For the world economy, a slower, more stable growth

June 12, 2013

The global economy may be entering an era of slower but more sustainable growth as the effects of the recent crisis fade, the World Bank said Wednesday in its latest update on economic conditions.

The semiannual report said that global trade has picked up while easing commodity prices are keeping inflation in check. Even after Congress agreed this year to raise taxes and allowed the spending cuts known as the sequester to go into effect,the U.S. economy is expanding and growth is expected to accelerate next year. The major emerging markets are likely to experience growth that is slower than the pre-crisis boom but also less volatile.

The slower, more stable growth is a welcome development, said Andrew Burns, the lead author of the report and the World Bank’s manager of global macroeconomics. “The potential cliff events we have been talking about have receded into the background . . . and it is a bit of a game changer. What we are talking about here is sustainable,” Burns said.

Even the recent volatility in the markets, with daily 100-point swings in the Dow Jones industrial average, may be a healthy sign of the transition from crisis to normalcy. Investors are simply adjusting to the gradual end of policies put in place to battle the extraordinary effects of a global crisis, Burns said.

Indeed, analysts have attributed the volatility spike to speculation that the Federal Reserve will start withdrawing its bond-buying program sooner than expected because of the improving economy.

The report noted particular improvements in the U.S. labor and housing markets. The U.S. economy is projected to grow by 2 percent this year, slightly higher than the 1.9 percent that the World Bank projected six months ago. Still, the report noted that a “fairly robust private sector recovery is being held back, but not extinguished, by fiscal tightening.”

In Europe, financial conditions have improved, but the economy continues to contract and unemployment is up. High-income countries in general continue to face challenges in their efforts to restore the financial sector’s health, reform institutions and get fiscal policy on a sustainable path. However, the World Bank notes that the likelihood of these challenges provoking a major crisis has declined.

The World Bank has lowered its estimates for the euro-zone economy this year, as fiscal and banking consolidation is dragging down growth, and is now projecting an economic contraction of 0.6 percent for 2013, compared with the previous projection of 0.1 percent. But Burns said that Europe is “past the worst of the crisis” and that as confidence rises, growth should resume.

Kaushik Basu, chief economist at the World Bank, noted that important positive actions have been taken on banking supervision, monetary policy and fiscal consolidation to stabilize the situation in the euro zone but said more steps are needed to improve fiscal coordination and create a stronger banking union.

In Japan, a dramatic relaxation of macroeconomic policy has sparked an uptick in economic activity, at least over the short term.

The World Bank also has recalculated potential growth in the developing world, now estimated at 6 percent. “We used to hear talk that countries will grow 9 percent like China,” Burns said. “Increasingly there is a recognition that they will have to do a lot of really difficult things to achieve that.”

Those steps include undertaking structural reforms, such as opening up international trade and foreign investment and investing in infrastructure and human capital, Burns said. “These measures underpinned strong developing country growth over the past 20 years and are worth sticking with,” he said.

Global trade is expected to expand by 4 percent in 2013, in part due to rapid expansion in trade among developing countries. More than 50 percent of a developing country’s exports now go to other developing countries. At the same time, commodity prices are easing: Metals and minerals are down 28 percent and energy by 14 percent since their peaks in early 2011, the World Bank said.

Despite the improving picture, there is no denying that “the slowdown in the real economy is unusually protracted,” Basu said. “This is reflected in the stubbornly high unemployment in industrialized nations and in the slowing growth in emerging economies.”

Howard Schneider contributed to this report.

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