By Emad Mekay
WASHINGTON, Apr 6 2005 (IPS)

World economic growth will slow down this year to 3.1 percent because of rises in U.S. interest rates and the value of the euro, and a slump in demand for exports from developing nations, the World Bank said in its annual forecast Wednesday.

The Washington-based lender said in its Global Development Finance 2005 report that growth among developing nations will be 5.7 percent this year, down from 6.6 percent in 2004, but still above recent growth trends.

The global outlook is a major discussion point at next week’s joint spring meetings of the World Bank and the International Monetary Fund (IMF), where dozens of finance and economy ministers from around the world gather.

The growth forecast also provides an important backdrop for the consideration of other economic issues, including aid, development loans and foreign reserves.

By region, the World Bank forecast said that growth in East Asia is projected to slow in 2005 and 2006, but only to still-high levels of 7.4 and 6.9 percent, respectively.

In Eastern Europe and Central Asia, the bank says that high oil prices helped Russia’s growth and boosted other economies in the region last year. It forecast their overall growth will be 5.5 percent in 2005, and 4.9 percent in 2006.

The area had experienced a strong rebound from 1.7 percent in 2003 to 5.7 percent in 2004. This was mostly driven by output gains in Mexico, Chile and Brazil, along with a sizeable rebound in Argentina, following its currency depreciation of 39 percent.

South Asia will grow at 6.2 and 6.4 for 2005 and 2006 respectively, while the Middle East and North Africa (MENA) will continue its downward trend to 4.9 percent this year and 4.3 percent for the next.

Last year, South Asia and the Middle East and North Africa (MENA) were the only developing regions to record a slowdown in growth.

Even though South Asia’s 2004 growth was impressive at 6.6 percent, it was down from 7.5 percent the previous year. MENA’ growth slowed to 5.1 percent in 2004, down from 5.5 percent the year before.

Although economic activity in Sub-Saharan Africa is expected to pick up, reaching 4.1 percent in 2005 and 4.0 percent in 2006, the report said this will remain behind the performance of most other developing regions.

Growth in Sub-Saharan Africa increased by an estimated 3.8 percent in 2004, with virtually all countries reporting positive growth, and some reaching five percent.

The World Bank scenario forecasts that increases in U.S. interest rates and the effects of the 25 percent appreciation of the euro since February 2002 will continue to contribute to a slowing of Gross Domestic Product growth in the second half of 2004 and into 2005 in developed nations. GDP growth among high-income countries will ease to about 2.4 percent in 2005, it said.

Among the other risks facing the global economy is the possibility of an abrupt increase in interest rates, a further large and steep depreciation of the U.S. dollar and a larger-than-anticipated hike in oil prices.

This could provoke not only a significant global slowdown but potentially a world recession, warned the Bank.

"(W)e should also keep in mind that current global financial imbalances pose risks-of disorderly exchange rate movements, or of interest rate increases-that could threaten these gains," said François Bourguignon, the World Bank’s chief economist.

"Developing countries need to prepare themselves for adjustments, some of which could be sudden," he added.

The report counted the 666-billion-dollar U.S. current account deficit, now equivalent to 5.6 percent of the U.S. GDP, as a major threat to global growth.

The deficit means that many developing countries are acquiring surpluses of foreign reserves. The World Bank warned that this excessive accumulation of foreign reserves could open those countries to risks associated with future changing exchange rates and fiscal costs.

"As a result, high-reserve countries may need to reevaluate the desirability and sustainability of continued reserve accumulation," said the Bank.

Foreign reserves held by developing countries grew by 378 billion in 2004, to an estimated 1.6 trillion dollars – an all-time high.

China held 610 billion dollars while India held 125 billion, and the Russian Federation, 114 billion dollars.

As to its reading of last year, the report said that 2004 overall growth was 3.8 percent, the highest rate of expansion in decades.

"It is no longer news that the world economy performed very well in 2004, with possibly the highest rate of expansion in nearly 30 years," said IMF Managing Director Rodrigo de Rato.

The rate was 6.6 percent in developing countries and led by a "torrid export-led expansion in China."

The bank blamed higher oil prices and the effects of exchange-rate appreciation for causing quarterly output in a number of rich nations to weaken in the second half, especially in Germany, Italy, and Japan.

But all developing regions grew faster in 2004 than they did during the past decade.

Oil and other commodity exporters were able to build up current account surpluses, while importers, the majority of developing countries, saw a significant rise in their import bills.

In contrast to earlier experiences of rising commodity prices, developing countries, particularly China, were the main engine of bigger demand over the past few years, said the report.

The report also noted that foreign direct investments outflows from developing countries rose to an estimated 40 billion dollars in 2004, up from 16 billion dollars in 2002.

These outflows are coming, for the most part, from the same countries receiving the bulk of private capital inflows, namely Brazil, China, Mexico and Russia.

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