The World Bank cut its global economic growth forecast because of the weaker outlooks for the economies of the USA, Russia and China, as well as the geopolitical tensions between Russia and Ukraine which triggered worldwide concerns. The Washington-based institution expects to see 2.8 percent of global economic growth in 2014, far below its January 2014 estimate of 3.2 percent. However, it kept its global growth forecasts for the next two years at 3.4 percent and 3.5 percent, respectively.
The growth outlook for the economy of the USA - the world’s largest economy - was lowered from 2.8 percent to 2.1 percent in 2014, particularly due to bad weather conditions last winter. Meanwhile, outlooks for Brazil, Russia, India, and China were also lowered. However, the World Bank expects growth to accelerate later in 2014 as the more developed economies continue to recover.
In the Global Economic Prospects report, the World Bank also warned emerging market for financial turmoil and recommends these countries to reduce the budget deficit, raise interest rates and issue policies to boost domestic productivity. This year marks the third consecutive year in which emerging market economies are expected to expand by less than five percent (yoy). This contributes to rising debt-to-GDP ratios in the economies which make the economies more vulnerable.
The forecasts of the World Bank include the assumption that geopolitical tensions in Ukraine will persist but will not worsen in the remainder of 2014. However, if an escalation occurs it could further weaken global confidence, resulting in slowing investments and crimping growth in emerging market economies by as much as 1.4 percentage points (the worst-case scenario).
Federal Reserve Policy
Federal Reserve officials have indicated that their benchmark interest rate will remain low until next year. The World Bank confirms that the Fed policy has a large influence on the global economy, especially emerging markets. For example, only recently assets in emerging markets started to recover from the huge sell-off that was triggered by the Fed's plan to cut the value of their stimulus (tapering off) since May 2013 (although the winding down only started in December 2013).