World Bank Raises Growth Forecasts as Richest Nations Strengthen

By Sandrine Rastello - Jan 15, 2014

Bloomberg

The World Bank raised its global growth forecasts as the easing of austerity policies in advanced economies supports their recovery, boosting prospects for developing markets’ exports.

The Washington-based lender sees the world economy expanding 3.2 percent this year, compared with a June projection of 3 percent and up from 2.4 percent in 2013. The forecast for the richest nations was raised to 2.2 percent from 2 percent. Part of the increase reflects improvement in the 18-country euro area, with the U.S. ahead of developed peers, growing twice as fast as Japan.

The report by the institution that’s trying to eradicate extreme poverty by 2030 indicates a near-doubling of the growth in world trade this year from 2012, as developed economies lift export-reliant emerging nations. At the same time, the withdrawal of monetary stimulus in the U.S. may raise market interest rates, hurting poorer countries as investors return to assets such as Treasuries, according to the bank.

“This strengthening of output among high-income countries marks a significant shift from recent years when developing countries alone pulled the global economy forward,” the bank said yesterday in its Global Economic Prospects report published twice a year. Import demand from the richest nations “should help compensate for the inevitable tightening of global financial conditions that will arise as monetary policy in high-income economies is normalized.”

Fed Tapering

The bank’s forecasts hinge on the orderly unwinding of Federal Reserve stimulus, which is starting this month with the trimming of monthly bond purchases to $75 billion from $85 billion. If investors react abruptly in coming months, as they did in May when the central bank mentioned the possibility of tapering, capital inflows to developing economies could drop again, according to the report.

“To date, the gradual withdrawal of quantitative easing has gone smoothly,” Andrew Burns, the report’s lead author, said in a statement. “If interest rates rise too rapidly, capital flows to developing countries could fall by 50 percent or more for several months -- potentially provoking a crisis in some of the more vulnerable economies.”

The bank sees a global expansion of 3.4 percent in 2015, compared with 3.3 percent predicted in June.

In the U.S., where growth is seen accelerating to 2.8 percent this year, unchanged from the outlook in June, the recent budget compromise in Congress will ease spending cuts previously in place and boost confidence from households and businesses, the bank said.

Japan’s Outlook

The bank held its forecast this year for Japan at 1.4 percent, while cautioning that the reforms of the economy promised by the government “have disappointed thus far, raising doubts about whether the improvement in economic performance can be sustained over the medium to longer term.”

It raised its prediction for the euro region to 1.1 percent for this year from 0.9 percent in June as the monetary union comes out of it debt crisis, propelled by Germany and showing improvement in fragile economies including Spain and Italy.

“The euro area is where the U.S. was a year and a half or two years ago, where growth is starting to go positive but it’s still hesitant,” Burns, also the bank’s manager of global macroeconomics, said in a phone interview. “We’re not going to be totally convinced until this gathers a little more steam.”

The bank estimates that investors withdrew $64 billion from developing-country mutual funds between June and August, with the impact most pronounced on middle-income countries including Brazil, India and Turkey. Not all economies were hit the same way, as China or Mexico were less affected because of stronger economic fundamentals, the bank said.

Developing World

The 2014 forecast for developing markets was cut to 5.3 percent from 5.6 percent.

The bank lowered its forecast for China this year to 7.7 percent from 8 percent, saying the world’s second-largest economy is shifting “to slower but more sustainable consumption-led growth.”

It cut projections for Brazil to 2.4 percent from 4 percent, for Mexico to 3.4 percent from 3.9 percent and for India to 6.2 percent from 6.5 percent.

Growth in developing countries will accelerate “modestly” between 2013 an 2016, at a pace about 2.2 percentage points below that of the years preceding the global crisis, according to the bank’s report.

“The slower growth is not cause for concern,” according to the report. “More than two-thirds of the slowdown reflects a decline in the cyclical component of growth and less than one-third is due to slower potential growth.”

Still, not all countries are well placed to respond to capital outflows and higher interest rates, according to the bank, which urged policy makers to prepare now for such an outcome.

To contact the reporter on this story: Sandrine Rastello in Washington at srastello@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net