Global Economy Is Looking Brighter, World Bank Says

WASHINGTON — Some of the darkest clouds threatening the global economy have started to lift, according the World Bank’s periodic update to its economic forecasts.

The latest version of the twice-yearly Global Economic Prospects report is one of the development bank’s least pessimistic in recent years, but hardly an exercise in optimism. It describes a “dramatic” easing of financial conditions around the world, stemming in part from policy changes to soothe the bond markets in Europe. Still, it warns that global growth will continue to be sluggish for years to come.

In the report, the World Bank estimates the world economy grew just 2.3 percent in 2012. It expects growth to pick up only modestly in the coming years, from 2.4 percent in 2013 to 3.3 percent in 2015.

Developing countries were responsible for more than half of global growth in 2012, the report said, and they will continue to be an engine of growth. The report estimates that developing countries grew 5.1 percent in 2012, and that the pace of growth will accelerate to 5.8 percent in 2015.

“Four years after the crisis, high-income countries are still struggling,” Andrew Burns, the report’s lead author, said in an interview. “Developing countries need to respond to that difficult environment not through fiscal and monetary stimulus, but rather by looking to reinforce their underlying growth potential in order to have sustainably stronger growth going forward.”

For the last four years, developing countries have remained in something of a defensive crouch, World Bank experts said. Their central banks and finance ministries have intently focused on managing the volatile financial and economic conditions emanating from the United States and Europe, and their policy making has focused on the short term.

But credit conditions have eased significantly in Europe, particularly since the European Central Bank, led by Mario Draghi, embarked on a major bond-buying program last year. Growth has started to pick up in the United States, after taking a hit in the second half of 2012 because of uncertainty stemming from the presidential election and the so-called fiscal cliff, a series of automatic spending cuts and tax increases that Congress mostly averted this month.

Now, developing economies need to focus more on their domestic economic troubles, bank economists said. That might mean making long-term investments in infrastructure, education, public health or regulation, rather than focusing on short-term stimulus measures to counteract economic fluctuations from elsewhere around the globe.

“They have spent the past four years reacting to what’s going on in high-income countries,” said Mr. Burns, noting that different developing countries faced significantly different development challenges. “As a result, almost necessarily, they’ve been paying less attention to some of these long-term growth-enhancing reforms that are so necessary.”

The report says that significant downside risks to global growth persist, including stalled progress in solving the European debt crisis, fiscal uncertainty in the United States, a decline in investment in China and spiking oil prices. However, the report said, “the likelihood of these risks and their potential impacts has diminished, and the possibility of a stronger-than-anticipated recovery in high-income countries has increased.”

Developing countries may start to reorient away from a crisis mind-set, the bank said. “The whole discussion has been dominated by the global crisis,” said Hans Timmer, the director of the development prospects group at the World Bank. “It’s logical that you are distracted, but there are several problems with that: If you don’t go back to the reform agenda, you don’t have that growth in the future.”

Weakness in large, wealthy countries continues to weigh on growth in the developing world, the report notes, hitting big exporters in South Asia, for instance. Political turmoil continues to rack the Middle East and North Africa, it said. But economic activity in East Asia has rebounded because of increasing regional trade and domestic demand in China.

In contrast, developed countries, like Germany, Japan and the United States, had growth of only 1.3 percent in 2012. The bank expects that growth to pick up starting in 2014, reaching 2.3 percent by 2015. The bank projects that the euro zone will continue to contract in 2013, reaching sluggish growth of 1.4 percent by 2015.

Global trade in goods and services is a bright spot in the report. Over all, such trade grew just 3.5 percent in 2012. The bank expects trade to jump 6 percent in 2013 and 7 percent by 2015, in no small part because of an accelerating demand from new consumers in big developing countries.

“From hopes for a U-shaped recovery, through a W-shaped one, the prognosis for global growth is getting alphabetically challenged,” Kaushik Basu, the World Bank chief economist, said in a statement. “With governments in high-income countries struggling to make fiscal policies more sustainable, developing counties should resist trying to anticipate every fluctuation in developed countries and instead ensure that their fiscal and monetary polices are robust and responsive to domestic conditions.”

Article source: http://www.nytimes.com/2013/01/16/business/global-economy-is-looking-brighter-world-bank-says.html?partner=rss&emc=rss