This interactive map reveals which nations’ stock exchanges are most exposed to the ‘carbon bubble’
International Monetary Fund warns on the effects of budget spending wrangles on a slowing US economy
America’s budget wrangling is holding back recovery in the world’s largest economy, according to a leaked draft of forecasts from the International Monetary Fund that coincided with data showing a dip in consumer confidence and weaker spending in the nation’s shopping malls.
Official figures from Washington showed that retail sales in March dipped by 0.4% in March – worse than Wall Street had been anticipating and the second monthly fall since payroll taxes and income tax rose at the start of 2013.
Chris Williamson, economist at Markit, said: “This weakness is possibly linked to increased payroll and income tax hikes which took effect at the start of the year, and will inevitably add to worries that the US economy is slowing as we move into the spring as automatic budget spending cuts come into force. With this in mind, the Fed will be more cautious about sending signals that it is preparing to ease back on policy stimulus.”
Meanwhile, the monthly snapshot of sentiment conducted by Michigan university showed consumer confidence dropped to its lowest in nine months.
The downbeat news came as the Bloomberg news agency reported that the International Monetary Fund would trim its growth forecast for the US in next week’s half-yearly World Economic Outlook.
Bloomberg said a leaked draft of the WEO showed that growth in the world’s biggest economy would be 1.7% in 2013, down from 2% in January when the IMF last updated its predictions.
The report said automatic cuts as part of the deal between the White House and Congress to tackle America’s budget deficit were the reason for the lower forecast for US growth this year. Action by Tokyo to combat inflation has led to the Fund increasing its estimate of Japanese growth in 2013 from 1.2% to 1.5%, but there has been no change in its forecast of a 0.2% contraction in the eurozone economy. The forecasts may be updated before their official release next Tuesday, but the draft leaked to Bloomberg has the global economy expanding by 3.4% in 2013, down from 3.5% in January.
New Bank of Japan governor seeks to end long spell of deflation which has hindered investment and economic growth
The Japanese central bank has said it will massively expand the country’s money supply to spur inflation as it strives to get the world’s third-largest economy out of its slump.
The Bank of Japan (BoJ) on Thursday vowed to achieve a 2% inflation target at “the earliest possible time”.
To do so, the central bank has launched “a new phase of monetary easing both in terms of quantity and quality” that will double the money supply, it said in a statement.
The new BoJ governor, Haruhiko Kuroda, has vowed to meet the inflation target within two years, heeding demands from the prime minister, Shinzo Abe, to once and for all end a long spell of deflation which has hindered investment and economic growth.
Abe’s government, which took power late last year, accused the previous central bank governor, Masaaki Shirakawa, of balking at undertaking bold enough monetary easing to get the economy back on track. The steps announced on Thursday under the first policy meeting chaired by Kuroda were in line with expectations and are likely to reassure jittery financial markets of Japan’s resolve to push ahead with its “reflationary” strategy.
The announcement pulled the Nikkei 225 stock average out of the red and sent the yen lower against the US dollar.
The BoJ will conduct money market operations to increase the monetary base by about ¥60tn to ¥70tn (£420bn to £490bn) a year. At the same time it plans to increase purchases of Japanese government bonds to total ¥50tn a year to encourage interest rates to decline, which it hopes will facilitate more lending.
The central bank is also extending the average remaining maturity of the bonds it purchases from three years to an average of seven years. Meanwhile, bonds with all maturities up to 40 years will be eligible for purchase.
As expected, the bank also extended the range of assets it can purchase, to include more risky real estate investment trusts and exchange-traded funds.
As part of the new strategy, the BoJ will end its current asset-purchasing programme, absorbing it into the future purchases of bonds, it said.
Answering concerns that the stimulus programme would further raise Japan’s public debt, the statement said that the government bond purchases would be “executed for the purpose of conducting monetary policy and not for the purpose of financing fiscal deficits”.
The BoJ will “examine both upside and downside risks to economic activity and prices and make adjustments as appropriate”, it said.
