Washington: The global economy is expected to slow to a modest 3.3% growth pace this year, but the pace could worsen if the United States slips into recession, the World Bank said Tuesday.
Despite financial turmoil unleashed by a meltdown in the US mortgage market, global growth slowed in 2007 to 3.6% from 3.9% rate in 2006, the Bank said in a report titled “Global Economic Prospects 2008.”
Most of the 2007 slowdown was due to weaker growth in high-income countries. Developing countries cushioned the blow with robust 7.4% growth, virtually unchanged from 2006.
Slowdown in US offset by resilience of developing countries
The Bank said the slowdown in the United States, the world’s largest economy, is being partly offset by the resilience of developing countries, which have powered through four consecutive years of record expansion.
After a modest growth of 3.3% in 2008, global output should expand by 3.6% in 2009 as the US economy rebounds, the report said.
US economic growth is expected to have slowed to 2.2% in 2007, from 2.9%. The Bank forecast a 1.9% expansion in 2008, then a rise to 2.3% in 2009.
The authors of the 2008 report highlighted the current “period of increased uncertainty” and cited several “serious downside risks” to a projected scenario of a soft landing for the global economy.
“External demand for products of developing countries could weaken much more sharply and commodity prices could decline if the faltering US housing market or further financial turmoil were to push the United States into a recession,” they wrote.
The development lender cited other potential risk factors such as overstimulation of the economy by monetary authorities in response to the climate of uncertainty and further steep declines in the dollar.
“Overall, we expect developing-country growth to moderate only somewhat over the next two years,” Uri Dadush, director of the World Bank’s Development Prospects Group and International Trade Department, said in an accompanying statement.
“However, a much sharper United States slowdown is a real risk that could weaken medium-term prospects in developing countries,” he said.
The 15-nation eurozone would suffer in this environment: growth was expected to decline more than a half percentage point to 2.1% in 2008, before rebounding to 2.4% in 2009, the Bank said.
And Japan would stutter to a 1.8% pace this year, bouncing up to 2.1% in 2009. Real gross domestic product (GDP) growth for developing countries is expected to ease to 7.1% in 2008, while high-income countries are forecast to grow by a moderate 2.2%.
Industrial production to accelerate in developing world
The report highlighted an acceleration of industrial production in the developing world in the first half of 2007 that buoyed economic growth. China, India and Russia were key in raising output.
The Bank estimated GDP in East Asia and the Pacific grew about 10% in 2007, with China up by more than 11%. Growth for the region was expected to ease to 9.7% in 2008 and to 9.6% by 2009. Except for China, direct exposures of financial institutions in the region to mortgage-based securities related to the US housing slump are limited, the report noted.
Among other regional forecasts for the developing world, GDP in Europe and Central Asia expanded by 6.7% in 2007 and is expected to slow down to 6.1% in 2008. Output in the Middle East and North Africa eased slightly in 2007 to 4.9% and is forecast, with the help of high oil prices, to surge 5.4% in 2008.
GDP growth in Sub-Saharan Africa grew 6.1% in 2007, and is seen rising by 6.4% in 2008. The report was produced by staff from the Development Prospects Group with Andrew Burns as lead author.