U.S. Deficits Could Reduce Global Growth

Continued high U.S. budget and trade deficits could sharply cut economic growth in developing countries by driving up interest rates and weakening the dollar, the World Bank said Wednesday.

Even without the effect of U.S. deficits, average economic growth in China, Russia, India and other developing economies is expected to decline from a three-decade high of 6.6% in 2004 to 5.2% next year, the bank said in a report on the global economic outlook.

But the bank said that fall could be sharper if financial markets responded to continued heavy U.S. borrowing by pushing up interest rates.

If rates rise, “and we think that that’s what ultimately will happen if there’s no [U.S.] policy adjustment, then all developing countries will suffer,” said Hans Timmer, a bank economist.

Latin America is especially vulnerable, Timmer said. He said that according to a projection by the bank’s economists, if interest rates rise by 2%, the 4% growth forecast for the region next year “would completely disappear.”

The U.S. deficit in trade and investment income with the rest of the world hit an all-time high of $665.9 billion last year, while the budget deficit soared to a record $412 billion.

“The advice that we would give to the U.S. authorities ... is that it’s important to move” on deficit reduction, said Uri Dadush, director of the bank’s Development Prospects Group.