As communists once did, today’s capitalists blame any failures on their system being ‘impurely’ applied
The Christmas issue of the Spectator ran an editorial entitled “Why 2012 was the best year ever“. It argued against the perception that we live in “a dangerous, cruel world where things are bad and getting worse”. Here is the opening paragraph: “It may not feel like it, but 2012 has been the greatest year in the history of the world. That sounds like an extravagant claim, but it is borne out by evidence. Never has there been less hunger, less disease or more prosperity. The west remains in the economic doldrums, but most developing countries are charging ahead, and people are being lifted out of poverty at the fastest rate ever recorded. The death toll inflicted by war and natural disasters is also mercifully low. We are living in a golden age.”
The same idea has been developed systematically in a number of bestsellers, from Matt Ridley’s Rational Optimist to Steven Pinker’s The Better Angels of Our Nature. There is also a more down-to-earth version that one often hears in the media, especially those of non-European countries: crisis, what crisis? Look at the so-called Bric countries of Brazil, Russia, India and China, or at Poland, South Korea, Singapore, Peru, even many sub-Saharan African states – they are all progressing. The losers are western Europe and, up to a point, the US, so we are not dealing with a global crisis, but simply with the shift of progress away from the west. Is a potent symbol of this shift not the fact that, recently, many people from Portugal, a country in deep crisis, are returning to Mozambique and Angola, ex-colonies of Portugal, but this time as economic immigrants, not as colonisers?
Even with regard to human rights: is the situation in China and Russia now not better than it was 50 years ago? Describing the ongoing crisis as a global phenomenon, the story goes, is a typical Eurocentrist view coming from leftists who usually pride themselves on their anti-Eurocentrism. Our “global crisis” is in fact a mere local blip in a larger story of overall progress.
But we should restrain our joy. The question to be raised is: if Europe alone is in gradual decay, what is replacing its hegemony? The answer is: “capitalism with Asian values” – which, of course, has nothing to do with Asian people and everything to do with the clear and present tendency of contemporary capitalism to limit or even suspend democracy.
This tendency in no way contradicts the much-celebrated progress of humanity – it is its immanent feature. All radical thinkers, from Marx to intelligent conservatives, were obsessed by the question: what is the price of progress? Marx was fascinated by capitalism, by the unheard-of productivity it unleashed; but he insisted this success engenders antagonisms. We should do the same today: keep in view the dark underside of global capitalism that is fomenting revolts.
People rebel not when things are really bad, but when their expectations are disappointed. The French revolution occurred only once the king and the nobles were losing their hold on power; the 1956 anti-communist revolt in Hungary exploded after Imre Nagy had already been a prime minister for two years, after (relatively) free debates among intellectuals; people rebelled in Egypt in 2011 because there was some economic progress under Mubarak, giving rise to a class of educated young people who participated in the universal digital culture. And this is why the Chinese Communists are right to panic: because, on average, people are now living better than 40 years ago – and the social antagonisms (between the newly rich and the rest) are exploding, and expectations are much higher.
That’s the problem with development and progress: they are always uneven, they give birth to new instabilities and antagonisms, they generate new expectations that cannot be met. In Egypt just prior to the Arab spring, the majority lived a little better than before, but the standards by which they measured their (dis)satisfaction were much higher.
In order not to miss this link between progress and instability, one should always focus on how what first appears as an incomplete realisation of a social project signals its immanent limitation. There is a story (apocryphal, maybe) about the left-Keynesian economist John Galbraith: before a trip to the USSR in the late 1950s, he wrote to his anti-communist friend Sidney Hook: “Don’t worry, I will not be seduced by the Soviets and return home claiming they have socialism!” Hook answered him promptly: “But that’s what worries me – that you will return claiming USSR is not socialist!” What Hook feared was the naive defence of the purity of the concept: if things go wrong with building a socialist society, this does not invalidate the idea itself, it simply means we didn’t implement it properly. Do we not detect the same naivety in today’s market fundamentalists?
