WASHINGTON, 14 December 2006 — The global economy has reached a potentially dangerous “turning point” with the United States at risk of recession if the housing market crashes, the World Bank warned yesterday.
In a report called Global Economic Prospects, the bank also said globalization is an unprecedented opportunity for developing nations, although income inequality and environmental damage could undermine its benefits. The twice-yearly report predicted growth in worldwide gross domestic product (GDP) of 3.2 percent in 2007, down from a projected 3.9 percent this year.
“The global economy has reached a turning point and the ingredients are in place for a soft-landing scenario, although some downside risks remain,” said World Bank economic forecaster Hans Timmer, one of the report’s two authors. “A faster-than-expected weakening of the housing markets in high-income countries could generate a much sharper slowdown and even recession, with potentially significant effects for developing countries,” he said.
The report said growth in the United States should ease gradually, but did not exclude a recession brought about by a housing crunch following years of red-hot growth. “Such a shock could prompt a recession in the United States, with growth slowing to as little as —0.2 percent of GDP in 2007 and 2.7 percent in 2008.” After its latest policy meeting Tuesday, the Federal Reserve cautioned that the US housing downturn has now become “substantial.” Among other major risks identified for the global economy, the World Bank report said an economic “overheating” could provoke a sharper slowdown, while “further inflationary pressure may yet emerge.” A supply shock in oil markets could also disrupt world growth, while a “disorderly unwinding” of global imbalances remains possible. In the medium term, the risk remains that investors could “rapidly lose confidence in the dollar” as the US economy slows and its current account deficit mounts.
Government data yesterday showed the US trade deficit fell to a 14-month low of $58.9 billion in October, thanks to a retreat by oil prices from summer highs. But the trade gap with China surged to a new high of $24.4 billion, underlining a political controversy as Treasury Secretary Henry Paulson and other top US officials headed to Beijing for economic talks this week.
The World Bank and International Monetary Fund have repeatedly warned that the global economy is dangerously out of kilter as China runs up mammoth surpluses and the United States devours imported goods.
Such stresses have sparked disquiet, in the United States and elsewhere, about the impact of globalization. The World Bank report devoted its largest section to how to best manage the growing integration of the international economy. In terms of its impact on poverty, the benefits of globalization have been clear and should continue, World Bank chief economist Francois Bourguignon said.
“The number of people living on less than $1 a day could be cut in half, from 1.1 billion now to 550 million in 2030,” he said.
Global trade in goods and services could rise more than threefold to $27 trillion in 2030, and trade as a share of the global economy will rise from one-quarter today to more than one-third, the report said.
“However, some regions, notably Africa, are at risk of being left behind. Moreover, income inequality could widen within many countries, compounding current concerns over inequality between countries,” Bourguignon cautioned.
