Oil costs to crimp expansion: World Bank

Global economic growth will slow to 3.2 per cent in 2005 and 2006 from 4 per cent this year because of higher oil prices, the World Bank said in its annual global economic report.

Oil prices, which have risen more than 40 per cent so far this year, had already shaved 0.5 per cent off of global growth forecasts for next year, the bank said.

A slowdown in the US investment cycle, higher interest rates in the United States and a slowing economy in China also influenced the new forecast, reported China Daily Thursday.

The World Bank, the largest financier of projects to developing nations, urged countries to take advantage of "favourable prospects" in their economies to narrow budget and trade deficits, reduce public debt and minimize vulnerabilities to swings in international capital markets, according to the 193-page Global Economic Prospects report released on Tuesday.

"This is no time for complacency," the bank said.

"Lingering imbalances in the global economy associated with rising twin deficits in the United States, a delayed recovery in Europe, high and volatile oil prices and questions about the path of China's economy constitute risks to the pace of growth in developing countries over the medium term."

India, with a budget deficit of about 10 per cent of gross domestic product, and nations such as Poland and Hungary should heed the advice and narrow their financing gaps "while growth is relatively good to cushion the blow," said Jay Bryson, global economist at Wachovia Corp in Charlotte, North Carolina.

Global growth this year is being buoyed by a 10.2 per cent increase in world trade, compared with a 5.5 per cent increase in 2003. Global trade is projected to grow 8.4 per cent in 2005 and 7.8 in 2006, the World Bank said. China was responsible for more than 20 per cent of the increase this year, the report said.

Growth in the United States, the world's largest economy, is projected to reach 3.2 per cent in 2005 and 3.3 per cent in 2006, the bank said in the report.

The economy is estimated to grow 4.3 per cent this year, the bank said.

The bank said financing requirements of the US budget and current account deficit, the broadest measure of trade in goods and services, may cause long-term interest rates to rise more than forecast and pose a risk to the global forecast. The US Federal Reserve on November 10 raised interest rates by a quarter point to 2 per cent, the fourth consecutive increase.

The US budget gap for fiscal year 2004 reached a record US$412 billion.

That may mean an increase in the amount of dollars needed to be converted to other currencies to pay for imports.

The deficit in the current account, the broadest measure of trade, reached a record US$166.2 billion in the second quarter.

"Barring a substantial increase in domestic savings by, for example, a tightening of fiscal policy, downward pressure on the US dollar is likely to resume as US foreign borrowing requirements remain high, and the already large amounts of external debt continue to accumulate," the bank said.

The dollar has fallen more than 30 per cent against the euro since 2002, the bank said.

The currency declined more than 4 per cent against the euro in the past month, and traded at a record low of US$1.3006 against the common currency on November 10.

"When we really start worrying about the finance ability of the current account deficit is when at the same time also interest rates go up in the United States and when it is clear that there is a decisive reorientation of foreign central banks in their investment in the United States," said World Bank economist Hans Timmer.

The World Bank projected average annual oil prices to fall to US$36 a barrel next year and to US$32 a barrel in 2006, down from a projected US$39 a barrel this year.

The forecast is based on the mean of one barrel of West Texas intermediate, Brent and Dubai.

Growth in the euro area is expected to gain momentum over the next two years after growing 1.8 per cent this year, the bank said.

It forecast regional growth of 2.1 per cent next year and 2.3 per cent in 2006.

Japan's economy, projected to grow 4.3 per cent this year, will slow to 1.8 per cent next year and 1.6 per cent in 2006, the lender said.

Slower growth is forecast for developing countries, down from 6.1 per cent in 2004 to a projected 5.4 per cent in 2005 and 5.1 per cent in 2006, the lender said.

Source: China Daily