When, during a recent TV debate in France, the French philosopher and economist Guy Sorman claimed democracy and capitalism necessarily go together, I couldn’t resist asking him the obvious question: “But what about China?” He snapped back: “In China there is no capitalism!” For the fanatically pro-capitalist Sorman, if a country is non-democratic, it is not truly capitalist, in exactly the same way that for a democratic communist, Stalinism was simply not an authentic form of communism.
This is how today’s apologists for the market, in an unheard-of ideological kidnapping, explain the crisis of 2008: it was not the failure of the free market that caused it, but the excessive state regulation; the fact that our market economy was not a true one, but was instead in the clutches of the welfare state. When we dismiss the failures of market capitalism as accidental mishaps, we end up in a naive “progress-ism” that sees the solution as a more “authentic” and pure application of a notion, and thus tries to put out the fire by pouring oil on it.
Institute for Fiscal Studies warns £64bn deficit needs more than public spending cuts – tax rises of £10bn-12bn needed too
Britain’s leading experts on public finances have warned of hefty tax increases in the first budget after the 2015 election as the next government seeks to repair a £64bn deficit caused by a stuttering economy.
The Institute for Fiscal Studies said tax rises of £10bn-12bn might be needed in the next parliament to put deficit reduction back on track and to avoid “eye-watering” cuts in some Whitehall departments that would reduce spending by a third in inflation-adjusted terms between 2010 and 2018.
Paul Johnson, the thinktank’s director, said it was not impossible for the government to achieve its deficit reduction target entirely by cutting departmental spending but it would be “very, very difficult indeed”.
“I would be very surprised if it [the adjustment] all came through public spending. If I was a betting man I would say there will be a combination of spending cuts, tax increases and a delay in reaching the fiscal objectives.”
The IFS said 75% of deficit cuts in the current parliament had come through spending cuts and the rest from tax increases. If the next government continued with that approach, it would need tax rises of £10-12bn, equivalent to 2.5p to 3p on the basic rate of income tax. In the past 30 years, tax rises have averaged £7.5bn in the first budget after an election.
Johnson said the need to continue the austerity programme into the next parliament had been caused by George Osborne’s decision to allow borrowing to rise while the economy has moved sideways over the past two years, rather than tighten policy further.
That decision was praised on Wednesday by the Organisation for Economic Cooperation and Development in its annual survey of Britain, which said a more modest pace of deficit reduction was warranted given the poor performance of the economy.
Admitting it had over-estimated the strength of Britain’s recovery from its longest and deepest post-war recession, the OECD said a “flexible approach” to budget cuts would be called for if fears of a triple-dip recession materialised.
“The fiscal stance [the strategy to cut Britain's record peacetime budget deficit] remains appropriate. However, if growth significantly underperforms expectations over the coming months, the flexibility of the fiscal framework should be utilised.” Britain is one quarter of negative growth away from entering a triple-dip recession after the economy shrank by 0.3% in the last three months of 2012.
The OECD said the Bank of England should take the lead in stimulating the economy, but that Osborne had won himself enough credibility to slow up the pace of deficit reduction if that was warranted by slower than expected growth.
Angel Gurría, OECD secretary general, said the government needed to do more to protect the poor from budget cuts and to encourage people back into work. “Fiscal consolidation needs to be embedded in a comprehensive package that also promotes growth. Further structural reforms are key to a stronger, more inclusive and prosperous Britain.”
The IFS said it was more likely than not that underlying borrowing would rise this year, but Osborne said the OECD report showed Britain was “on the right track”.
Rachel Reeves, shadow chief secretary to the Treasury, said: “The IFS report shows how badly the government’s plan has failed. By choking off the recovery the chancellor is now borrowing billions more than he planned as the costs of economic failure mount. This economic failure is why George Osborne is now being forced to find further spending cuts and tax rises.”
The IFS said the government decision to ringfence spending on the NHS, international development and part of the schools’ budget had resulted in other departments – such as the Home Office and Justice – facing real cuts of 20% in the current spending round.
