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World Bank Forecasts Global Economy to Grow 3.1% in 2018, but Warns of Slower Pace Ahead

The World Bank has forecast global economic growth to edge up to 3.1% in 2018 after a stronger-than-expected 2017, as the recovery in investment, manufacturing and trade continues, and as commodity-exporting developing economies benefit from firming commodity prices.

However, this is largely seen as a short-term upswing, the World Bank said in its “Global Economic Prospects” reports. Over the longer term, slowing potential growth—a measure of how fast an economy can expand when labor and capital are fully employed—puts at risk gains in improving living standards and reducing poverty around the world.

Growth in advanced economies is expected to moderate slightly to 2.2% in 2018, as central banks gradually remove their post-crisis accommodations and as an upturn in investment levels off. Growth in emerging market and developing economies as a whole is projected to strengthen to 4.5% in 2018, as activity in commodity exporters continues to recover.

“The broad-based recovery in global growth is encouraging, but this is no time for complacency,” said Jim Yong Kim, World Bank group president. “This is a great opportunity to invest in human and physical capital. If policy makers around the world focus on these key investments, they can increase their countries’ productivity, boost workforce participation, and move closer to the goals of ending extreme poverty and boosting shared prosperity.”

The report said 2018 is on track to be the first year since the financial crisis that the global economy will be operating at or near full capacity. With slack in the economy expected to dissipate, policymakers will need to look beyond monetary and fiscal policy tools to stimulate short-term growth and consider initiatives more likely to boost long-term potential.

[Read more about the global economy: Global Outlooks: India’s Economy on the Rise, While China’s Growth Seen Slowing]

The slowdown in potential growth is the result of years of softening productivity growth, weak investment, and the aging of the global labor force. The deceleration is widespread, affecting economies that account for more than 65 percent of global gross domestic product. Without efforts to revitalize potential growth, the decline may extend into the next decade, and could slow average global growth by a quarter percentage point and average growth in emerging market and developing economies by half a percentage point over that period.

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“An analysis of the drivers of the slowdown in potential growth underscores the point that we are not helpless in the face of it,” said the World Bank’s senior director for development economics, Shantayanan Devarajan. “Reforms that promote quality education and health, as well as improve infrastructure services could substantially bolster potential growth, especially among emerging market and developing economies. Yet, some of these reforms will be resisted by politically powerful groups, which is why making this information about their development benefits transparent and publicly available is so important.”

Risks to the outlook remain tilted to the downside. An abrupt tightening of global financing conditions could derail the expansion. Escalating trade restrictions and rising geopolitical tensions could dampen confidence and activity. On the other hand, stronger-than-anticipated growth could also materialize in several large economies, further extending the global upturn.

In the U.S., growth picked up in 2017 to an estimated 2.3%, supported by strengthening private investment. The recovery reflected a diminished drag from capacity adjustments in the energy sector, rising profits, a weakening dollar, and robust external demand.

Policy initiatives of the U.S. administration, including in the areas of health care and infrastructure, have made limited headways, while the outcome of renegotiations of the North American Free Trade Agreement remains uncertain. Barring major additional policy changes, U.S. growth is expected to reach 2.5% in 2018 and then to moderate to an average of 2.1% percent in 2019-20. Low labor participation and weak productivity trends remain the most significant drag on U.S. growth over the longer term.

In East Asia and the Pacific, key areas for apparel and textile sourcing, growth is forecast to slip to 6.2% in 2018 from an estimated 6.4% in 2017. A structural slowdown in China is seen offsetting a modest cyclical pickup in the rest of the region.

Stronger-than-expected growth among advanced economies could lead to faster-than-anticipated growth in the region. On the downside, rising geopolitical tension, increased global protectionism, an unexpectedly abrupt tightening of global financial conditions, and steeper-than-expected slowdown in major economies, including China, pose downside risks to the regional outlook. Growth in China is forecast to moderate to 6.4% growth in 2018 from 6.8% in 2017. Indonesia is forecast to accelerate to 5.3% in 2018 from 5.1% in 2017.

Growth in Europe and Central Asia is expected to ease to 2.9% in 2018 from an estimated 3.7% in 2017. Recovery is expected to continue in the east of the region, driven by commodity exporting economies, counterbalanced by a gradual slowdown in the western part as a result of moderating economic activity in the Euro Area.

In Latin America and the Caribbean, growth is projected to advance to 2 percent in 2018 from an estimated 0.9% in 2017. Growth momentum is expected to gather as private consumption and investment strengthen, particularly among commodity-exporting economies. Brazil is expected to pick up to 2 percent in 2018, from an estimated 1 percent in 2017, while Mexico is anticipated to accelerate to 2.1% this year from an estimated 1.9% last year.

Growth in the Middle East and North Africa is expected to jump to 3 percent in 2018 from 1.8% in 2017. Reforms across the region are expected to gain momentum, fiscal constraints are expected to ease as oil prices stay firm and improved tourism should support growth among economies that are not dependent on oil exports.

In South Asia, another important region for fashion manufacturing, growth is forecast to accelerate to 6.9% in 2018 from an estimated 6.5% in 2017. Consumption is expected to stay strong, exports are anticipated to recover, and investment is on track to revive as a result of policy reforms and infrastructure upgrades.

India is expected to pick up to a 7.3% rate in 2018, while Pakistan is anticipated to accelerate to 5.8%.

In Sub-Saharan Africa—seen as fertile ground for raw material and apparel production—growth is anticipated to pick up to 3.2% in 2018 from 2.4% in 2017. Stronger growth will depend on a firming of commodity prices and implementation of reforms. South Africa is forecast to tick up to 1.1% growth in 2018 from 0.8% in 2017, while Nigeria is anticipated to accelerate to a 2.5% expansion from 1 percent% last year.