The World Bank warned the global economic recovery has peaked and said the severity of the coming slowdown will depend on how skittish foreign investors are about buying U.S.-dollar-denominated assets.
Meanwhile, the Asian Development Bank said that Asia's developing economies will sustain robust growth into 2007 as strong domestic demand, regional trade and a steady inflow of investment offset soaring oil prices and moderating growth in the U.S. and China.
In an annual report on the risks confronting developing economies, the World Bank said the global recovery of the past three years has masked cracks that can't be left unattended much longer. The fragility, it said, was highlighted by "brisk selloffs" of the dollar last month after some Asian central banks said they might diversify their currency portfolios. "The global economy is at a turning point," Francois Bourguignon, the bank's chief economist, said in a foreword to the report. "Growth has peaked, and pressures to address global imbalances are growing, exposing important risks facing both developed and developing countries as the needed adjustments occur."
The bank urged a "coordinated response" to minimize the risk of a crisis: The U.S. government should shrink its record budget deficits, Europeans should ensure that their monetary policy doesn't get tighter than that of the U.S., and major Asian nations should permit their currencies to rise against the dollar in a "managed appreciation."
The bank said its best-case scenario calls for a mild slowdown during the next few years. The annual growth rate of gross domestic product, 3.8% in 2004, is likely to drop to 3.1% this year and hover at about that level through 2007. Among developing countries, the rate should slip to 5.7% this year and 5.2% in 2006, from 6.6% last year.
The U.S. current-account deficit -- the broadest measure of its trade balance -- hit a record $666 billion last year, or 5.6% of GDP. That gap used to be financed mainly by foreign private investors, but such investors have been retreating since 2001, increasing U.S. reliance on foreign central banks. Last year, "most of the current-account deficit was financed by sales of public-sector assets and securities," the bank said.
In its latest Asian Development Outlook, the ADB said GDP for Asia, excluding Japan, will grow between 6.5% and 6.9% annually over the next three years. For 2005, the ADB forecast average GDP growth of 6.5% for developing Asia, up from 6.2% it predicted last September. The upbeat forecast stems from momentum generated by the region last year, when GDP growth averaged 7.3%. That was the fastest growth rate since the 1997-98 Asian financial crisis.
Even countries hit by a devastating tsunami in late December will likely emerge quickly from the devastation, the ADB said. Asia, excluding Japan, will see a "brisk pace" of growth in intraregional trade as the rest of developing Asia integrates further with China and increasingly with India.
The ADB forecast China's GDP will grow 8.5% in 2005, 8.7% next year and 8.9% in 2007, following growth of 9.5% in 2004, and it expects Asia's fastest-growing economy to achieve a soft landing as a result of government policies aimed at damping sectors viewed as overheated.
Domestic demand will be the main driver of the region's growth; moderating export growth its main damper. "Domestic market conditions have become stronger over the past two years in most countries, providing some cushion against a potential deterioration in the external environment," the report said.
The ADB expects developing Asia's exports to rise by 13.8% this year and 11% in 2006 and 2007, after growing an average 25.5% in 2004. Imports, meantime, are expected to rise 16.1% this year, 13.7% in 2006 and 12.2% in 2007.
For 2006 and 2007, ADB forecast GDP growth in developing Asia of 6.6% and 6.9%, respectively. Tempering the upbeat message, the ADB warned that Asian economies -- and particularly those in Southeast Asia -- are at risk from surging oil prices, epidemics and terror attacks, as well as still-large U.S. external imbalances and the impact of further increases in interest rates by the Federal Reserve.
Write to Joseph Rebello at joseph.rebello@dowjones.com and Cris Larano at cris.larano@dowjones.com
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