The World Bank warned on Tuesday that the global economy is increasingly vulnerable to a sharp slowdown as troubles in emerging markets mount and as advanced economies struggle to grow. This comes from the bank’s latest mid-year forecasts.
The bank’s new projection pegs global growth at 2.4% in 2016, down from the 2.9% forecast in January and slower than last year’s weak pace. The bank also cut its forecast for global growth in 2017 to 2.8% from 3.1% in January.
World Bank chief economist Kaushik Basu warned: “The global outlook faces pronounced risks of another stretch of muted growth. A wide range of risks threaten to derail the recovery.”
The report noted that commodity exporters such as Brazil, Russia, Nigeria and others suffered some of the largest downward growth revisions. Governments have been forced to cut spending due to the price collapse in metals, oil, energy and other commodities.
Weakening currencies in numerous countries, especially emerging nations, also are forcing central banks to raise interest rates to curb inflation. And higher borrowing costs are weighing on investment and putting many company balance sheets deep into the red.
The bank also cut its forecast for the world’s largest economy, America. Citing a wounded energy sector, the strong US dollar and anemic international demand, the bank lowered its 2016 GDP forecast from 2.7% to only 1.9%. This came as a surprise to many analysts, but shouldn’t have, given that GDP was much weaker than expected in the 1Q at 0.8%.
Japan, the world’s third-largest economy, isn’t gaining traction despite the Bank of Japan’s move into negative interest rate territory. The World Bank said Japan will grow by only 0.5% this year, nearly a full percentage point lower than it forecasted in January.
The bank fears emerging market growth could decelerate further. The one notable exception was China, the world’s second largest economy, where the bank left its growth forecast unchanged at 6.7% – only because Beijing continues to juice output with more and more stimulus. But the bank warned of building financial risks that could trigger a deep slide in growth in China at some point.
The World Bank economists cited growing political risks as another threat to future growth. A U.K. exit from the European Union could severely dampen investment as uncertainty weighs on markets, they said.
Likewise, governments from Brazil to South Africa to Indonesia and others also are facing deepening political turbulence, on top of persistent risks from wars in the Middle East and geopolitical tensions in the South China Sea.
“If we have a major shock, it can translate into a very sharp slowdown for the global economy,” said Ayhan Kose, the chief author of the bank’s Global Economic Prospects report.
They also pointed to the uncertainty surrounding the US presidential election, which they fear may be suppressing global activity already, and could worsen depending on the outcome of the election. They point to the growing anti-trade rhetoric in the US and warn that such protectionist tendencies are not limited to the US.
Bank economists are also concerned that the Federal Reserve could tighten faster than markets expect, causing a jump in borrowing costs that could spark financial turmoil around the world. Volatility in capital flows also could flare up again if jittery investors pull out of emerging market equity, currency and bond markets, they warned.
For another look at the world economy, broken down by regions, let’s turn to a graphic from The Economist, the widely-followed London-based research and forecasting group.
The above forecast was issued at the beginning of this year and will be updated in the weeks just ahead. As you can see in the bottom left corner, The Economist forecasted 2016 global growth of 2.7% in January. But that was before the US economy registered growth of only 0.8% in the 1Q, far below expectations.
Clearly, The Economist’s updated forecast will be lower than the 2.7% shown above, most likely in-line with the World Bank’s latest global growth forecast of 2.4%, or even lower. Japan will certainly be revised lower, and several other regions, perhaps including the US, are likely to get a haircut as well.
The bottom line is that global growth is slowing. As discussed above, the World Bank is worried that things could get worse before they get better. This is yet another negative sign for the US and global equity markets.
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