The World Bank cut its global growth forecast for this year after emerging markets from China to Brazil slowed more than projected, while budget cuts and slumping investor confidence deepened Europe's contraction.
The world economy will expand 2.2 percent, less than a January forecast for 2.4 percent growth and slower than last year's 2.3 percent, the bank said in a report released Wednesday in Washington. It lowered its prediction for developing economies and sees the euro region's gross domestic product shrinking 0.6 percent. In contrast, forecasts were raised for the U.S. and Japan, which was helped by fiscal and monetary stimulus.
"Hard data so far this year point to a global economy that is slowly getting back on its feet," the Washington-based lender said in its twice-yearly report. "However, the recovery remains hesitant and uneven."
Efforts by European policy makers to stem the region's debt crisis have alleviated the main risk to global growth and financial-market stability, according to the lender. The bank now sees smaller threats, including lower commodity prices and the impact of unwinding unprecedented monetary stimulus in advanced economies including the U.S., the talk of which has sent currencies from India to Thailand lower and Mexican bond yields higher in recent weeks.
Debate among U.S. policy makers over when and how to dial back the Federal Reserve's $85 billion-a-month program of asset purchases has shaken financial markets in developing nations. More than $2.5 trillion has been erased from the value of global equities since Fed Chairman Ben S. Bernanke said May 22 that the Fed could scale back stimulus efforts if the employment outlook shows "sustainable improvement."
"In the short run, if the U.S. becomes a little more attractive, there will be some marginal movement of money," World Bank Chief Economist Kaushik Basu said in an interview Wednesday. “I don't think this is the kind of fluctuation that will last past two months or so."
The withdrawal of accommodative policy may have consequences in the longer run as interest rates in developing countries rise more than in their industrial counterparts, slowing investment and growth, according to the report.
For next year, the bank said it expects 3 percent growth worldwide, compared with a 3.1 percent advance in its January forecast.
The World Bank predicts the U.S. will grow 2 percent this year compared with a forecast in January for a 1.9 percent expansion, though fiscal tightening is holding it back. The new forecast for the 17-country euro area compares with a 0.1 percent contraction seen in January.
Developing countries collectively were forecast by the World Bank to expand 5.1 percent, less than the 5.5 percent estimated in January.
China’s growth outlook was cut to 7.7 percent from 8.4 percent, according to the World Bank's report. The 6.1 percent forecast for India was reduced to 5.7 percent and Brazil's was lowered to 2.9 percent from 3.4 percent.
While China’s slowdown was expected, "it is the timing, that it happened a bit quickly that caught people by surprise," Basu said. "Given that China used to grow at 10 percent and it was pulling so much of the world along with that, that is indeed a concern," especially in regions that benefited from Chinese investment such as sub-Saharan Africa, he said.
The effects could be neutralized if growth picks up in Europe or Japan, which the bank now sees expanding 1.4 percent this year from 0.8 percent in its January forecasts, he said.
Japan's monetary and fiscal stimulus is the right policy for the country, even if it's pushed up the currency of some nations as the yen depreciated, Basu told reporters Wednesday. The bank estimates higher Japanese exports could also benefit countries such as Thailand and the Philippines, which supply parts and components to Japan.
"For growth to remain strong through 2015, however, Japan will have to implement a robust set of productivity enhancing policy changes," according to the report.
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