World Bank cuts global economic growth forecast

07 January 2016

Slow recovery in emerging markets will weigh heavily on growth in 2016

China’s prolonged slowdown, coupled with a consistent slump in commodities prices and contractions in Brazil and Russia, will weigh down the global economy, according to the Washington-based World Bank.

The global economy is forecast to grow by 2.9 per cent in 2016, the bank said in its Global Economic Prospects report, lowering its June 2015 projection of 3.3 per cent global growth. The world economy advanced 2.4 per cent in 2015, compared with a forecast of 2.8 per cent in June, slower than the 2.6 per cent expansion in 2014, the bank said.

Growth was less than expected in 2015, as falling commodity prices, flagging trade and capital flows, and episodes of financial volatility sapped economic activity. Firmer growth ahead will depend on continued momentum in high-income countries, the stabilisation of commodity prices, and China’s gradual transition towards a more consumption and services-based growth model, according to the World Bank.

The bank has cut its outlook for China’s growth in 2016 to 6.7 per cent, from 7 per cent in June, as well as a 6.5 per cent increase for 2017. Brazil’s economy will shrink 2.5 per cent this year, while Russia’s will contract 0.7 per cent, the World Bank said.

Modest growth

“The global economy will need to adapt to a new period of more modest growth in large emerging markets, characterised by lower commodity prices and diminished flows of trade and capital,” Kaushik Basu, senior vice-president and chief economist at the World Bank, said in the report.

China’s high debt levels are the nation’s main short-term risk, the lender said, noting that debt-to-output ratios are larger than in most developing countries. Still, Beijing has ample room to use public spending to stimulate growth in the “low-probability scenario” of a faster-than-anticipated slowdown, the bank said.

The World Bank also trimmed its projection for US growth to 2.7 per cent in 2016, down from a forecast of 2.8 per cent in June, citing the dampening effect of the surging US dollar on exports. Loose monetary policy should continue to sustain “fragile” recoveries in Japan and the euro area, the lender said.

In the Middle East, however, the growth is forecast to accelerate to 5.1 per cent in 2016, from 2.5 per cent in 2015, as the expected suspension or removal of economic sanctions against Iran will allow the country to play a larger role in global energy markets.

Growth is expected to pick up in other oil exporters as well, predominantly on the assumption that oil prices will stabilise, according to the World Bank.

However, the Middle East is subject to serious risks from the possibility of an escalation of conflict, a further decline in oil prices, and failure to improve living conditions, which could spark social unrest, the lender said in the report.

The benefits to consumers and business from lower oil prices have been “surprisingly muted”. However, a stabilisation of prices at low levels could “release pent-up demand”, causing the global economy to grow faster than expected.

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