Roundup: Global economy continues fragile recovery despite divergent trends, World Bank says

Following another disappointing year in 2014, the global economy is continuing its fragile and divergent recovery.

In its latest flagship report Global Economic Prospects released on Tuesday, the World Bank lowered its estimates for global growth in 2014 and 2015 to 2.6 percent and 3 percent, respectively, citing that the global economy is still struggling to gain momentum.

Many high-income countries continue to grapple with the fallout of the global financial crisis, and emerging economies are less dynamic than in the past, it added.

DIVERGENT GROWTH CONTINUES

"The global economy is at a disconcerting juncture. It is as challenging a moment as it gets for economic forecasting," said Kaushik Basu, World Bank chief economist and senior vice president.

The global growth is expected to rise moderately to 3 percent in 2015, down from a projection of 3.4 percent in June, and average about 3.3 percent through 2017.

Underneath the fragile global recovery lie increasing divergent trends. Recovery in the United States and Britain is gaining momentum while the euro area and Japan lag behind as the fallout of the financial crisis lingers. China "is undergoing a carefully managed slowdown" with growth slowing to a still-robust 7.1 percent this year, the bank said.

The Washington-based agency upgraded its forecasts for U.S. growth to 3.2 percent in 2015, up from a 3 percent estimate given in June. The U.S. economic growth, it projected, will moderate to 3 percent and 2.4 percent in 2016 and 2017, respectively.

Suffering protracted low inflation, the euro area will grow at a sluggish rate of 1.1 percent in 2015, higher than 0.8 percent in 2014. Its growth will rise to 1.6 percent in 2016 and 2017. In Japan, growth will be 0.2 percent in 2014 and then rise to 1.2 percent in 2015 and 1.6 percent in 2016.

Basu said India's economic growth should finally catch up to China's next year and in 2017, at a clip of about 7 percent.

Despite disappointing growth in 2014, the global economy will continue improving in 2015, boosted in part by soft oil prices, a strong U.S. economy, continued low global interest rates, and receding domestic headwinds in several large emerging markets, the bank said.

CHINESE ECONOMY FACES CHALLENGES

The World Bank expected the Chinese economy to grow 7.1 percent in 2015, lower than 7.4 percent in 2014. The growth will further slow to 7 percent in 2016 and 6.9 percent in 2017, as the country' s structural reforms, such as a gradual withdrawal of fiscal stimulus and continued prudential measures to slow non-bank credit expansion, will weigh down on the growth.

China faces the challenge of containing financial vulnerabilities in the short term, while putting long-term growth on a secure footing, the bank said.

To rein in financial vulnerabilities, the Chinese authorities have tightened regulation and supervision, especially for shadow banking; nontraditional lending has slowed considerably as a result and lending appears to be shifting back to conventional bank loans and corporate bonds.

The bank estimated that the reform agenda China announced in November 2013 has the potential to raise its output by 2-3 percent in the long term. In the short term, however, it may dampen growth as factor reallocation across sectors proceeds gradually and companies adjust to new factor prices.

LOW OIL PRICES RESULT IN WINNERS, LOSERS

The sharp decline in oil prices since mid-2014 will support global activity and help offset some of the headwinds to growth in oil-importing economies. However, it will dampen growth prospects for oil-exporting countries with significant regional repercussions. Overall, the bank believed the oil price drop is net positive for global economy.

However, there are multiple factors reducing the overall positive impact, said Ayhan Kose, director of Development Prospects at the World Bank.

Facing the post-crisis legacies, low oil prices could encourage households and corporations to save rather than spend; central banks'ability to fend off deflationary risks might be limited; low oil prices might reduce promising investments in unconventional oil; and oil-exporting economies will undergo destabilizing effects.

Low inflation risk, weak global economy, stagnant wage growth in the United States could make the Federal Reserve to raise interest rates more slowly than anticipated, Basu said. Endite