A continuation of the ringfencing until 2018 would result in unprotected budgets being cut by 33% while public sector employment would be 1.2m lower than in 2010.
The IFS said the total was 300,000 higher than expected by the independent Office for Budget Responsibility and that avoiding such big headcount reductions would require tax increases or deeper cuts in welfare spending. In 2013-14 those in work would gain from tax cuts while those not employed would lose from benefit cuts. Families with children would see the biggest cuts in benefits over the current parliament.
Johnson said: “As economic performance and forecasts have worsened the chancellor has followed a dual strategy. He is allowing borrowing to increase substantially in this parliament – allowing the automatic stabilisers to work – whilst promising another dramatic dose of public spending cuts in the next parliament.”
Timothy Garton Ash raises an important question (Come on, India! Show us freedom can triumph, 31 January) but poses it badly by exaggerating how free Indians are. Yes, the metropolitan elite can speak and write with reasonable freedom and this is important. And yes, according to the constitution everyone should enjoy these freedoms. But for people who are neither rich nor well-connected this can seem irrelevant.
The reality, certainly in much of central India, is that landlords and employers behave as petty tyrants, confident that the newspapers, which depend on them for advertising, will not report abuses and that the local judiciary, composed of friends and relatives, would protect them in the unlikely event of a sacked employee, evicted smallholder or victim of violence trying to obtain justice. Privatisation is unlikely to tackle these problems as private businessmen and landlords are key culprits. It is true the police often do their bidding, but not quite as reliably as the private armies which larger businesses employ.
As petty tyranny breeds incompetent management and low pay makes for the inefficient use of labour, it seems plausible that it is precisely the lack of freedom and poor human rights which hold back the Indian economy. The question is then why a lack of freedom appears to be less damaging in China.
• Timothy Garton Ash makes several valid points, but also misleads. His comparisons of India and China omit the fact that economic inequality in China greatly exceeds that of India. He appears not to know that the current Indian government, in its first term (2004-09), spent over $57bn on poverty programmes – greatly in excess of any previous government, or of the Chinese. And he is wrong about Indian politicians buying the votes of the poor. Even illiterate voters are too canny to be duped, and they have thrown out the more moneyed parties at state and national elections on a majority of occasions since the late 70s.
• What a desperate series of excuses Timothy Garton Ash pours out to “explain” why India lags so far behind China in development, with one-third of the per-capita income, terrible poverty etc. Religion, ossifying British bureaucracy, huge diversity etc are hamstrings, he pleads. But China has just as many ethnic groups, had a stultifying imperial bureaucracy and major religious backwardness etc.
The difference is, it tore them all up and started again: it was called a revolution, and established a planned economy or, to be brief, socialism. The decades using major capitalist investment for economic propulsion are not an error, though it has brought its own dangers, not least importing western attitudes and dire consumerism, and weakening the Leninist side of what Garton Ash wants to describe as “Leninist capitalism” (a devious non-Marxist term). But China remains a socialist state, running capitalism as a technical and economic mechanism but only under an overall political state plan. This is far more controlled than the chase-the-short-term-profit laissez-faire of untrammelled capital (euphemistically called “democracy”) and gets the results – in just 30 years at that.
The current focus is on pushing investment towards the more undeveloped west side of the country, which is making huge strides in infrastructure and otherdevelopment, to draw living standards towards Shanghai and the rest of the eastern economic zones.
This state control is what has allowed the growth not only to do better than India but surge right past it.
• Timothy Garton Ash provides a timely reminder of the need for broader-based social development in the subcontinent but stops short of taking India’s government to task. The state in India is engaged in a curious strategy of allowing schools, hospitals and other government services to atrophy while dispensing huge sums via populist development programmes. How this strategy will play out is unclear, but in the meantime the poor are taking things into their own hands, and it is interesting that on the day of this article, a huge demonstration against manual scavenging reached its climax in Delhi.
