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Global Economic Prospects

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November 16, 2005—Economic growth in developing countries will slow to 5.9 percent this year, down from 6.8 percent last year.

That’s according to the World Bank’s annual Global Economics Prospect report for 2006, which forecasts economic growth in developing countries will be 5.7 percent in 2006.

Growth in high income countries is forecast to be largely flat, says Andrew Burns, one of the authors involved in the report.

“That reflects different developments. We see the growth in the United States slowing somewhat; Japan being relatively stable at currently levels of just over two percent and a strengthening of growth in Europe,” Burns says.

Overall, the report says the slowdown among industrial economies, which began in the second half of 2004, continued this year. It predicts gross domestic product (GDP) growth will come in at 2.5 percent, down from 3.1 percent last year.

Burns says while economic growth in developing countries slowed down in percentage terms, it remains “very strong”. The report predicts developing economies will continue to grow at very high rates, and more than twice as fast as high income economies.

Oil Prices

Burns says high oil prices was one factor in dampening the global expansion.

“High oil prices have played an important role. Also just following that very strong growth that we saw in 2004, you can expect a slowdown, as countries hit their capacity constraints. The tightening of monetary policy in the United States has also played a role,” he says.

Burns says its expected oil prices will decline over the next several years.

“We see the prices at US$60 a barrel for 2006. We expect them to average US$56 and to fall to about US$52 a barrel in 2007.”

However he says the increases in oil prices since 2004 is expected to generate “substantial economic costs” for oil-importing poor economies, which are not reflected in the GDP figures.

“If we look in terms of incomes in developing economies, there the slowdown has been much sharper – we’ve had a drop in incomes of around three percent.”

Burns says unless steps are taken to assist the most vulnerable of the oil importing low income countries, they are going to have to meet that additional cost to pay for higher oil by cutting back on spending on other items.

 “And that, we fear, will have an important impact on poverty in those countries,” he says. 

Risks to Positive Outlook
The report says its relatively positive outlook is subject to “important downside risks.”

Chief among these is the possibility of a disruption in oil supply. The report warns that a future supply shock could drive oil prices even higher, potentially reducing global output by 1.5 percent for several years.

The future path of interest rates, which despite recent increases are still low, is also identified as another source of uncertainty.

The report says persistent global imbalances, signs of rising inflation and concerns about the sustainability of government finances in industrialized countries are all factors that could push rates up, and possibly provoke a more serious slowdown.

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