World Bank warns of threat to global economy from trade conflict

Containers and trucks seen at an automated container terminal in Qingdao port, Shandong province, China, on Dec 10, 2018.
Containers and trucks seen at an automated container terminal in Qingdao port, Shandong province, China, on Dec 10, 2018.PHOTO: REUTERS

WASHINGTON • Trade conflict between the world's two largest economic powers is already inflicting collateral damage, and threatens to do yet more harm to the global economy, the World Bank has warned.

And the global slowdown is beginning as government and corporate debt rises, especially among the poorest countries, while mounting interest rates increase borrowing costs, the bank said on Tuesday in its semi-annual Global Economic Prospects report.

The report was markedly more pessimistic than a year ago - when the outlook was for synchronised global growth - and peppered with exhortations to take "urgent", "imperative" or "critical" action.

"Risks are rising," said senior World Bank economist Ayhan Kose. "The global economy is going through a difficult period. Skies are darkening, and we see the global economy slowing."

Growth of the world economy is expected to slow to 2.9 per cent this year, and 2.8 per cent in 2020, slightly below the previous forecast, and the estimates for nearly all regions and countries were downgraded.

At the centre of the turmoil, US economic growth is expected to slow this year by four-tenths of a point, falling to 2.5 per cent, down from 2.9 per cent last year. It is expected to slow even further next year to 1.7 per cent.

China's economy is also slowing amid the trade dispute, and growth should slip to 6.2 per cent this year and next, compared with 6.5 per cent last year.

Mr Kose, who heads the World Bank's Development Prospects Group - which twice a year produces the global economic forecasts - said he hoped for a resolution, but urged governments to prepare for a difficult road ahead.

"Global growth is still robust but whether a storm will hit or it will clear highly depends on how policymakers are going to react," he said.

 
 
 

Though the bank still sees a low probability of recession in the United States, even a small slowdown has an outsize effect.

And if the US and China slow by a full percentage point, it will cut global growth by nearly the same amount, with dire consequences for many countries.

"Trade tensions are already affecting activity around the world," said Mr Kose, and it could get worse.

The report sharply downgraded the growth forecasts for key emerging market economies such as Mexico, South Africa and Russia, as well as for crisis-struck countries Turkey and Argentina. So far, India and Indonesia have escaped that fate.

With growing risks dominating the outlook, the World Bank urged member countries to prepare themselves, with changes in spending, investment and borrowing to establish "policy buffers" against coming headwinds. "The sense of urgency has to be there," Mr Kose said.

 
A version of this article appeared in the print edition of The Straits Times on January 10, 2019, with the headline 'World Bank warns of threat to global economy from trade conflict'. Print Edition | Subscribe