Tuesday

11th Aug 2020

EU recovery strengthening despite global decline, World Bank forecasts

  • The eurozone has recovered quicker than expected but the oil price slump and a US rate rise could dampen the global economy, the World Bank warns. (Photo: World Bank Photo Collection)

The outlook for the European economy has improved despite the looming threat of Greece being forced out of the eurozone, according to a new report by the World Bank.

However, the bloc’s periphery countries continue to be affected by the ongoing war in Ukraine, and the EU’s resultant trade sanctions battle with Russia, which has plunged both countries into severe recessions.

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Published on Wednesday night (10 June), the World Bank’s bi-annual Global Economic Prospects report expects the world economy to grow by 2.8 percent in 2015. With the prospect of economic stagnation in the eurozone and Japan now receding, the Washington-based bank sees low commodity prices and the effects of the long-awaited hike in US interest rates as the main threats to the world economy.

The eurozone’s recovery has been boosted by increased demand prompted by the slump in oil prices and the European Central Bank’s €60 billion per month quantitative easing programme, and is forecast to grow by 1.5 percent this year - up from 0.8 percent forecast in January - and by 1.8 percent in 2016, according to the bank.

“The Euro Area has emerged from recession, with recoveries gathering strength in Spain, Portugal, and (especially) Ireland,” the report states.

Meanwhile, although the bank expresses concern that a Greece exit could hurt nearby countries Romania and Bulgaria, it notes that “the exposures of other parts of the Euro Area have diminished since 2010”.

“Foreign bank exposures to Greek sovereign and non-sovereign debt have declined sharply. The ECB’s quantitative easing program, which began in March, has shielded sovereign bonds in other peripheral countries from contagion risks,” the report says.

Despite this, 23 percent of Bulgarian bank assets are held by Greek banks, making it one of the most vulnerable EU countries to a Greek exit from the eurozone.

Meanwhile, a collapse in export revenues from oil, a sharp devaluation of the rouble, and trade restrictions on food as a result of its incursions in Ukraine, have plunged the Russian economy into a recession that the World Bank forecasts will knock 2.7 percent off its output in 2015, although it predicts a “modest recovery” in 2016.

The EU and the IMF disbursed the first $5 billion (€4.5 billion) tranche of aid to Ukraine as part of a four-year support programme for the country, but the Ukrainian economy is expected to reduce by 7.5 percent this year, with the bank warning that the conflict has “has destroyed or damaged sizeable parts of the production and export base in the eastern regions of Ukraine, disrupted trade and investment links.

The US Federal Reserve is expected to finally increase its interest rates after nearly seven years of near zero rates, a move which is unlikely to have much impact on EU countries but is likely to increase the borrowing costs of emerging and developing countries.

Both the World Bank and the IMF have urged the Federal Reserve to delay the rate hike until next year.

“Developing countries were an engine of global growth following the financial crisis, but now they face a more difficult economic environment,” said World Bank Group President Jim Yong Kim in a statement accompanying the report.

“We’ll do all we can to help low and middle-income countries become more resilient so that they can manage this transition as securely as possible,” he added.

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