Global recovery drives World Bank triple growth upgrade for UK economy

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The upward revisions were driven by expectations of stronger growth in advanced and emerging economies, with a recovery in industrial activity and a rise in global trade expected to lift output around the world. Credit: Bloomberg

The World Bank has upgraded its forecasts for UK growth over the next three years against a stronger global backdrop that will boost the British economy despite its weak start to the year.

Economists at the Bank expect the UK economy to grow by 1.7pc this year. This is only slightly below last year’s expansion of 1.8pc, and up from a forecast of 1.2pc in January.

This is only slightly below last year’s expansion of 1.8pc, and up from a forecast of 1.2pc in January.

Ahead of a UK general election this Thursday that will shape Britain’s future outside the European Union, growth for 2018 and 2019 was also upgraded to 1.5pc a year, up from previous projections of 1.3pc.

With a fragile but real recovery now underway, countries should seize this moment to undertake institutional and market reformsJim Yong Kim, World Bank.

The revisions were driven by expectations of stronger growth in advanced and emerging economies, with a recovery in industrial activity and a rise in global trade expected to lift output around the world.

Franziska Ohnsorge, a lead economist at the World Bank, said the near-term upgrade was driven by “unexpectedly resilient” activity around the turn of the year.

She said the UK’s highly open economy meant it would be sensitive to developments in the global economy over the next few years, while a projected upturn in the eurozone was also expected to lift UK growth, “despite uncertainties related to Brexit discussions”.

An upturn in the US is expected to support growth in advanced economies, alongside stronger domestic demand in the eurozone and Japan and firming investment across the developed world.

The international body expects the global economy to expand by 2.7pc this year. This is unchanged from its January forecast and follows years of persistent downgrades amid disappointing growth.

Its forecasts for stronger growth in 2018 and 2019 of 2.9pc were also unchanged.

“Global growth is firming, contributing to an improvement in confidence,” the World Bank said in its twice-yearly healthcheck of the global economy.

Jim Yong Kim
Reasons to be cheerful. Jim Kim, president of the World Bank, said signs of stronger global growth were “encouraging”. Credit: Bloomberg

Jim Yong Kim, the president of the World Bank, said it was “encouraging” that the global economy was “gaining firmer footing”, though he warned that the recovery was not entrenched and the threat of increased trade protectionism remained.

Dr Kim said: “With a fragile but real recovery now underway, countries should seize this moment to undertake institutional and market reforms that can attract private investment to help sustain growth in the long-term.”

Risks remain

The World Bank warned “policy uncertainty” surrounding US fiscal policy and Brexit negotiations posed the biggest risks to the outlook, which remained tilted to the downside.

“Negotiations around the exit of the United Kingdom from the European Union carry risks,” it said. “If the uncertainty persists, it could weigh on investor confidence and derail the ongoing recovery in growth.”

UK growth upgrades still below pre-referendum predictions UK growth upgrades still below pre-referendum predictions – High charts Cloud Annual GDP growth (%)UK growth upgrades still below pre-referendum predictions UK growth upgrades still below pre-referendum predictions .

 

While the UK is currently projected to grow at the same pace as the eurozone this year, the upgrades still fall short of the World Bank’s predictions for UK growth before the June 2016 EU referendum, when the economy was forecast to expand at about 2pc a year until the end of the decade.

 

The World Bank warned that the “direction of Brexit negotiations” would have consequences for the UK and EU, signalling that it was in the best interest of both sides to reach an accord on a comprehensive trade deal.

It also highlighted that prospects in the eurozone remained “clouded by elevated policy uncertainties”, while a high share of bad loans in the bloc had exposed “fragilities” in the single currency zone.

Almost ten years after the financial crisis, investment in the eurozone had not yet returned to pre-crisis levels, the World bank noted.

The UK economy grew by just 0.2pc in the first three months of the year, as higher inflation squeezed household incomes and put the brakes on consumer spending.

However, recent survey data suggest that growth in the second quarter is expected to bounce back. A closely watched poll of the UK’s dominant services sector on Monday is expected to show activity slowed only slightly in May.

Steady growth in China and the emergence of Russia and Brazil from deep recessions following the oil price collapse are also expected to boost growth in the coming years, the World Bank said.

Debt worries grow

However, it warned that rising private sector debt and “deteriorating government debt dynamics” in emerging markets had left some countries vulnerable to a credit crunch in the event of a downturn.

Analysis by the World Bank showed government debt as a share of gross domestic product (GDP) exceeded its 2007 level by more than 10 percentage points in more than half of emerging markets at the end of 2016, leaving them with less ammunition to fight the next crisis.

The deterioration in government debt dynamics since the global financial crisis is considerably more persistent than after previous episodes of financial stress World Bank

“The deterioration in government debt dynamics since the global financial crisis is considerably more persistent than after previous episodes of financial stress,” it warned.

It said this increased the risk that these countries could be forced into counterproductive austerity measures if a downturn hit.

“Although many emerging markets have … accumulated significant reserve buffers over the past two decades, they now need to shore up their fiscal positions to prevent sudden spikes in financing cost from forcing them into fiscal tightening,” the World Bank said.

“Over the longer term, structural policies that support investment and trade are critical to boost productivity and potential growth.”

The World Bank said nurturing the global recovery would remain a big challenge for policymakers.

It said: “Policy priorities include measures to support workers most affected by sectoral shifts in employment through better training and job search programs, and to share the dividends of growth and gains from globalisation more widely.”

 

 

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