IMF Cuts Global Growth Forecast – With U.S, Lone Bright Spot

Will we drag the rest of the world along — or, will they drag us down?

(Bloomberg) — The World Bank cut its forecast for global growth this year, as an improving U.S. economy and low fuel prices fail to offset disappointing results from Europe to China.

The world economy will expand 3 percent in 2015, down from a projection of 3.4 percent in June, according to the lender’s semiannual Global Economic Prospects report, released today in Washington.

The report adds to signs of a growing disparity between the U.S. and other major economies while tempering any optimism that a plunge in oil prices will boost output. Risks to the global recovery are “significant and tilted to the downside,” with dangers including a spike in financial volatility, intensifying geopolitical tensions and prolonged stagnation in the euro region or Japan.

“The global economy today is much larger than what it used to be, so it’s a case of a larger train being pulled by a single engine, the American one,” World Bank Chief Economist Kaushik Basu told reporters on a conference call. “This does not make for a rosy outlook for the world.”

The Washington-based lender upgraded its forecast for U.S. growth to 3.2 percent this year from a 3 percent estimate given in June. It reduced its projections for the euro area and Japan, citing lingering effects from the financial crisis and “structural bottlenecks.” It also cut its forecast for China, saying the world’s second-biggest economy is undergoing a “managed slowdown.”

IMF Forecast

The World Bank is the latest institution to lower its global estimate amid a recovery that has repeatedly disappointed policy makers. The International Monetary Fund trimmed its 2015 outlook in October to 3.8 percent, citing weak demand and residual debt from the financial crisis. The IMF plans to update its global forecast next week.

The 19-nation euro area is projected by the World Bank to grow 1.1 percent in 2015, down from a June estimate of 1.8 percent. China will expand 7.1 percent, down from the 7.2 percent pace the bank projected in October and a 7.5 percent estimate in June. Japan will expand at a 1.2 percent clip, down from the 1.3 percent projected in June, according to the bank.

It also cut its forecast for global growth in 2016 to 3.3 percent from 3.5 percent.

The bank sees average oil prices falling 32 percent this year, a decline that’s historically associated with a boost to global GDP of about 0.5 percent. Yet the impact on growth may be smaller in 2015 and 2016 because of other headwinds including weak confidence that encourages saving rather than spending, and a “significant” income shift from oil-producing countries to those that are net consumers, the World Bank said.

“It is as challenging a moment as it gets for economic forecasting,” Basu said. “While lower oil prices are good overall for the global economy, the process of falling creates uncertainty, winners and losers.”

To contact the reporter on this story: Andrew Mayeda in Ottawa at amayeda@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net Scott Lanman, Alister Bull

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