World Bank sees 'darkening clouds' for global economy

The World Bank downgrade forecasts for economic growth citing risks such as trade tensions, weaker manufacturing and stress in emerging economies, whilst no-deal Brexit would impact countries to east and south of eurozone.

David Sapsted

9 January 2019

The World Bank has downgraded its forecast for global economic growth this year and next, amid fears over stagnation in emerging markets, rising trade tensions and weakening manufacturing activity.

Trade tensions, slowing emerging markets and weakening manufacturing indicate potential downturn

The international financial institution's annual review is now predicting 2.9 per cent growth this year and 2.8 per cent for 2020 - both representing a 0.1 per cent fall from forecasts made last June."Downside risks have become more acute," said the bank's report. "Disorderly financial market developments could disrupt activity in the affected economies and lead to contagion effects. Trade disputes could escalate or become more widespread, denting activity in the economies involved and leading to negative global spill-overs."The bank's report, ominously entitled 'Darkening Skies', said the implications of an economic slowdown would probably be most keenly felt in low-income countries that have failed to raise per capita incomes sufficiently.While the report said that some nations, such as India, had seen a decline in the numbers in poverty, progress had stalled in Sub-Saharan Africa, which the World Bank projects could hold as many as 87 per cent of the poorest people in the globe by 2030."In order to keep the global economy on an even keel, the bank recommends that countries invest more in developing their residents' skills, ease restrictions on investment, and reduce barriers to trade — rather than raise them, as the United States has recently done by imposing tariffs on 12 per cent of its goods imports," reported CNN.

Economic growth in the US likely to slow following boost from tax cuts

"The United States is still among the best performing economies in the world, but its growth streak could run out soon, as the effects of the tax cuts and government spending wear off, and the era of easy money fades further into the distance as the Federal Reserve raises interest rates. Although a recession isn't obviously around the corner, a volatile political environment and mounting corporate debt loads are a toxic cocktail."The bank stated, "The policy mix in the United States will shift from expansionary to contractionary during the forecast horizon, with monetary, fiscal, and trade policies all expected to become a drag on activity within the next couple of years."In this context, relatively small negative shocks have the potential to abruptly end the current expansion."

Rising interest rates start to bite globally

Rising interest rates were also found to be affecting emerging markets with governments and companies that borrowed heavily when rates were low in the aftermath of the recession a decade ago, now having to re-finance at higher rates. The rise in the value of the dollar was also found to be hurting some emerging market borrowers.“Global growth is slowing, and the risks are rising," said Ayhan Kose, the World Bank economist who oversees the forecast. “In 2017, the global economy was pretty much firing on all cylinders. In 2018, the engines started sputtering."The bank, which markedly downgraded its 2019 forecast for growth in Turkey, Argentina, Iran and Pakistan among others, left its forecast for the US economy unchanged at 2.5 per cent this year, down from 2.9 per cent in 2018.

No-deal Brexit expected to reduce growth across UK, EU and North Africa

It also predicted 1.6 per cent growth for the 19 eurozone countries, down from 1.9 per cent last year; and 6.2 per cent growth for China, down from 6.5 per cent in 2018. Franziska Ohnsorge, lead author of the report, told the BBC, "In China, its policy engineered a very deliberate slowdown towards more stable long-term growth."On Brexit, the bank see a possible risk for countries that are particularly reliant on selling to Europe. If there is a no-deal Brexit, the bank said there could be significant economic damage to both the UK and the EU, which could then have a knock-on effect in Eastern European and North African nations that are closely integrated with Europe.

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