The World Bank has slashed its forecast for global growth in 2014 to below 3 per cent following a sluggish first half of the year.
The Bank had predicted in January that the world would register GDP growth of 3.2 per cent this year but last week it revised that estimate down to 2.8 per cent.
In its biannual report, it said the revision had occurred after economic growth “got off to a bumpy start this year, buffeted by poor weather in the United States, financial market turbulence and the conflict in the Ukraine”.
The latest estimate on US growth from the US Bureau of Economic Analysis suggests its economy, the largest in the world, contracted by 1 per cent in the first three months of 2014, its first quarterly contraction since the first quarter of 2011.
If the World Bank’s prediction is correct it means six out of the past seven years will have seen global growth of less than 3 per cent, with the post-crisis bounce in 2010 an outlier.
However, the World Bank maintained its optimistic outlook for future growth, expecting the world economy to expand by 3.4 per cent in 2015 and 3.5 per cent in 2016.
And the revised growth of 2.8 per cent in 2014 will still be a larger expansion than the 2.4 per cent seen in 2013.
The World Bank said the main driver behind the pick-up in growth this year would be the ‘high-income’ countries, such as the US, Japan and the UK.
The report said: “A reduced drag on growth from fiscal consolidation, improving labour market conditions and a steady release of pent-up demand in these countries are projected to overcome first-quarter softness.”
The World Bank said the data coming from the US since the first quarter indicated that the economy would rebound strongly in the second quarter after the weather-impacted blip at the start of the year.
It predicted the US would still manage to grow by 2.1 per cent in 2014, in spite of the contraction.
Growth in developing countries is expected to remain significantly higher than high-income nations, but the rate of growth is predicted to remain flat, coming in at 4.8 per cent for the third year in a row.
The World Bank said the near-term risks to economic growth in both the high-income and developing countries have significantly reduced.
But it pointed to several medium-term risks in high-income countries, including “fiscal sustainability challenges, an orderly exit from unconventional monetary policy, deflation risks and the need for structural reforms to boost productivity growth”.
The World Bank also emphasised the need for developing economies to take advantage of the current “easy global financial conditions” to put their domestic economies in order before fiscal tightening in the high-income countries puts pressure on developing countries as well.
The report stressed the necessity for many developing economies to tighten policy because “fiscal balances have deteriorated substantially since 2007 and, despite solid growth, debt levels have increased by 10 or more per cent in more than half of developing countries”.