Author of 2006 review speaks out on danger to economies as planet absorbs less carbon and is ‘on track’ for 4C rise
Lord Stern, author of the government-commissioned review on climate change that became the reference work for politicians and green campaigners, now says he underestimated the risks, and should have been more “blunt” about the threat posed to the economy by rising temperatures.
In an interview at the World Economic Forum in Davos, Stern, who is now a crossbench peer, said: “Looking back, I underestimated the risks. The planet and the atmosphere seem to be absorbing less carbon than we expected, and emissions are rising pretty strongly. Some of the effects are coming through more quickly than we thought then.”
The Stern review, published in 2006, pointed to a 75% chance that global temperatures would rise by between two and three degrees above the long-term average; he now believes we are “on track for something like four “. Had he known the way the situation would evolve, he says, “I think I would have been a bit more blunt. I would have been much more strong about the risks of a four- or five-degree rise.”
He said some countries, including China, had now started to grasp the seriousness of the risks, but governments should now act forcefully to shift their economies towards less energy-intensive, more environmentally sustainable technologies.
“This is potentially so dangerous that we have to act strongly. Do we want to play Russian roulette with two bullets or one? These risks for many people are existential.”
Stern said he backed the UK’s Climate Change Act, which commits the government to ambitious carbon reduction targets. But he called for increased investment in greening the economy, saying: “It’s a very exciting growth story.”
David Cameron made much of his environmental credentials before the 2010 election, travelling to the Arctic to highlight his commitment to tackling global warming. But the coalition’s commitment to green policies has recently been questioned, amid scepticism among Tory backbenchers about the benefits of wind power, and the chancellor’s enthusiasm for exploiting Britain’s shale gas reserves.
Stern’s comments came as Jim Yong Kim, the new president of the World Bank, also at Davos, gave a grave warning about the risk of conflicts over natural resources should the forecast of a four-degree global increase above the historical average prove accurate.
“There will be water and food fights everywhere,” Kim said as he pledged to make tackling climate change a priority of his five-year term.
Kim said action was needed to create a carbon market, eliminate fossil-fuel subsidies and “green” the world’s 100 megacities, which are responsible for 60 to 70% of global emissions.
He added that the 2012 droughts in the US, which pushed up the price of wheat and maize, had led to the world’s poor eating less. For the first time, the bank president said, extreme weather had been attributed to man-made climate change. “People are starting to connect the dots. If they start to forget, I am there to remind them.
“We have to find climate-friendly ways of encouraging economic growth. The good news is we think they exist”.
Kim said there would be no solution to climate change without private sector involvement and urged companies to seize the opportunity to make profits: “There is a lot of money to be made in building the technologies and bending the arc of climate change.”
Britain’s GDP forecast cut by 0.3, while global economy is expected to grow by 4.1% in 2013
The head of the International Monetary Fund, Christine Lagarde, said on Wednesday that 2013 would be a make-or-break year for the global economy, as the Washington-based institution trimmed its growth forecasts for the US, Britain and the eurozone.
In a keynote address at the World Economic Forum, Lagarde said the biggest challenge for the year ahead was keeping up the momentum for reform.
“I believe that if we continue to act, 2013 will be a defining year in terms of finally getting beyond the crisis,” the IMF managing director said. “But more than that, I believe we are standing in the antechamber of a new global economy, marked by rapidly shifting circumstances and new modes of thinking.”
Lagarde was speaking hours after the IMF trimmed its growth forecast for the world economy in 2013, noting that the upturn was now expected to be more gradual than expected three months ago.
“We have avoided the collapse, let’s beware of relapse, it’s no time to relax,” Lagarde said. “2013 will be a make-or-break year.” The new global economy would be built on the principles of openness, inclusiveness and accountability.
Lagarde warned of the risks of climate change and of backsliding on necessary reforms of the financial sector, and admitted that policymakers – including the IMF – had underestimated the costs of inequality. Unless action was taken to combat global warming, the next generation would be “roasted, toasted, fried and grilled”.
