Jan 15, 2015

    World Bank sees slower growth for global economy

    THE World Bank has said that the global economy is likely to grow at a slower pace than it previously expected, even with lower oil prices providing some lift.

    In its Global Economic Prospects report out yesterday, the World Bank said that the global economy is likely to expand by a modest 3 per cent this year.

    While this is faster than the 2.6 per cent growth registered last year, it is slower than the 3.4 per cent expansion the bank had initially forecast for this year.

    "Several major forces are driving the global outlook: soft commodity prices, persistently low interest rates but increasingly divergent monetary policies across major economies, and weak world trade," the report said.

    The sharp decline in oil prices since mid last year will support global activity and help offset some of the headwinds to growth in oil-importing developing economies, it noted.

    "However, it will dampen growth prospects for oil-exporting countries, with significant regional repercussions."

    Oil prices have crashed from above US$100 (S$134) a barrel to around US$45 since the middle of last year. Societe Generale and Bank of America have said that the United States benchmark crude is on the way to US$40 soon.

    In fact, the rout may continue to US$35 in the "near term", because both oil supply and demand will have a delayed reaction to falling prices, Mr Francisco Blanch, head of commodities research at Bank of America in New York, said in a report last Tuesday.

    The World Bank noted in its outlook that soft oil prices offer a window of opportunity to implement subsidy and energy tax reforms in oil-importing countries.

    This would give them more fiscal resources which could be used for "better-targeted pro-poor spending or investment".

    On the flip side, sustained low prices "could severely undermine fiscal resources and external balances in several already-fragile oil-exporting economies in the Middle East, Europe and Central Asia and Latin America", the World Bank added.

    Slowing growth across large oil-exporting economies, including Russia, will have important regional repercussions too.

    And oil is not the only risk factor the world has to worry about.

    If the euro zone or Japan slips into a prolonged period of stagnation or deflation, global trade could weaken even further, the World Bank warned.

    Although it is a low-probability event given China's substantial policy buffers, a sharper decline in growth could also trigger "a disorderly unwinding of financial vulnerabilities" in the country that would have considerable implications for the global economy, it added.

    "Should growth slow abruptly, or credit conditions tighten sharply, a self-reinforcing cycle of weakening growth and deteriorating credit quality could ensue."