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World Bank says US budget poses global risk

World Bank headquarters in Washington D.C.

World Bank headquarters in Washington D.C.

U.S. budget battles are restraining economic growth around the world, posing a greater risk to the global economy than even a renewed euro-zone crisis, the World Bank said Tuesday.

In new economic forecasts, the bank said it expects the global economy to expand just 2.4% this year, barely better than the weak pace of 2012. The U.S., the world’s largest economy, could fall into recession if federal budget cuts occur as scheduled in early March, while the euro zone’s downturn is expected to continue through the year.

Developing countries, meanwhile, are growing at some of their slowest rates of the past decade.

“It’s a risky year,” World Bank chief economist Kaushik Basu said.

A critical divide persists in most economies: Investor sentiment is rising, buoyed by powerful monetary stimulus and easing fears about a euro-zone meltdown. But underlying economies remain lethargic.

 “Financial markets are calmer, but there is no pickup in growth,” Mr. Basu said. “You can keep markets calm for one or two years, but if this is not backed up with real growth you could get another round of financial risks coming in.”

The World Bank’s projections, like many others, have often proved to be too optimistic in recent years. Its latest forecast marks a downgrade from its projection in June for 2013 global growth of 3%. The bank’s economists attributed the disappointment to worse-than-expected U.S. business investment and uncertainty tied to U.S. budget policy.

The bank’s expectation for U.S. growth of 1.9% this year is based on the assumption of “significant progress” toward a medium-term budget plan and more than just a short-term punt on raising the federal debt ceiling.

In an alternative scenario the bank labeled “fiscal paralysis,” the U.S. implements large, across-the-board government spending cuts scheduled to begin in March and Congress provides only a short-term increase in the debt ceiling. That would cause the U.S. economy to shrink by 0.4%, knocking Europe into a deeper contraction and reducing global growth by 1.4 percentage point.

A separate scenario involving a renewed euro-zone crisis, in which two of the currency bloc’s economies are frozen out of capital markets, would slow global growth by 1.3 percentage points, the bank said. WSJ

FACTS & FIGURES

The percentage of Americans naming the federal deficit and the way government operates as the top problems facing the country today are higher than they have been since the 1990s and the 1970s. Gallup

These concerns may become even more salient in the weeks ahead. The federal government now faces a situation akin to the one in August 2011 — with the amount of federal debt projected to exceed the mandated debt ceiling. Gallup

Americans are beginning to feel the pinch from Washington’s decision to embrace austerity measures aimed at bringing down the nation’s budget deficit. Reuters

Paychecks across the country have shrunk over the last week due to higher federal tax rates. Taxes went up on December 31 for about 160 million workers as a temporary payroll tax cut expired, which will cost the average worker about $700 a year, according to the Tax Policy Center, a Washington think tank.

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