The World Bank just got more pessimistic about global growth

The World Bank has been warning of a worldwide economic slowdown for a while now, but its projections just t...

Posted: Jan 9, 2019 6:43 AM
Updated: Jan 9, 2019 6:43 AM

The World Bank has been warning of a worldwide economic slowdown for a while now, but its projections just took a turn for the worse.

In a 200-page report issued Tuesday, the international financial institution laid out evidence that emerging markets have been stagnating, as trade has contracted and financing conditions have worsened. The Bank knocked down its expectations for this year's global growth to 2.9% from its previous forecast of 3%. It also lowered its 2020 growth forecast to 2.8% from 2.9%.

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The World Bank blamed the downgrade on the global economy's more-sudden-than-expected deceleration since the institution's last forecast in June.

And the situation could deteriorate further — confirming Wall Street's concerns about next year being a difficult one for American companies with significant business abroad.

"Downside risks have become more acute," the Bank's report reads. "Disorderly financial market developments could disrupt activity in the affected economies and lead to contagion effects. Trade disputes could escalate or become more widespread, denting activity in the economies involved and leading to negative global spillovers."

The United States is still among the best performing economies in the world, but its growth streak could run out soon, as the effects of the tax cuts and government spending wear off, and the era of easy money fades further into the distance as the Federal Reserve raises interest rates. Although a recession isn't obviously around the corner, a volatile political environment and mounting corporate debt loads are a toxic cocktail.

"The policy mix in the United States will shift from expansionary to contractionary during the forecast horizon, with monetary, fiscal, and trade policies all expected to become a drag on activity within the next couple of years," the authors write. "In this context, relatively small negative shocks have the potential to abruptly end the current expansion."

Still, the implications of an economic crunch are probably worse for low-income countries, many of which haven't managed to raise per-capita incomes enough to keep closing the gap with the developed world. Although absolute poverty has been declining in places like India, progress has stalled in Sub-Saharan Africa, which the World Bank projects could hold as much as 87% of the planet's poor people by 2030.

In order to keep the global economy on an even keel, the bank recommends that countries invest more in developing their residents' skills, ease restrictions on investment, and reduce barriers to trade — rather than raise them, as the United States has recently done by imposing tariffs on 12% of its goods imports.

The World Bank is going through its own difficult transition, with President Jim Yong Kim unexpectedly resigning on Monday, three years ahead of schedule. President Donald Trump will now need to appoint a successor, since the United States is the bank's largest shareholder.

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