Cheap oil will weigh on global economy, says World Bank

Oil Drums

Global growth will slow this year as oil exporters in the developing world struggle to cope with lower energy prices, the World Bank has said in its half-yearly economic health check.

The benefit of cheaper oil pricesfor Europe, Japan and other oil importing nations, which has sustained their growth through 2015 and 2016, has failed to offset a slowdown in parts of Africa, Asia and South America that depend on selling energy to sustain their incomes.

In one of the gloomiest predictions by an international forecaster, the bank said the effect of the collapse in oil income on developing countries would restrict global growth to 2.4% this year, well down on its January forecast of 2.9%.

In the UK the growth rate will be restricted to 2% this year and 2.1% in 2017 and in 2018. The US will also stabilise at about 2% annually for the next couple of years, while the eurozone will expand at a more modest 1.6% in 2016 and in 2017 before slipping to 1.5% in 2018.

The tumbling price of metals and food on world markets last year hit emerging and developing economies without triggering a significant rise in spending by richer countries.

The Washington-based bank, which lends more than £25bn a year to developing countries, said weaker global trade, a downturn in private and public investment and a slump in manufacturing added to the woes of economies that have become dependent on high oil prices to bolster growth.

Commodity prices have recovered since the spring with oil, steel, aluminium and zinc gaining ground. The oil price, which fell below $27 (£18) a barrel in January, has exceeded $50 in recent weeks, while zinc has recovered from $1,500 a tonne to more than $2,000 a tonne. But the bank said prices remained low compared with market expectations and would continue to hit investment and government spending across the developing world for the rest of this year.

Jim Yong Kim, the bank’s president, has warned Britons that a vote to leave the EU would further undermine confidence in global trade and hit growth, rebounding on economies such as the UK that rely on exports to drive growth.

In its report, the World Bank echoed a warning by the International Monetary Fund in April, that the downside risks to growth were growing as richer countries struggled to free themselves from the debts associated with the financial crisis and poorer states struggled to cope with low commodity prices.

Kaushik Basu, the World Bank’s chief economist, said: “Against this backdrop of weak growth, pronounced risks, and limited policy space, policymakers in emerging and developing economies should put a premium on enacting reforms, which, even if they seem difficult in the short run, foster stronger growth in the medium and the long run.

“Among these measures, efforts to invest in infrastructure and education, health and other human skills and wellbeing, as well as initiatives to promote economic diversification and liberalise trade, will boost growth prospects and improve standards of living. The international community has an important role to play in the pursuit of these goals.”

About half the downward revision in global growth came from emerging economies, which are expected to grow by 3.5% compared with a growth rate of 1.7% in advanced economies. It said richer countries had failed to capitalise on lower commodity prices and faced an equally uncertain year.

“Investment continues to be soft amid weaker growth prospects and elevated policy uncertainty, while export growth has slowed reflecting subdued external demand. Despite an expected boost from lower energy prices, and the ongoing improvement in labour markets, growth is projected to level off in 2016 rather than accelerate,” the report said.

The IMF said in April that GDP growth would edge up slightly this year to 3.2%, from 3.1% in 2015, which many analysts said was an overoptimistic estimate.

Powered by article was written by Phillip Inman Economics correspondent, for The Guardian on Tuesday 7th June 2016 21.01 Europe/London © Guardian News and Media Limited 2010


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