World Bank Lowers Global Growth Outlook; Urges Fed To Hold Off Rate Hike

The World Bank 061115

The World Bank downgraded its global growth outlook, as developing countries face tough transition with high borrowing costs and lower commodity prices in 2015. The organization also urged the Federal Reserve to hold off raising rates until the next year, citing the risks it may pose to emerging markets.

The global economy is expected to expand 2.8 percent instead of the 3 percent estimated in January, the Washington-based lender said in its biannual Global Economic Prospects report.

The growth forecasts for 2016 and 2017 were left unchanged at 3.3 percent and 3.2 percent, respectively.

"Developing countries were an engine of global growth following the financial crisis, but now they face a more difficult economic environment," said World Bank Group President Jim Yong Kim.

Developing countries are projected to grow by 4.4 percent this year, with the growth expected to pick up pace to 5.2 percent in 2016, and to 5.4 percent in 2017.

The outlook for developing countries was influenced by falling commodity prices, the stronger dollar and tightening financial conditions.

In the current environment, there will be a premium on structural reforms in developing countries to ensure a smooth adjustment to low commodity prices and gradually tightening financial conditions, Kaushik Basu, chief economist and senior vice president of the World Bank said.

However, in high-income countries, recovery is gaining momentum, as growth in the euro area and Japan picks up and the United States continues to expand, despite a weak start to the year.

A very gradual monetary tightening cycle is expected to begin in the U.S. The Federal Reserve is likely to raise interest rates in the second half of 2015, the lender noted. Interest rate normalization in the U.S. will dampen capital flows to developing countries but the bank said it is not expected to cause any major turbulence.

The bank sees the strengthening of the U.S. dollar to slow the U.S. economy more than expected, leading to some global strain.

The U.S. is forecast to expand 2.7 percent this year, down from 3.2 percent projected in January. The estimate for 2016 was revised down to 2.8 percent from 3 percent, while that for 2017 was maintained at 2.4 percent.

The outlook for the euro area was upgraded to 1.5 percent this year from 1.1 percent. The bloc is forecast to expand 1.8 percent the next year versus the 1.6 percent estimated in January. For 2017, the outlook was maintained at 1.6 percent.

Japan's economic growth is seen at 1.1 percent compared to the 1.2 percent estimated previously. The Japanese economy is expected to grow 1.7 percent in 2016 and 1.2 percent in 2017.

In China, the carefully managed slowdown continues, with growth likely to moderate to a still robust 7.1 percent this year, the lender noted. In 2016 and 2017, growth is forecast to be 7 percent and 6.9 percent, respectively.

In India, which is an oil-importer, reforms have buoyed confidence and falling oil prices have reduced vulnerabilities, paving the way for the economy to grow by a robust 7.5 percent rate in 2015. The growth is expected to pick up further to 7.9 percent in 2016 and to 8 percent in 2017.

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