HARSH northern winter in the US along with the Ukraine conflict have chilled the outlook for global economic growth this year, but highly developed economies will lead a rebound later in the year, the World Bank has projected.
The bank trimmed its global growth forecast to 2.8 per cent for the year, from its 3.2 per cent forecast in January.
Still, growth in the US and Europe will accelerate this year as the effect from government spending cuts recedes, labour markets improve, and pent-up demand starts to flow through high-income economies, the bank said in its Global Economic Prospects report.
Growth in emerging markets would likely face headwinds due to a reluctance to enact policy changes in many countries, a rise in military conflicts, and the spectre of higher interest rates in the future, the bank said.
“We’re coming to a period where growth is going to be more difficult to achieve than in the past everywhere, including in emerging markets,” World Bank economist Andrew Burns, the report’s lead author.
For years, developing economies led by China were responsible for eye-popping growth that lured investment from wealthier countries and helped to lift hundreds of millions of workers out of poverty. Stung by the 2008 financial crisis, emerging markets still recovered more quickly than high-income countries because of their lower dependence on real-estate prices and bank lending.
However, after the crisis, economists at the World Bank and elsewhere say developing markets, unlike high-income nations, failed to shift toward policies that support longer-term growth — such as improving electricity grids or lifting competition-inhibiting rules.
In China, policies that curb credit growth could slow the country’s export-fuelled economy and infrastructure expansion while boosting risks in real estate, many economists say. But a failure to shift gears in the economy could lead to unsustainable levels of debt down the road, many economists say.
In its report, the World Bank warned of a “hard landing” in China that could weigh down East Asian countries and hurt commodity exporters.
“Rebalancing the economy, while minimising financial instability as credit growth slows and financial reforms are implemented is a formidable task,” the bank said. It highlighted China’s rocky real-estate market as one area of “growing concern,” noting the combined factors of “falling house prices, record-levels of unsold units, and stagnant investment.”
A hard-landing scenario in China, with investment growth falling 10 per cent, would cut 3 percentage points off growth there but would have only a small impact on non-Asian countries, unless they are commodity suppliers to China, Burns said.
Beyond China, many developing countries are concerned a return to growth in developed economies could lead the US Federal Reserve and other major central banks to raise interest rates, a move likely to divert capital from higher-risk investments in emerging markets.
“For economies that have large financing needs — either because they have a lot of debt or large current account deficits — they’ll come under pressure,” Burns said. “You know you can’t stay with this kind of monetary support forever.”
Financial concerns aren’t the only worries for global growth. From Egypt to Thailand, military intervention is also taking a toll on economic prospects. This year Russia moved troops into Ukraine’s Crimea region and annexed the territory, contributing to instability in other parts of Ukraine and pushing Ukraine’s economy toward a 5 per cent contraction this year, the World Bank said.
Russia is expected to grow at just 0.5 per cent this year due to elevated political tensions, the bank said.
Source: The Australian