World Bank cuts growth outlook as advanced nations drag

Reuters: A frustratingly slow economic recovery in developed nations is holding back the global economy, the World Bank said on Tuesday, as it sharply cut its outlook for world growth in 2013.

The World Bank forecast that global gross domestic product will inch up 2.4% this year, from 2.3% in 2012. In its last forecast in June, the bank projected global growth would reach 3.0% in 2013.

Andrew Burns, lead author of the bank’s Global Economic Prospects report, said that a recovery the bank had anticipated last year was now expected “Closer to the end of the first quarter and into the second quarter of 2013, rather than beginning a little earlier”.

The Bank warned that a drawn-out political battle in the United States over raising the Government’s borrowing limit and spending cuts could hit growth, spark a loss of confidence in the US Dollar and unnerve financial markets.

The World Bank also cut its forecast for developing countries, which last year grew at their slowest pace in a decade, to 5.5% in 2013 from 5.9% in the June forecast. It said growth in these countries should slowly pick up, reaching 5.7% next year and 5.8% in 2015.

Before the global financial crisis hit in 2007, developing countries as a whole were chalking up growth rates of around 7.5%, with China growing at an annual rate of 10%.

The World Bank forecast that Chinese growth would reach 8.4% this year, slowing to 7.9% by 2015.

In comparison, growth in advanced economies should reach a very weak 1.3% this year, weighed down by spending cuts, high unemployment and weak consumer and business confidence, the World Bank said. Activity should strengthen next year to 2% and 2.3% in 2015.

While financial markets were buoyed by measures adopted last year to address the Euro zone debt crisis, the World Bank urged Washington to outline a credible medium-term fiscal plan that ‘avoids episodes of brinkmanship’ over raising the country’s self-imposed debt ceiling.

The White House and the US Congress did agree at the beginning of January to extend tax cuts for American families earning less than US$ 450,000 a year as part of a deal over the so-called fiscal cliff.

But lawmakers must still navigate the debt limit as well as thrash out a deal over drastic automatic spending cuts that were postponed until 1 March.

“Policy uncertainty (in the US) has already dampened growth,” the World Bank said. “Should policymakers fail to agree such measures, a loss of confidence in the currency and an overall increase in market tensions could reduce US and global growth by 2.3% and 1.4% respectively.”

Burns urged developing countries to ‘maintain a steady hand on monetary policy’ and not to react too forcefully to changes in developed countries. He said developing nations should focus on structural policies and investments to support sustained growth.

The Bank said most developing countries were operating at or near ‘full capacity’ and additional efforts to boost output risk hitting inflation speed bumps.

Meanwhile, the World Bank said a decline in China’s unusually high investment rate was not likely to affect global growth over the medium to long term, but warned that a sharp decline could have domestic and global consequences.

World Bank economic simulations suggest that a 10 percentage point deceleration in Chinese investment would cause Chinese GDP growth to slow by about 3% points.

The Bank said a bitter territorial row between China and Japan over islands in the East China Sea has had an impact on Japanese exports to China.