World Bank paints gloomy picture, cuts global outlook

India to stay world's fastest growing economy; Mena growth to remain flat.

Dubai: India will continue to be the world’s fastest growing big economy and widen its lead on China over the next two years, the World Bank said as it cut its global growth outlook for this year.

The multi-lateral lender warned developing countries face a series of tough challenges in 2015, including the looming prospect of higher borrowing costs as they adapt to a new era of low prices for oil and other key commodities.

The World Bank Group’s latest Global Economic Prospects report released on Thursday said the world economy would expand 2.8 per cent this year, below its three per cent prediction in January while developing countries are now projected to grow by 4.4 per cent this year, with a likely rise to 5.2 per cent in 2016, and 5.4 per cent in 2017.

The bank forecasts India’s gross domestic product, GDP, expansion to accelerate to 7.5 per cent this year, 7.8 per cent in 2016 and eight per cent in 2017 while China’s growth is poised to slow from 7.1 per cent this year to seven per cent in 2016 and 6.9 per cent in 2017.

“Developing countries were an engine of global growth following the financial crisis, but now they face a more difficult economic environment,” said World Bank Group President Jim Yong Kim.

For the Middle East and North Africa, World Bank forecast growth would remain flat at 2.2 per cent in 2015. “The expected regional growth rebound to 3.7 per cent in 2016-17 is predicated on improving external demand, strengthening confidence that boosts investments in some oil-importing countries (Egypt, Jordan).”

The bank also lowered the growth outlook for the United States to 2.7 per cent this year, from 3.2 per cent in January, and to 2.8 per cent next year, from a previous forecast of three per cent.

However, growth in South Asia is expected to continue firming to 7.1 per cent this year, led by a recovery in India and supported by a gradual strengthening of demand in high-income countries.

“The decline in global oil prices has been a major benefit for the region, driving improvements in fiscal and current accounts, enabling subsidy reforms in some countries, and the easing of monetary policy,” the bank said.

“In India, new reforms are improving business and investor confidence and attracting new capital inflows, and should help raise growth to 7.5 per cent this year. In Pakistan, remittances are expected to remain solid, and manufacturing and service sectors should continue to recover. However, growth is expected to remain moderate, reflecting ongoing energy constraints,” said the global lender.

“Slowly but surely the ground beneath the global economy is shifting. China has avoided the potholes skillfully for now and is easing to a growth rate of 7.1 percent; Brazil, with its corruption scandal making news, has been less lucky, dipping into negative growth,” said Kaushik Basu, World Bank chief economist and senior vice-president.

“With an expected growth of 7.5 per cent this year, India is, for the first time, leading the World Bank’s growth chart of major economies. The main shadow over this moving landscape is of the eventual US liftoff. This could dampen capital flows and raise borrowing costs. This report provides a comprehensive analysis of what the liftoff may mean for the developing world,” said Basu.

The bank said with an expected liftoff in US interest rates, borrowing would become more expensive for emerging and developing economies over the coming months. “This process is expected to unfold relatively smoothly since the US economic recovery is continuing and interest rates remain low in other major global economies,” it said.

Basu said the Federal Reserve should hold off on a rate hike until next year to avoid worsening exchange rate volatility and crimping global growth.

“We’ll do all we can to help low- and middle-income countries become more resilient so that they can manage this transition as securely as possible. We believe that countries that invest in people’s education and health, improve the business environment, and create jobs through upgrades in infrastructure will emerge much stronger in the years ahead. These kinds of investments will help hundreds of millions of people lift themselves out of poverty,” added Kim.

issacjohn@khaleejtimes.com