Bad weather in the U.S., the crisis in Ukraine, rebalancing in China and the anticipated rise in interest rates will hit global growth this year, according to the World Bank, which has urged countries to continue urgent reforms.
The Washington-based organization, a United Nations agency which provides loans to developing countries, has downgraded its global growth estimates for this year to 2.8 percent, from a January forecast of 3.2 percent.
“We are not totally out of the woods yet,” Kaushik Basu, the bank’s senior vice president and chief economist, said in a press release.
“A gradual tightening of fiscal policy and structural reforms are desirable to restore fiscal space depleted by the 2008 financial crisis. In brief, now is the time to prepare for the next crisis.”
Developing countries singled out for special attention included Ghana, India, Kenya, Malaysia, and South Africa. The bank urged these countries to tighten fiscal policy and reinvigorate structural reforms. Growth for developing countries is now eyed at 4.8 percent this year, down from its January estimate of 5.3 percent, it said.
China is expected to grow by 7.6 percent this year, it added, but said this would depend on the success of rebalancing efforts by its government and predicted wide “reverberations across Asia” if a feared hard landing occurred.
“Growth rates in the developing world remain far too modest to create the kind of jobs we need to improve the lives of the poorest 40 percent,” President Jim Yong Kim said. “Countries need to move faster and invest more in domestic structural reforms to get broad-based economic growth to levels needed to end extreme poverty in our generation.”
With central banks in the U.K. and the U.S. edging slowly towards rate hikes and an end to ultra-loose monetary policy, the World Bank believes that financial markets would remain skittish. This volatility would further undermine the potential for global growth, it said. It also warned that Brazil, South Africa and Turkey are particularly vulnerable to these policy movements due to high inflation and their current account deficits.
U.S. growth was also downgraded with an estimate of 2.1 percent this year, down from the previous forecast of 2.8 percent. The bank put this largely down to the severe weather conditions in the winter months which saw gross domestic product dip by 1 percent in its first quarter. On the whole, high-income countries are expected to grow by 1.9 percent in 2014, accelerating to 2.4 percent in 2015 and 2.5 percent in 2016, it said. These developed economies will contribute about half of global growth in 2015 and 2016, compared with less than 40 percent in 2013 it added.
Analyst Ryan Huang from brokerage firm IG Markets said that these new estimates from the World Bank just reaffirm the view of the market, which had seen a range of factors colliding to stifle global growth.
“The downside risk at the moment appears to be the gas pricing dispute between Russia and Ukraine,” he said in a morning note on Wednesday.
“One other risk in the medium term, also highlighted by the World Bank, is the potential of financial turmoil in emerging markets once the U.S. Federal Reserve raises its interest rates. This could see a pullback in liquidity in global markets, however, this is likely to be an issue in 2015 rather than 2014.”