World Bank President Jim Yong Kim. Molly Riley—AFP
Global lending body says incoming U.S. administration’s economic policies could significantly impact economic growth globally.
The World Bank on Tuesday pared back its global growth estimate for 2017, but uncertainty about the economic policies of U.S. president-elect Donald Trump is clouding the outlook.
“We need to pay attention. All eyes are on U.S. policymakers and how they will formulate their policies,” Ayhan Kose, main author of the World Bank’s global forecast, told AFP in an interview. “What happens in the United States does not stay in the United States.”
In the semi-annual Global Economic Prospects report, the World Bank lowered the estimate for global growth this year a tenth from the June forecast, to 2.7 percent compared to the 2.3 percent growth seen last year. The World Bank maintained its U.S. forecast at 2.2 percent following a sluggish 1.6 percent in 2016.
But those estimates could go much higher.
Even the table in the report displaying the forecasts for the major regions and economies comes with a footnote warning about the uncertainty: “The U.S. forecasts do not incorporate the effect of policy proposals by the new U.S. administration, as their overall scope and ultimate form are still uncertain.”
Kose said it is simply too soon to draw any conclusions, however a simulation showed the individual and corporate tax cuts that Trump discussed during the campaign could on their own add three-tenths to the U.S. growth rate this year, and more than double that in 2018. And infrastructure spending could have an even larger impact. “These are significant increases,” he said.
“A healthy U.S. economy is good for the rest of the world,” since an increase in U.S. growth of one full percentage point could boost advanced economies by eight-tenths after a year, and emerging markets by six-tenths. So global growth potentially could rise another tenth this year to 2.8 percent, and get a three-tenths boost in 2018, he said.
However, he was quick to stress the caveats to this estimated impact: It will depend on the timing of the tax cuts, how they impact inflation, and how the Federal Reserve reacts. The same is true for other proposals like big spending on infrastructure, which would have a more direct impact on growth, but could exacerbate an already tight labor market, which also could fuel inflation.
The U.S. central bank has cautioned that spending that fuels inflation could require more and faster increases in the benchmark lending rate. Higher interest rates in turn would tend to slow economic growth.
Kose said the rising threat of protectionism in advanced economies also remains a concern, and that uncertainty “is a challenge to businesses in the U.S. and abroad.” But again he said, it is too early to tell what the impact on global growth will be until the specifics are known—for example, whether U.S. tariff increases Trump has threatened are limited to one product, like automobiles, or extend to an entire country.
“One thing we know well, open trade policies help promote economic growth,” Kose said, in the closest he came in the interview to a word of caution to the new administration.
After a pretty bad year in 2016, Kose said the world economy is poised for a recovery, especially with major commodity exporters returning to growth after recessions, including Russia, Brazil and Argentina. The euro area is expect to grow 1.5 percent this year—the same as in the June forecast—and 1.4 percent in 2018, after 1.6 percent GDP last year.
Japan’s growth is forecast at 0.9 percent and 0.8 percent for 2017 and 2018, which is a half-point better than the June estimate. The China forecasts are unchanged, with growth expected to slow to 6.5 percent this year and 6.3 percent next, which Kose called “a healthy slowdown.”
“They have done a real competent job so far slowing down the economy” from double-digit rates.
Kose said the most worrisome thing about the global outlook is the continued drop off in investment. “The single most important issue we are focusing on in this report is the persistent investment weakness in emerging and developing economies,” he said. “The issue is critical.”
Investment expanded 10 percent in 2010, but has slowed steadily growing just 3.5 percent in 2016. There is no smoking gun for the cause of the decline, but some factors include the collapse of commodity prices, which reduced investment in those industries, debt problems in some countries, and political uncertainty in others.