The World Bank on Tuesday pared back its global growth estimate for this year, but uncertainty about the economic policies of US president-elect Donald Trump is clouding the outlook.
“We need to pay attention. All eyes are on US policymakers and how they will formulate their policies,” said Ayhan Kose, main author of the World Bank’s global forecast. “What happens in the United States does not stay in the United States.”
In the semi-annual Global Economic Prospects report, the World Bank lowered the estimate for global growth this year one-tenth from the June forecast, to 2.7 percent compared with 2.3 percent growth seen last year.
The World Bank maintained its US forecast at 2.2 percent following a sluggish 1.6 percent last year.
However, those estimates could go much higher. Even the table in the report displaying the forecasts for the major regions and economies comes with a footnote warning about the uncertainty: “The US forecasts do not incorporate the effect of policy proposals by the new US administration, as their overall scope and ultimate form are still uncertain.”
Kose said it is simply too soon to draw any conclusions, however a simulation showed the individual and corporate tax cuts that Trump discussed during the campaign could on their own add three-tenths to the US growth rate this year, and more than double that next year.
Infrastructure spending could have an even larger impact.
“These are significant increases,” he said. “A healthy US economy is good for the rest of the world,” since an increase in US growth of one full percentage point could boost advanced economies by eight-tenths after a year and emerging markets by six-tenths.
So global growth potentially could rise another tenth this year to 2.8 percent and get a three-tenths boost next year, he said.
WAITING FOR SPECIFICS
However, he was quick to stress the caveats to this estimated impact: It will depend on the timing of the tax cuts, how they impact inflation and how the US Federal Reserve reacts.
The same is true for other proposals like big spending on infrastructure, which would have a more direct impact on growth, but could exacerbate an already tight labor market, which also could fuel inflation.
The US central bank has cautioned that spending that fuels inflation could require more and faster increases in the benchmark lending rate.
Higher interest rates in turn would tend to slow economic growth.
Kose said the rising threat of protectionism in advanced economies also remains a concern and that uncertainty “is a challenge to businesses in the US and abroad.”
After a pretty bad year, Kose said the world economy is poised for a recovery, especially with major commodity exporters returning to growth after recessions, including Russia, Brazil and Argentina.
The eurozone is expect to grow 1.5 percent this year — the same as in the June forecast — and 1.4 percent next year, after 1.6 percent GDP last year.
Japan’s growth is forecast at 0.9 percent and 0.8 percent for this year and next year, which is a half-point better than the June estimate.
The China forecasts are unchanged, with growth expected to slow to 6.5 percent this year and 6.3 percent next, which Kose called “a healthy slowdown.”
“They have done a real competent job so far slowing down the economy” from double-digit rates, he said.
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