World Bank Says Global Economic Growth to Slow for Second Year

Jan. 9 (Bloomberg) -- Global economic growth will slow for a second straight year in 2008 as tighter credit conditions and higher oil prices weaken expansions in the U.S., Japan and Europe, the World Bank said in an annual forecast.

The world economy will grow 3.3 percent this year, down from an estimated 3.6 percent pace in 2007 and 3.9 percent in 2006, the bank said. The U.S. economy, the world's largest, will expand 1.9 percent, compared with 2.2 percent last year, it said. Japan's gross domestic product is forecast to increase 1.8 percent while the euro-region's rises 2.1 percent this year.

``Things have changed dramatically,'' Elliot Riordan, a World Bank senior economist, said at a briefing on the outlook yesterday in London. ``All the uncertainties surrounding global growth and financial markets have become intensified.''

China, India and other developing nations will help prevent a deeper slowdown, the Washington-based development bank said. China will record the world's fastest growth pace, expanding 10.8 percent this year, after 11.3 percent in 2007. Developing countries as a group will grow 7.1 percent, from 7.4 percent in 2007, the World Bank said.

The World Bank lowered its 2008 global growth estimate from 3.6 percent in its previous outlook in May. The bank then projected growth of 3 percent this year in the U.S., 2.4 percent in Japan and 2.2 percent in the euro region.

``Several serious downside risks cast a shadow over this soft landing for the global economy,'' the report said, citing ``danger of a banking crisis and a U.S. recession.''

`Downward Spiral'

``Unexpected and large-scale new losses'' in financial markets, would risk a ``downward spiral'' in the economy and finance industry, the bank said.

Still, Riordan said the U.S. will probably escape a contraction. The World Bank's forecast assumes that a U.S. housing recession entering its third year won't drag down the entire economy and that ``strong export growth'' will help.

``Our outlook paints a fairly benign picture of the global economy, with no outright recession,'' Riordan said. ``With the U.S. subprime crisis, the financial effects have not extended to developing countries to the extent that we had earlier believed.''

The U.S. dollar represents a ``risk factor'' for the global economy, according to the bank's report. A recession in the U.S. or ``excessive'' Federal Reserve interest-rate cuts might contribute to ``further sharp declines'' in the American currency, it said.

`Challenging' Year

The year ``will likely be challenging for policy makers, with a large number of interrelated downside risks,'' the report said. ``These include the possibility of a full-fledged recession in the United States, higher oil prices and further escalation of turbulence in financial markets linked to the U.S. subprime debacle.''

Next year, the global economy is expected to rebound, growing 3.6 percent and led again by developing countries, the World Bank said.

``Overall, we expect developing-country growth to moderate only somewhat over the next two years,'' Uri Dadush, director of the World Bank's development and trade unit, said in a statement. ``However, a much sharper United States slowdown is a real risk that could weaken medium-term prospects in developing countries.''