By Jim Puzzangherra and Don Lee
5:50 PM PST, January 15, 2014
WASHINGTON — After a long and lumpy recovery, the world economy may finally be at a turning point with global growth expected to accelerate this year behind the rising strength of the U.S. and other major developed countries.
But world finance leaders are warning of lingering effects of the last recession and, in particular, citing some growing threats — capital flight in developing countries and deflation in rich nations.
"With inflation running below many central banks' targets, we see rising risks of deflation, which could prove disastrous for the recovery," Christine Lagarde, managing director of the International Monetary Fund, said Wednesday in a Washington meeting.
Deflation, or falling prices, dampens consumer spending and business investment and is very difficult to overcome, as Japan's experience has shown. "If inflation is the genie, then deflation is the ogre that must be fought decisively," Lagarde said.
Her remarks came a day after the World Bank's new report forecast a significant pickup in growth this year, with the global economy projected to expand 3.2% this year from 2.4% in 2013.
Most of the acceleration will come from advanced countries, notably the U.S., as the drag from budget cuts and policy uncertainty eases, and the private sector gains firmer footing, the organization said in its latest Global Economic Prospects report.
The U.S. economy is projected to grow 2.8% this year, up from 1.8% estimated for 2013, the World Bank said.
The forecast is in line with the views of many private analysts, who see an American economy benefiting from a recovering housing market and stronger manufacturing and consumer demand, as the number of households continue to increase and many have become better off financially to spend more for goods and services.
The Eurozone is recovering from its recession and debt woes. The single-currency region is expected to show small positive growth this year, and with Japan also likely to expand moderately — after nearly two decades of struggling with deflation — the high-income nations as a whole are turning a corner into more robust growth, the World Bank said.
Combined, the major developed countries will grow 2.2% this year, the World Bank forecast, a significant improvement over the estimated 1.3% rate last year.
Meanwhile, developing countries such as China and India will grow 5.3% this year, compared with 4.8% last year, regaining strength after two weak years, the World Bank said.
"Growth appears to be strengthening in both high-income and developing countries, but downside risks continue to threaten the global economic recovery," said World Bank President Jim Yong Kim.
The IMF is scheduled to release its new economic outlook next week, but Lagarde's remarks indicate that its forecast for global growth also will be upgraded.
"This crisis still lingers," she told the audience at the National Press Club in Washington. "Yet optimism is in the air. The deep freeze is behind, and the horizon is brighter."
One major risk is the Federal Reserve's upcoming moves after its decision in December to start reducing its monthly bond-buying stimulus program. The World Bank report said the Fed's pullback of monetary stimulus has the potential to "throw curve balls" at the worldwide economy.
At this point, Lagarde and World Bank officials said they are expecting only modest effects on developing countries from an orderly reversal of monetary policy by the Fed.
But they noted there could be problems if markets react negatively, as they did last spring and summer when the Fed was considering a cutback of its stimulus program and interest rates shot up. The higher rates drained investment from developing nations.
"Depending on the severity of the market reaction, capital flows to developing countries could be cut by 50% or more for several months" this year, the World Bank warned. Such a reaction would hinder growth.
Said Lagarde: "Central banks should return to more conventional monetary policies only when robust growth is firmly rooted."
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