“I believe that the economics profession and the policy community have downplayed inequality for too long,” Lagarde said. “Now all of us have a better understanding that a more equal distribution of income allows for more economic stability, more sustained economic growth, and healthier societies with stronger bonds of cohesion and trust.”
Lagarde said the financial sector hid too much activity in murky and dark corners, and put its own short-term gain ahead of supporting the real economy. She listed a series of risks, including a further dilution of capital and liquidity requirements, a failure to police shadow banks and derivatives, and compensation.
“Ultimately, again, this is all about accountability: we need a financial sector that is accountable to the real economy—one that adds value, not destroys it.”
In its updated World Economic Outlook, the IMF said 2013 was on course to be a better year for the global economy than 2012 but expressed concern about renewed eurozone problems or excessive action to cut the US budget deficit. “If crisis risks do not materialise and financial conditions continue to improve, global growth could be stronger than projected. However, downside risks remain significant, including renewed setbacks in the euro area and risks of excessive near-term fiscal consolidation in the United States. Policy action must urgently address these risks.”
The IMF said it expected the world economy to grow by 4.1% in 2013, up from 3.5% in 2012 but 0.1 points lower than forecast in October 2012. Instead of a small 0.1% increase in the eurozone economy in 2013, the IMF is now pencilling in a decline in gross domestic product of 0.2%. Spain and Italy will endure a second year of recession, while the two biggest countries of the single currency area – Germany and France – are expected to achieve growth of 0.6% and 0.3%.
“The euro area continues to pose a large downside risk to the global outlook. In particular, risks of prolonged stagnation in the euro area as a whole will rise if the momentum for reform is not maintained”, the IMF said.
The IMF has cut Britain’s growth forecast by 0.1 points to 1% in 2012 and by 0.3 points to 1.9% in 2014. The US is expected to be the fastest growing of the leading western economies in 2013 at 2%, and the IMF said it was vital a budget deal was agreed speedily.
Identifying the strategy for securing any changes to the UK’s relationship with the EU will be as important as determining what, if any, these changes should be (Report, 16 January). How one asks for things, after all, often determines what one gets. In this regard, the current strategy being touted looks hopelessly counter-productive. The premise is that, by threatening to veto treaty changes sought by other member states, the UK will have maximum leverage to secure the changes it wants. However, this veto exists only on paper.
The court of justice stated in its Pringle judgment last November that member states can set up treaties outside the EU framework and use EU institutions to run these. The only constraint is that these must not alter the “essential character” of the institutions. Faced with a threat of British veto on future fiscal integration, other member states would thus simply agree a new treaty managed by the EU institutions. This would be “EU” in everything but name. There would be no reason for it to take account of any British interests.
The terms of trade have therefore changed. A price no longer has to be paid by those wishing to push on with integration to those who previously could stop it. Rather, a price has to be paid by those who do not wish to participate to ensure they are not excluded on unfavourable terms.
• It is difficult to see how Britain, after leaving the EU, could possibly be sidelined. In macroeconomic terms, EU membership is virtually irrelevant for a member state that is large and not in the eurozone. Given the size of the EU budget, which is tiny, there is no reason why free trade and free capital movement cannot continue after “Brexit”.
Besides, the EU is becoming increasingly irrelevant in the global economy. When Britain joined the EEC – the forerunner of the EU – in 1975, the EEC was a trading block that accounted for 40% of global economic output. Today, it accounts for 25%. Within a decade, this figure is likely to be less than 15%. There may be many reasons why Britain should stay in the EU; fear of economic or political marginalisation cannot be one of them.
• Many benefits from EU membership are directly attributable to legislative change. Eric Deakins (Letters, 14 January) says much of this legislation would have appeared anyway. In fact, the UK was dragged kicking and screaming to accept equal pay, the working time directive, and many other social and labour rights.
