World Bank warns brewing trade storm jeopardizes global economy

And the global slowdown is beginning as
government and corporate debt rise, especially among the poorest
countries, while mounting interest rates increase borrowing costs, the
bank said in its semi-annual Global Economic Prospects report.

The
report was markedly more pessimistic than a year ago — when the
outlook was for synchronized global growth — and peppered with
exhortations to take “urgent,” “imperative” or “critical” action.

“Risks are rising,” senior World Bank
economist Ayhan Kose told AFP. “The global economy is going through a
difficult period. Skies are darkening and we see the global economy
slowing.”

Growth of the world economy is expected to
slow to 2.9 percent this year, and 2.8 percent in 2020, slightly below
the previous forecast, and the estimates for nearly all regions and
countries were downgraded.

At the center of the turmoil, US economic
growth is expected to slow this year by four tenths of a point, falling
to 2.5 percent down from 2.9 percent in 2018, and to slow even further
next year to 1.7 percent.

China’s economy also is slowing amid the trade dispute, and growth should slip to 6.2 percent this year and next.

Kose, who heads the World Bank’s Development
Prospects Group — which twice a year produces the global economic
forecasts — said he hoped for a resolution but meanwhile urged
governments to prepare for a difficult road ahead.

“Global growth is still robust but whether a
storm will hit or it will clear highly depends on how policymakers are
going to react,” he said.

Trade war damage

Though the bank still sees a low probability
of recession in the United States, even a small slowdown has an outsize
effect. And if the United States and China slow by a full percentage
point, it will cut global growth by nearly the same amount, with dire
consequences for many countries.

“Trade tensions are already affecting activity around the world,” Kose said, and it could get worse.

The report sharply downgraded the growth
forecasts for key emerging market economies like Mexico, South Africa
and Russia, as well as for crisis-struck countries Turkey and Argentina.
So far India and Indonesia have escaped that fate.

But the United States and China together account for about a third of global GDP and 20 percent of global trade.

“How they resolve their differences is going to be very important how global economy is going to shape this year,” said Kose.

Trade is an engine of growth and has been “a
driving force in terms of poverty reduction,” he said. “Our hope is that
these differences are going to be resolved.”

But the sharp decline in global equities
markets at the end of last year showed the uncertainty generated by the
trade conflict undermines business confidence and slows investment, Kose
said.

Looking at the data, “you definitely see that in 2018 manufacturing has slowed; (and) export orders have slowed.”

After rising in 2018, confidence is ebbing and “this is cause for concern.”

Policy buffers

With growing risks dominating the outlook, the
World Bank urged member countries to prepare themselves, with changes
in spending, investment and borrowing to establish “policy buffers”
against coming headwinds.

“The sense of urgency has to be there,” Kose
said. “Ultimately a robust policy framework is the most important
insurance when you have a slowing economy and rising risks.”

That is especially true with rising debt levels, as interest rates are moving higher.

The report highlights with concern a big jump
in borrowing by the poorest nations, debt that increasingly coming from
lenders that unlike the World Bank do not provide concessional terms.