World Bank lowers forecast for 2003

The World Bank cut its forecast for world economic growth to 2.5 percent for next year from 3.6 percent projected six months ago, and said that the expansion remains vulnerable to shrinking investment and rising oil prices.

The revision shows how optimism early last year receded as the likelihood of a US war with Iraq grew, corporate accounting scandals spread and emerging markets such as Brazil and Turkey struggled to stay solvent.

"The recovery has been much more hesitant and uneven than we had expected," said Nicholas Stern, the World Bank's chief economist, at a news conference to release its Global Economic Prospects. "It's still a recovery, but it's a fragile recovery."

The outlook, while an improvement over the 1.7 percent forecast for this year, is constrained by the richest countries, the bank said. Policy makers have little room to cut interest rates and taxes or increase government spending to boost growth, said bank economist Uri Dadush. Growth this year and last has been the slowest in a decade.

"We are reaching the limits of what policy stimulus can do," Dadush said.

A new US tax cut, as the administration of President George W. Bush has proposed, may eliminate "room to maneuver down the road," he said.

The bank said in yesterday's report that the US economy will grow 2.6 percent next year after 2.3 percent this year, and Japan will grow 0.8 percent after zero growth this year. The countries that share the euro currency will see their economy expand 1.8 percent next year from 0.8 percent this year, the bank said.

"Uncertainty is keeping investors cautious, if not skittish, throughout the world," the report said. Oil prices will probably stay near US$23 a barrel in 2003, the bank said.

"Crude oil prices are expected to remain firm in early 2003 because of the potential for military action against Iraq and tight supply conditions," the report said.

A US war against Iraq, should that occur, may push prices to US$40 a barrel as happened during the Persian Gulf War in 1990, the report said. It did note that spare capacity is greater than it was then and Iraq's share of world production is much smaller. Prices will probably fall to US$19 a barrel by 2005, the bank said.

Latin America's economy will probably expand 1.8 percent next year after its first regional contraction in two decades this year.

"We believe the worst is over," said the bank's chief Latin American economist, Guillermo Perry. The economic collapse in Argentina "has basically bottomed out," he said.

The outlook depends on Brazil avoiding a default such as Argentina's, he said. Still, per capita economic growth in Latin America is set to be only 0.3 percent a year through 2005, the slowest rate in the world.

And the number of those in dire poverty in Africa is unlikely to fall during the next dozen years because of AIDS, corruption and falling commodity prices. South Asian and East Asian nations such as India and South Korea will be the best performers next year and in the future, the bank predicts.