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Uncertainty over Trump clouds global economic outlook: World Bank

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Traders from ETX Capital work in central London on November 9, 2016 following the result of the US presidential election. PHOTO | AFP

Traders from ETX Capital work in central London on November 9, 2016 following the result of the US presidential election. FILE PHOTO | AFP 

By AFP

Posted  Wednesday, January 11   2017 at  10:45

In Summary

  • In the semi-annual Global Economic Prospects report, the World Bank lowered the estimate for global growth this year a tenth from the June forecast, to 2.7 per cent compared to the 2.3 per cent growth seen last year.
  • Even the table in the report displaying the forecasts for the major regions and economies comes with a footnote warning about the uncertainty.

The World Bank pared back its global growth estimate for 2017, but uncertainty about the economic policies of US President-elect Donald Trump is clouding the outlook.

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"We need to pay attention. All eyes are on US policymakers and how they will formulate their policies," Ayhan Kose, main author of the World Bank's global forecast, said in an interview.

"What happens in the United States does not stay in the United States."

In the semi-annual Global Economic Prospects report, the World Bank lowered the estimate for global growth this year a tenth from the June forecast, to 2.7 per cent compared to the 2.3 per cent growth seen last year.

The World Bank maintained its US forecast at 2.2 percent following a sluggish 1.6 percent in 2016. But those estimates could go much higher.

Even the table in the report displaying the forecasts for the major regions and economies comes with a footnote warning about the uncertainty: "The US forecasts do not incorporate the effect of policy proposals by the new US administration, as their overall scope and ultimate form are still uncertain."

Kose said it is simply too soon to draw any conclusions, however a simulation showed the individual and corporate tax cuts that Trump discussed during the campaign could on their own add three-tenths to the US growth rate this year, and more than double that in 2018.

And infrastructure spending could have an even larger impact.

"These are significant increases," he said.

"A healthy US economy is good for the rest of the world," since an increase in US growth of one full percentage point could boost advanced economies by eight-tenths after a year, and emerging markets by six-tenths.

So global growth potentially could rise another tenth this year to 2.8 percent, and get a three-tenths boost in 2018, he said.

Waiting for specifics

However, he was quick to stress the caveats to this estimated impact: It will depend on the timing of the tax cuts, how they impact inflation, and how the Federal Reserve reacts.

The same is true for other proposals like big spending on infrastructure, which would have a more direct impact on growth, but could exacerbate an already tight labor market, which also could fuel inflation.

The US central bank has cautioned that spending that fuels inflation could require more and faster increases in the benchmark lending rate.

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