reforms to boost productivity growth. Short-term risks are less pressing and more balanced than before.

It added that among developing countries, short-term risks had also become less pressing, partly because earlier downside risks have been realized over the past year without generating large upheavals, and because the economic adjustments over the past year have reduced vulnerabilities.

In contrast, domestic price and wage pressures remain strong and current account deficits high in Brazil and Turkey, it said.

It said that while supportive in the short term, the fall in developing country yields since April could exacerbate underlying vulnerabilities that persist in several economies if domestic credit and demand start to expand too rapidly in response to increased financial inflows.

“Heightened risks in one or more of these economies could spark contagion to other countries. The baseline assumes that tensions in Ukraine will persist this year without escalating further.

“However, if they escalate, they could deeply shake global confidence, generating a slowdown of 1 or more percentage points of GDP in developing countries,” it said.

The World Bank concluded by saying that medium-term growth would have to come from structural reforms.

“In a world where external financial conditions are expected to tighten and remain challenging, future growth must increasingly be driven by domestic efforts to boost productivity and competitiveness.

“Developing countries have shown their ability to prosper even as high-income country growth and imports weakened, but to continue to do so they will need to reinvigorate domestic reforms that have taken a backseat to fire-fighting and demand management in the post-crisis period.

The World bank said ambitious and advanced reform agendas in some countries (China, Mexico and the Philippines) and past reforms in others (Colombia and Peru) are enabling these countries to better navigate global financial headwinds.

It said the reform plans announced since November 2013 demonstrate China’s commitment to improving resource allocation and increasing the role of market forces in the economy.

But rebalancing the economy, while minimizing financial instability as credit growth slows and financial reforms are implemented is a formidable task.

“Growth in house prices has moderated as home sales and property construction have fallen, pointing to the real-estate market and associated lending as an area of growing concern.

“Any hard landing could have substantial spillovers within East Asia, and to commodity exporters,” it said.