Tuesday April 10 4:05 PM ET World Bank Sees Gloomy Global Outlook
By Mark Egan
WASHINGTON (Reuters) - The World Bank (news - web sites) on Tuesday forecast sluggish global economic growth this year, based largely on a growth forecast for the U.S. economy that is dramatically lower than predictions from other sources.
In its annual Global Development Finance report, the World Bank said it expects the world economy to expand by just 2.2 percent this year -- much lower than the 3.4 percent it predicted when it last revised its outlook in November.
The falloff in expectations for the world's richest economy was even more pronounced. The Washington-based lender forecast U.S. growth of just 1.2 percent this year, down from the 3.2 percent forecast it made just five months ago.
That 1.2 percent projection is well below the 2.4 percent U.S. growth forecast by the Bush administration and the U.S. Congressional Budget Office (news - web sites). It is also well below the 1.9 percent forecast on average by Wall Street economists.
Hans Timmer of the World Bank's research department attributed the difference in the forecasts to the fact that the bank's projection is more up to date, and said that others will likely revise their estimates lower soon.
While the report forecasts a quick turnaround in U.S. fortunes, with growth expected to rebound to 3.3 percent in 2002, the bank admits in its report, ``The risks to the forecast are substantial.''
The outlook for Europe is better, with growth forecast at 2.5 percent this year, down from an earlier estimate of 3.2 percent, before picking up to 3.1 percent in 2002.
Japan's outlook was darkest of all, with growth seen at just 0.6 percent this year, much weaker than the 2.1 percent forecast last November. Japan is expected to post growth of 1.8 percent in 2002.
RAPID REBOUND?
The notion of a short-lived U.S. slowdown followed by a rapid rebound was predicated on a slew of assumptions. Among them were an underlying increase in U.S. productivity, lower interest rates boosting demand, lower oil prices and subdued inflation, a weaker dollar versus the euro and higher consumer confidence from lower income taxes.
Timmer said the forecast calls for an actual contraction of the U.S. economy during the first three months of this year and growth near zero between April and June, with recovery swiftly following. Third quarter growth is seen at more than 2 percent and close to 3 percent in the final three months of the year.
``With equity markets continuing to slide through the early months of 2001, further movement to the low-case scenario, and hence a more prolonged period of subdued consumer and producer sentiment, becomes increasingly likely,'' the report states.
``A (U.S.) hard landing can still be avoided,'' World Bank Chief Economist Nicholas Stern said at a news briefing.
But while Stern said he was hopeful the downturn would be short-lived, he admitted that forecast was made with little confidence because it is always difficult to spot a turning point in an economic trend.
``We can't say with any great confidence when that turnaround will occur,'' Stern said. But he said there was plenty of scope for help from fiscal and monetary policy, and that the inventory cycle was much shorter due to the importance of the high-tech sector -- factors that all argue for a short-lived downturn.
Stern said the biggest single factor which could undermine the rebound was a sharp contraction in bank lending, noting that delinquencies were on the rise in the United States.
The report is also based on the assumption that the price of oil will fall to $25 a barrel in 2001 and further ease to $20 a barrel by 2003.
The World Bank said the weaker-than-expected growth in the major industrialized economies will result in economic growth of 4.2 percent this year in developing nations, lower than November's forecast of 5 percent growth. Developing nations should enjoy growth in 2002 of 4.9 percent.
Growth in the East Asia and Pacific region is expected at 5.5 percent this year and 6.0 percent in 2002. The developing countries of Europe and Central Asia are seen growing 2.3 percent this year and 4.2 percent next year. Growth in Latin America and the Caribbean is expected at 3.7 percent and 4.4 percent in 2001 and 2002. And South Asia is expected to grow at 5.5 percent in both years.
The report notes a deterioration of U.S. stock market conditions could further worsen conditions in developing nations, though the longer-term impact of that scenario would increase capital availability in emerging economies.
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