The World Bank cut its forecast for the global economy as slowing growth in trade and investment and rising interest rates sapped momentum, especially in emerging markets.
Downside risks to the world economy have become more acute, including the threat of “disorderly” market movements and an escalation of trade disputes, the development lender said Tuesday in its semi-annual update to its global outlook. Debt vulnerabilities in emerging markets and developing countries have increased, it said.
The Washington-based bank expects global growth of 2.9% this year, down from 3% in 2018 and a reduction of 0.1% point from its forecast in June. The bank lowered its projection for growth in emerging markets by 0.5% to 4.2%, and slightly downgraded its outlook for expansion in the euro area.
“The outlook for the global economy has darkened. Global financing conditions have tightened, industrial production has moderated, trade tensions have intensified, and some large emerging market and developing economies have experienced significant financial market stress,” the bank said. “Faced with these headwinds, the recovery in emerging market and developing economies has lost momentum.”
Rising borrowing costs and the trade war between the US and China have dimmed the outlook for global growth and unnerved investors. US stocks suffered the worst December rout since the Great Depression. Former US Treasury Secretary Larry Summers encouraged policy makers this week to prepare for a recession in the world’s largest economy.
“We are facing a more difficult period for the global economy and the volatility in the financial markets certainly gave us that signal recently,” World Bank Chief Executive Officer Kristalina Georgieva told reporters Tuesday on a conference call.
Georgieva will take over interim leadership of the entire World Bank Group next month after President Jim Yong Kim abruptly announced on Monday that he will resign to take a job in the private sector. The transition comes at a busy time for the World Bank, which may face growing demand for its loans as emerging markets grapple with rising US interest rates.
Conceived during the Second World War to fund Europe’s reconstruction, the World Bank now focuses on alleviating poverty around the world. It committed nearly $64bn in loans in the fiscal year ended June 30 last year.
The World Bank kept its forecast for U.S. growth unchanged, at 2.5% this year. The development lender expects the euro zone to expand 1.6% this year, down 0.1 point from its forecast in June.
Japan’s economy will grow 0.9% this year, up 0.1 point from six months ago. The bank cut its forecast for growth in China by 0.1 point to 6.2% this year.
Central banks need to be flexible and “pragmatic” amid the financial volatility, Ayhan Kose, director of the World Bank’s development prospects group, told reporters. While recent weak data is troubling, it remains to be seen if it’s a sign of a deeper slowdown, he said.
“That is the big question, what these financial markets are telling us,” Kose said.