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Money News

The World Bank Has Some Good News, and Some Bad News

June 06, 2018

  • The World Bank forecasts global economic growth of 3.1% for 2018
  • The U.S. economy is expected to grow 2.7% this year, and 2.5% in 2019
  • Trade wars, however, could upend the global economy
3 min read

The U.S. economy is humming—and the rest of the globe is joining in the chorus.

Despite looming trade wars and a debt crisis in Italy, among other things, the world’s economy is set to grow more than 3% this year, according to a new forecast from the World Bank.

That’s on par with what the bank forecast earlier this year, and roughly equal to its prediction for growth in 2017.

What is the World Bank?

The World Bank is an international financial institution. It provides loans and financing, primarily to developing countries, in an effort to reduce poverty worldwide. Headquartered in Washington, D.C., it was founded in 1944 at the Bretton Woods Conference by a delegation of international economists and policymakers in an effort to help poor countries secure loans.

The World Bank issues semiannual reports on global economic growth. The latest report, the June 2018 Global Economic Prospectus, provides reasons for optimism–cautious optimism, that is.

What does the latest report say?

0%
forecasted global growth
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forecasted U.S. growth

The headline is that the world economy is set to match expectations in 2018, growing 3.1%, and then an additional 3% in 2019, according to the report.

Domestically, the U.S. economy is expected to grow 2.7%, a bump from the 2.5% the World Bank forecast in its January report. Next year, it’s estimating 2.5% growth.

The rest of the report, though largely positive, is more of a mixed bag.

The good news

Roughly half of the world’s economies are growing, with China leading the pack. China, the world’s second-largest economy after the U.S., is expected to expand 6.5% in 2018, according to the report.

“All the consensus forecasts for 2018 and 2019 reflect optimism,” Shantayanan Devarajan, acting chief economist for the World Bank Group said in the report.

The upgraded forecasts for both the U.S. and the global economy may come as a reassurance as an avalanche of political and financial news has worried investors and thrown markets into disarray over the past several months.

The report says that economic growth should remain “robust” for the next year or two.

“This synchronized recovery may lead to even faster growth in the near term, as stronger growth in, say, China or the United States spills over to other parts of the world,” Devarajan said.

Curb your enthusiasm

“Protectionist threats cast a dark cloud over future growth. If these threats lead to trade wars, the consequences could be devastating.” – Shantayanan Devarajan, acting chief economist for the World Bank Group

The bad news is that economic growth is expected to slow by 2020, mostly because the world’s economies should be firing on all cylinders.

That rosy outcome is threatened by the possibility of escalating trade wars.

“Protectionist threats cast a dark cloud over future growth. If these threats lead to trade wars, the consequences could be devastating,” Devarajan said. “Even if they do not, uncertainty about economic policy dampens investor sentiment.”

Tariffs could pummel the global economy to a degree not seen since the financial crisis in 2008 and 2009, the report says.

With uncertainty surrounding the trade negotiations involving the U.S. and China—and with new trade barriers recently announced between the U.S. and Canada, Mexico, and the E.U.—it’s unclear how things will shake out.

The U.S. also has increasing budget deficits to consider. A deficit is a shortfall between a government’s expenditures and revenues, which tends to increase the national debt. Following last year’s tax cuts, the budget deficit in the U.S. could reach 5% of GDP over the next decade, which could lead to inflation, experts say.

Looming interest rate hikes in the U.S. could also upend the World Bank’s forecasts.

By Sam Becker
Sam Becker is Stash's financial writer.

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