Cape Town, South Africa: Global economic growth will probably slow to 2.7% this year from 3.7% in 2007, checked by spiralling food and energy prices and the subprime credit crisis, the World Bank said.
Developing countries should be less affected, with their economies expanding on average 6.5%, down from 7.8%, the Washington-based lender said on Tuesday in its Global Development Finance report released here.
Cascading effect: Men at work aboard an oil rig in Canada. The World Bank had in January pegged the global economic growth at 3.3% for this year, but rising oil prices and the credit crisis have forced a revision.
“The slowdown in high-income countries has become more apparent since the end of 2007,” the bank said. “The continued strength of domestic demand and imports in developing countries is helping to cushion the global effects of the slowdown in high-income countries.”
In January, the World Bank forecast global growth of 3.3% for this year, while the International Monetary Fund in April predicted 3.7%. The growth outlook has deteriorated as record oil and food prices stoke inflation and trim output. Oil traded in New York jumped to a record $139.12 on 6 June.
“Inflationary pressures are becoming more and more of a problem,” Hans Timmer, one of the report’s authors, told reporters. The risks posed by rising oil prices are “much more serious than before.”
The World Bank expects the US economy to expand 1.1% this year, half of what it grew in 2007, and lower than a previous prediction of 1.9%. Growth in the 15-nation euro area will probably slow to 1.7% from 2.6%, while in Japan it may ease to 1.4% from 2%, the bank said.
Growth in China is expected to slow to 9.4% from 11.9% and in South Africa to 4.2% from 5.1%. Nigeria’s economic growth rate is expected to rise to 7.9% from 6.1% as it benefits from increased oil prices.
For developing nations, “the inflationary risk and impact of high food and oil prices pose an even more serious challenge than the effects of the US slowdown and financial turmoil,” Timmer said. Some of them are already “feeling the heat of the international environment,” especially those that have large current-account deficits.
The Global Development Finance report shows net private investment in developing countries surged by $269 billion last year to a record $1.03 trillion, with the bulk of the money going to Brazil, India, Russia and China. It forecasts those investment flows will drop to about $800 billion by next year.
“Net bank lending and bond flows have increased from virtually zero in 2002 to 3% of developing countries’ GDP in 2007,” the report said. “Net foreign direct and portfolio equity flows have increased from 2.7% of GDP to 4.5%.”
The subprime crisis has had a “modest” impact in developing countries, because most of their financial institutions were not involved in that type of lending, said Mansoor Dailami, another of the report’s authors.
Both he and Timmer said the global economy is unlikely to experience stagflation, a term coined in the 1960s to describe a mix of slow growth and rising prices, in coming months.
“The current situation is still one of strong growth,” Timmer said. “The higher oil prices are still primarily the result of high demand.”