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World Bank cuts global growth forecast
June 14, 2013
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WASHINGTON: The World Bank cut its global growth forecast for this year after emerging markets from China to Brazil slowed more than projected, while budget cuts and slumping investor confidence deepened Europe’s contraction.

The world economy will expand 2.2 per cent, less than a January forecast for 2.4 percent growth and slower than last year’s 2.3 percent, the bank said in a report released yesterday in Washington. It lowered its prediction for developing economies and sees the euro region’s gross domestic product shrinking 0.6 per cent. In contrast, forecasts were raised for the US and Japan, which was helped by fiscal and monetary stimulus.

“Hard data so far this year point to a global economy that is slowly getting back on its feet,” the Washington-based lender said in its twice-yearly report. “However, the recovery remains hesitant and uneven.”

Efforts by European policy makers to stem the region’s debt crisis have alleviated the main risk to global growth and financial-market stability, according to the lender. The bank now sees smaller threats, including lower commodity prices and the impact of unwinding unprecedented monetary stimulus in advanced economies including the US, the talk of which has

sent currencies from India to Thailand lower and Mexican bond yields higher in recent weeks.

Asian equities tumbled today, with the region’s benchmark index headed toward a correction, and the yen rose to the strongest in two months against the dollar after the World Bank cut its growth forecast amid concern central banks may pare monetary stimulus.

The MSCI Asia Pacific Index dropped as much as 3 per cent, erasing this year’s gains. Bond risk in Asia climbed, and emerging-market stocks slid to a nine-month low, led by Chinese and Thai shares.

Debate among US policy makers over when and how to dial back the Federal Reserve’s $85 billion-a-month program of asset purchases has shaken financial markets in developing nations. More than $2.5 trillion has been erased from the value of global equities since Fed Chairman Ben S. Bernanke said May 22 that the Fed could scale back stimulus efforts if the employment outlook shows “sustainable improvement.”

“In the short run, if the US becomes a little more attractive, there will be some marginal movement of money,”

World Bank Chief Economist Kaushik Basu said in an interview yesterday. “I don’t think this is the kind of fluctuation that will last past two months or so.”

The withdrawal of accommodative policy may have consequences in the longer run as interest rates in developing countries rise more than in their industrial counterparts, slowing investment and growth, according to the report.

The Bank of Korea kept its benchmark interest rate unchanged today after a surprise cut in May aimed at boosting an economy hit by a yen drop that gives Japanese companies an edge over Korean exporters. New Zealand’s central bank left its Official Cash Rate at 2.5 per cent and cut its growth forecast for the year through March 2014 to 3 per cent from 3.3 per cent.    

For next year, the World Bank said it expects 3 per cent growth worldwide, compared with a 3.1 per cent advance in its January forecast.

The World Bank predicts the US will grow 2 percent this year compared with a forecast in January for a 1.9 per cent expansion, though fiscal tightening is holding it back. The new forecast for the 17-country euro area compares with a 0.1 per cent contraction seen in January.

Bloomberg

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