World Bank cuts global growth forecast in wake of falling oil price

14 Jan 15
The World Bank has revised down its outlook for the world economy in 2015 pointing to low oil prices, weak global trade, financial market volatility and the risk of prolonged stagnation and deflation in the eurozone and Japan.

By Judith Ugwumadu | 14 January 2015

The World Bank has revised down its outlook for the world economy in 2015 pointing to low oil prices, weak global trade, financial market volatility and the risk of prolonged stagnation and deflation in the eurozone and Japan. 

In its twice-yearly Global Economic Prospects forecast, the bank predicted that the economy would grow to 3% this year and 3.3% in 2016, as risks to the outlook remain tilted to the downside, due to four factors. This marked a slight downgrade from the 3.4% it forecast in June, but would still be stronger than last year’s 2.6% growth.

The bank warned that the global economy was still struggling to gain momentum as many high-income countries tackle the legacies of the global financial crisis and emerging economies become less dynamic than in the past.

Franziska Ohnsorge, lead author of the report, said: ‘Risks to the global economy are considerable. Countries with relatively more credible policy frameworks and reform-oriented government will be in a better position to navigate the challenges of 2015.’

It forecasted that, across high-income countries, growth would be 2.2% in 2015-17, up from 1.8% in 2014 because of gradually recovering labour markets, receding fiscal consolidation and still low financing costs.

In developing countries, growth is projected to rise from 4.4% last year to 4.8% in 2015. Despite the slight growth poorer countries still face significant policy challenges in an environment of weak global growth and considerable uncertainty. Progress on implementing structural reforms must be continued to boost long-term growth, the report stated. It added that the sharp decline in oil prices means that policymakers could implement subsidy and tax reforms to rebuild fiscal space.

Amongst large middle-income countries that will benefit from lower oil prices is India, where growth is expected to jump to 6.4% this year (from 5.6% in 2014), rising to 7% in 2016/17. In Brazil, Indonesia, South Africa and Turkey, the fall in oil prices will lower inflation and reduce current account deficits, a major source of vulnerability for many of these countries, the report stated.

But, sustained low oil prices would weaken activity in exporting countries, the report said. Russia’s economy, for instance, is projected to contract by 2.9% in 2015, getting barely back into positive territory in 2016 with growth expected at 0.1%.

World Bank group president Jim Yong Kim noted that: ‘In this uncertain economic environment, developing countries need to judiciously deploy their resources to support social programmes with a laser-like focus on the poor and undertake structural reforms that invest in people.

‘It’s also critical for countries to remove any unnecessary roadblocks for private sector investment. The private sector is by far the greatest source of jobs and that can lift hundreds of millions of people out of poverty.’

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