World Bank Forecasts Slower but Smoother Growth
Comment of the Day

June 14 2013

Commentary by David Fuller

World Bank Forecasts Slower but Smoother Growth

Here is the opening from this interesting article by Annie Lowrey for the NYT & IHT (may require subscription registration, PDF also provided
WASHINGTON - The world economy will face slower but less volatile growth in the coming months and years, the World Bank forecast on Wednesday, as dire risks from the financial crisis in Europe fade and emerging economies confront new challenges adapting to softer commodity prices and the prospect of rising interest rates.

"There's a growing recognition that this is not the aftereffect of the crisis," Andrew Burns, the lead author of the report, said in an interview. "It is a new normal."

All in all, the bank's economists forecast that the global economy will grow about 2.2 percent this year and 3 percent in 2014 in the latest periodic update to its Global Economic Prospects report. That is slightly weaker growth than the World Bank forecast in January.

The report's authors said they expected sluggish growth from high-income countries, with the euro area remaining weak but finally emerging from recession and Japan gaining some momentum from the government's aggressive fiscal and monetary measures after a decade of malaise and stagnation. The bank raised its estimate of 2013 growth for Japan to 1.4 percent from its earlier prediction of 0.8 percent.

The United States is expected to be relatively strong among the world's rich nations. Even so, the World Bank, which is responsible for encouraging development around the globe, anticipates that the American economy will grow only about 2 percent this year, in line with its performance over the last three years.

For emerging economies, conditions vary widely, the report said, but the picture is broadly good. Across large parts of Latin America, East Asia and sub-Saharan Africa, countries are growing close to their potential capacities, tied to factors like increases in productivity and the working-age population, and should expect little acceleration in the coming years, the report said.

David Fuller's view I think the World Bank's estimates on global GDP growth are about right, based on what we currently know, but I do not agree with Andrew Burns' comment that, "It is a new normal".

History shows us that it takes at least 5 to 7 years before GDP growth returns to what we would regard as normal following credit crisis recessions. Conditions began to improve after 2008, so approximately 5.5 years have elapsed since the trough.

Inevitably, not all countries will recover at the same rate. For instance, some Asean developing economies were less damaged and are currently doing better. Conversely, Europe's economic problems could easily persist for longer.

Energy costs will also be a big factor. The USA invented fracking technology and is currently the leading beneficiary in terms of lower energy costs. Canada is in a similar position, and interestingly, China appears to have made rapid progress in producing much needed cleaner energy from a variety of sources, including hydropower, solar, wind and nuclear. Moreover, China should be in a strong position to develop its enormous reserves of shale gas, subject to the availability of sufficient water resources. This informative article covers part of the story on China's rapid renewable energy adoption: A Look at the Development of China's Renewable Energy Sector.

Currently, energy costs are high in Asia but there are economies of scale and other countries should be able to follow China's lead in the next few years. Theoretically, this should be true of Europe but the EU is currently locked into energy costs and unnecessarily restrictive policies which can only delay economic recovery. The UK is in a similar position.

Energy costs are the single biggest variable influence, in my opinion, on regional GDP growth prospects. The outlook is improving, thanks to an increasingly concentrated and creative effort to produce both cleaner and more abundant energy. The motivating forces behind this effort are high energy costs, energy shortages, the need for efficiency gains, and the alarming risks of global warming. There are always bumps in the road, but in my opinion, the prospects for cleaner, cheaper and more abundant energy will be considerably greater over the next thirteen years and beyond, than they have been during this century to date.

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