The regulation on Registration, Evaluation, Authorisation and Restriction of Chemicals (Reach), entered into force on 1 June 2007, obliging UK manufacturers to meet common environmental standards. Changes in sewage processing, waste disposal and recycling were in direct response to EU law. Moreover, the whole point of single market legislation, including that concerning lead-free petrol, is that it is universally applied so we benefit not only from implementation and enforcement here, but throughout the European Economic Area.
• Simon Jenkins (No more talk of in or out. We should be thinking opt-outs, 16 January) appears remarkably confident in his assertions. Many of us, who reject the anti-European stances he backs, would prefer the UK to be part of the eurozone, making it work a lot better by pooling fiscal sovereignty, and also accepting the social chapter and other civilising measures which go to make up a truly free market; free, that is, of the neo-classical economics that are presently ruining the world.
He accuses “Brussels” of power-grabbing and corruption, but these operate in every economy because some people prefer to gain advantages by less than fair means. You only have to look at the wreck of the British economy to establish that.
Furthermore, we are not yet done with establishing peace in our small continent, since many of the Balkan countries have a long way to go. As Europeans, we bear a responsibility to help them get there, without treating them simply as a market opportunity, which, as you report elsewhere, is being driven by hedge funds in the case of Greece. Only a tough-minded EU can put a stop to such shenanigans and it needs some British muscle to do so. I
Chief says poor countries cannot rely on high-income nations to drag them along
The World Bank has warned developing countries that they would need to be able to cope with a weak recovery in the west as it predicted a tentative and uneven recovery from the financial crisis of four years ago.
Highlighting the risks from a relapse in the euro area and from the political in-fighting in the US over the budget, the bank said poor countries needed to build up their economic strength because they could not rely on high-income countries to drag them along.
“The economic recovery remains fragile and uncertain, clouding the prospect for rapid improvement and a return to more robust growth”, said World Bank president, Jim Yong Kim. “Developing countries have remained remarkably resilient thus far. But we can’t wait for a return to growth in the high income countries, so we have to continue to support developing countries in making investments in infrastructure, in health, in education. This will set the scene for the stronger growth that we know they can achieve in the future.”
The bank said that more than four years after the collapse of Lehman Brothers in September 2008 triggered the worst global economic downturn of the post-war era, the world economy continued to struggle. Developing countries had seen their growth rates fall, although they were still expanding more quickly than high-income countries, where activity had been dampened by the crisis in the eurozone and by the uncertainty caused by the threat of the US falling off the “fiscal cliff”.
In its annual Global Economic Prospects, the Bank said upside and downside risks to its forecasts were more balanced than a year ago, and there was a smaller chance of the downside risks materialising. The report said rich countries were still coping with the after effects of the slump and the need to deal with big budget deficits but that the outlook was for a gradual recovery.
“While headwinds from restructuring and fiscal consolidation will persist in high-income countries, these should become less intense allowing for a slow acceleration in growth over the next several years.”
For high income countries, the Bank said growth was again projected to be a “mediocre” 1.3% in 2013, but rising to 2% in 2014 and 2.3% in 2015. A further year of falling output is forecast for the eurozone, with growth of just 0.9% in 2014.
“Although the likelihood of a serious crisis of confidence in the euro area that would lead to a bloc-wide freezing up of financial markets has declined significantly, continued progress is needed to improve country-level finances, and enact plans to reinforce pan-European schemes for a banking union and sovereign rescue funds.”
The bank said that if the euro area failed to maintain the momentum for reform, some of the more vulnerable members could be frozen out of capital markets.
“In the US, solid progress towards outlining a credible medium-term fiscal consolidation plan that avoids periodic episodes of brinkmanship surrounding the debt ceiling, is needed. Policy uncertainty has already dampened growth. Should policymakers fail to agree such measures, a loss of confidence in the currency and an overall increase in market tensions could reduce US and global growth by 2.3% and 1.4% respectively.”
The report said many of the poorest countries of Africa continued to grow rapidly. Excluding South Africa, the region’s largest economy, GDP output expanded by 5.8% in 2012, with a third of countries in the region growing by at least 6%.