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World Bank trims growth forecast

By Howard Schneider,January 15, 2013

View Photo Gallery - : The top 10 countries with the highest GDP: See where the U.S. stands…

The World Bank has sharply reduced its estimate of global economic growth in 2013, projecting that the downturn in Europe and the United States’ fiscal problems will continue to weigh on investment and spending.

The bank said it expects the world economy to expand 2.4 percent this year, compared with 3 percent growth it had forecast as of June.

The second half of 2012 saw a worsening of the euro crisis, fiscal brinksmanship in the United States that left central debt and spending issues unresolved, and a recognition that developing countries were slowing as well.

Although World Bank officials said they found some developments last year “comforting,” including the deal that avoided the worst of the “fiscal cliff” in the United States, they still saw big risks ahead: a misstep in Europe that aggravates problems there, or a collapse in fiscal talks that threatens the U.S. sovereign debt rating.

That alone could force global growth down a notch.

Economic weaknesses from 2012 “ended up lasting a fair bit longer” than expected, said Andrew Burns, lead author of the bank’s latest Global Economic Prospects report.

The bank forecast U.S. growth of 1.9 percent — less than the most-pessimistic estimates from the Federal Reserve. The bank also foresaw more modest growth for China in coming years — 8.4 percent in 2013, slowing to about 8 percent the following two years.

But its most sour note was again reserved for Europe, where a financial and sovereign debt crisis has eased but a moribund economic landscape remains. Even the German economy, the region’s largest and the presumed pillar of growth, shrank in the final months of 2012, and leaders in the region remain torn over the proper balance of budget-cutting austerity and programs to rebuild growth.

As of June, the bank had forecast full-year growth for the 17-nation euro area of 1.1 percent in 2013. It now expects recession to continue, with a contraction of minus-0.1 percent for the year.

The World Bank said growth should begin to pick up later in the year, a forecast consistent with projections of the European Central Bank.

But World Bank chief economist Kaushik Basu said that the actions of the ECB — lending large sums to banks and offering to backstop governments — had given the region “breathing space.”

That does not mean that the euro zone’s problems are fixed, and so far, the region’s real economy — the realm of households, businesses and investment — has failed to rebound even though the turmoil in the financial sector has calmed, Basu said.

“Europe is comforted by the fact that there are important statements of intentions” from the region’s political leaders, he said. “We are still waiting to see how those intentions are carried out.”