New Year’s optimism on financial markets has quickly been curbed by the World Bank, which on Tuesday cut its global growth forecast for 2013.
“Four years after the onset of the global financial crisis, the worst appears to be over. However, the global economy remains fragile, as high-income countries continue to suffer from volatility and slow growth,” the Washington-based institution said in its latest “Global Economic Prospects” report.
Warning of potential downside risks in the eurozone, U.S. debt issues, declining Chinese investment or a disruption to oil supplies, the bank expects the world economy to grow by 2.4 percent in 2013, down from its June forecast of 3 percent.
The bank noted that developing countries recorded among their slowest economic growth rates of the past decade in 2012, with gross domestic product estimated to have expanded by 5.1 percent.
The troubled eurozone is not expected to see positive growth until 2014, with its GDP forecasted to contract by 0.1 percent this year due to its sovereign debt crisis.
In the East Asia and Pacific region, growth slowed to an estimated 7.5 percent in 2012, down from 8.3 percent the previous year, “largely due to weak external demand and policy actions in China to contain inflation,” the bank said.
China posted its weakest growth rate since 1999, with its economic expansion dropping to 7.9 percent in 2012 compared to 9.3 percent a year earlier. However, the world’s second-biggest economy is expected to bounce back this year by posting 8.4 percent growth.
Despite market enthusiasm for “Abenomics,” the bank cut its forecast for Japan nearly in half, to just 0.8 percent growth in 2013 compared to its previous estimate of 1.5 percent. The slide was blamed by the bank “in part because of political tension with China over the sovereignty of islands in the region.”
“Overall, the global economic environment remains fragile and prone to further disappointment, although the balance of risks is now less skewed to the downside than it has been in recent years,” the bank said in its twice-yearly report.
The global recovery is not expected to arrive until the second quarter of 2013, gradually strengthening to a 3.1 percent expansion in 2014. In the Asia-Pacific region, growth is seen picking up to 7.9 percent this year, aided by improved domestic demand and global trade.
Economic gravity shift
Weaker global growth since the global financial crisis has accelerated the shift of economic gravity toward Asia, according to a separate report released on Thursday by PricewaterhouseCoopers (PwC).
According to the accounting group, emerging economies including China and India will expand much more rapidly than the G7 [Britain, Canada, France, Germany, Italy, Japan and the United States] over the next four decades “providing they can overcome major challenges presently hindering their growth.”
PwC partner and economist Jeremy Thorpe said in a statement: "In the short term, the global financial crisis has hit the G7 much harder than the E7 [Brazil, China, India, Indonesia, Mexico, Russia and Turkey]. It has also caused downward revisions in the estimates of longer term trend growth in the G7 – particularly the economies in Europe and the US which relied heavily on public and private borrowing to drive growth.
"In terms of PPP, the E7 could overtake the G7 before 2020. We expect that, by 2050, China, the US and India will be the largest economies, by far, with a big gap to Brazil in fourth place. Malaysia has considerable growth potential too."
However, the report noted risks including social tensions driven by rising income inequalities in China, high fiscal deficits in Brazil and India, and Russia’s overreliance on oil and gas revenues.
Similar to a recent forecast by the Centre for Economics and Business Research, Australia is expected to lose ground, with PwC estimating it could drop out of the top 20 by 2050, largely due to demographics.
End of fear?
However, at least one economist, RBS Morgans’ Michael Knox, sees a somewhat rosier outlook.
After suffering two international banking crises in the past five years, Knox has forecast that the world will return to normality in 2013 due to the “enormous liquidity being provided by central banks”.
In a recent report by the Australian economist, precautionary assets such as gold and U.S. treasury bonds will be sold and the proceeds directed to the rising equities market. Investors will be living in the world characterized by “the end of fear.”