World Bank still sees global growth picking up amid policy risks

The World Bank building in Washington, DC.
The World Bank building in Washington, DC. PHOTO: AFP

WASHINGTON (BLOOMBERG) - The World Bank kept its outlook for the global economy unchanged, forecasting a modest pickup in growth despite uncertainty about monetary policy and the risk of a surge in protectionism.

The development lender projects the world economy will grow by 2.7 per cent this year and 2.9 per cent the next, the same as its January forecast.

"Global activity is firming broadly as expected," the World Bank said in a report released on Sunday (June 4). "Manufacturing and trade are picking up, confidence is improving, and international financing conditions remain benign."

Still, the lender warned that risks to its global outlook remain tilted to the downside.

"Policy uncertainty is likely to remain high in 2017, and there is a risk that financial-market volatility could increase from current low levels," the bank said.

Risks include unexpected changes in monetary, trade or other policies in major economies, as well as financial-sector uncertainty and geopolitical turmoil, according to the bank.

The lender is projecting that growth in the volume of world trade will accelerate this year to 4 per cent, up 0.4 percentage point from its January forecast. But it cautioned that "additional erosion of the multilateral rules-based system that has been built since the mid-1940s could put downward pressure on economic integration, and ultimately on growth and job creation."

The World Bank didn't include proposals by the administration of US President Donald Trump to cut taxes and boost infrastructure spending, noting the administration hasn't provided enough details and the time frame is unclear.

Plans to slash corporate and personal income tax rates could boost short-term growth, but may also substantially increase the nation's fiscal deficit, the lender said. While the unemployment rate is close to its long-run equilibrium, the US Federal Reserve is expected to raise interest rates more gradually than in past tightening cycles, it said.

The development lender raised its forecast for growth in the euro area to 1.7 per cent this year, up 0.2 percentage point from previously, as loose monetary policy supports domestic demand and strengthening global trade and investment lifts manufacturing.

The bank also boosted its outlook for Japan to 1.5 per cent, up 0.6 percentage point from its forecast six months ago, as stronger external demand boosts exports and the economy benefits from accommodative monetary and fiscal policy. The bank left its forecast for growth this year in China unchanged at 6.5 per cent.