Abu Dhabi, UAEMonday 24 June 2019

World Bank cuts global growth outlook on sluggish investment and trade woes

Trade slowdown and build-up of government debt also weigh on economies

US President Donald Trump nominated senior Treasury official David Malpass in February to lead the World Bank. Bloomberg
US President Donald Trump nominated senior Treasury official David Malpass in February to lead the World Bank. Bloomberg

The World Bank cut its 2019 global growth forecast, citing a decline in investment levels across the world and a slowdown in trade growth to the weakest since the financial crisis 10 years ago.

Global gross domestic product (GDP) growth is forecast at 2.6 per cent this year, according to the Washington-based lender, a reduction from its 2.9 per cent projection in January and down from a 3 per cent estimate made last year. The global economy is expected to accelerate by 2.7 per cent next year and 2.8 per cent in 2021, according to the bank's annual Global Economic Prospects report released on Wednesday.

“Substantial challenges are clouding the global economic outlook in both the near and long term,” the World Bank's president David Malpass said in the report's foreword. “Global growth has continued to weaken and momentum remains fragile. Downside risks to growth predominate, including rising trade barriers, a build-up of government debt and deeper-than-expected slowdowns in several major economies.”

Global trade growth for this year has been revised down a full percentage point, to 2.6 per cent—slightly below the pace of the 2015-16 trade slowdown, and the weakest since the 2008 global financial crisis. The bank's revisions follow similar moves by the International Monetary Fund and World Trade Organisation.

The re-ignition of trade tensions between the US and China is a key reason for the downgrade, the bank said. President Donald Trump has threatened to impose tariffs on all Mexican imports from next week unless the Central American country halts flows of alleged illegal migrants to the US.

In May Mr Trump raised tariffs on some Chinese products and threatened to impose duties on the majority of other imports from China.

However, the World Bank’s forecasts for China and the US were broadly unchanged from earlier. Growth in the US, the world's largest economy, is projected to decelerate to 2.5 per cent, slowing further to 1.7 per cent in 2020 and 1.6 per cent in 2021 as the fiscal stimulus expires.

China, the world's second largest economy, is set to expand 6.2 per cent this year, slowing to 6.1 per cent in 2020, a 0.1 percentage point dip from the bank’s earlier forecast.

For emerging market and developing economies, sluggish investment levels are particularly concerning, Mr Malpass said. The bank expects investment in these economies to remain weak and below historical averages, “held back by slow global growth, limited fiscal space and structural constraints that misallocate or discourage investment, such as poor business environments, labour and product market controls, and weak governance”.

Government debt in emerging market and developing economies has surged by an average 15 percentage points of GDP since 2007 to 51 per cent of GDP in 2018.

“The current environment of low global interest rates and weak growth may appear to mitigate concerns about elevated debt levels,” the bank said.

However, the cost of rolling over debt can increase sharply during periods of financial stress and result in financial crises the bank cautioned, which may have further negative implications for investment and long-term growth.

The bank downgraded its forecast for the eurozone, the world's biggest economic bloc, to 1.2 per cent in 2019 and 1.4 per cent in 2020, down 0.4 and 0.1 percentage points respectively from January’s forecast. The revision reflects weakness in trade and domestic demand. The 19-country bloc grew 1.8 per cent last year.

“Economic conditions in the euro area have deteriorated rapidly since mid-2018, particularly in the manufacturing sector,” the report said. The heightened possibility of a disorderly exit by the UK from the European Union compounds economic risks.

Overall, heightened policy uncertainty and weaker-than-expected investment in advanced economies and many emerging market economies casts a shadow on global growth prospects for the coming year.

Growth in the Middle East and North Africa is projected to remain subdued at 1.3 per cent in 2019, compared to a forecast 1.4 per cent in 2018. Investment activity in oil-exporting economies has slowed due to weak oil sector output and the effects of renewed US sanctions on Iran, the World Bank said. Regional growth is projected to pick up to around 3 percent in 2020-21, supported by capital investment and policy reforms.

“Recent high-frequency indicators suggest this period of weakness may be receding; however, global activity remains subdued,” the bank said.

Updated: June 5, 2019 02:14 PM

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