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World Bank sees stronger growth as rich economies expand

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[January 15, 2014]  By Anna Yukhananov

WASHINGTON (Reuters)  The World Bank on Tuesday raised its forecast for global growth for the first time in three years as advanced economies started to pick up pace, led by the United States.

The rosier outlook suggests the world economy is finally breaking free from a long and sluggish recovery after the global financial crisis.

The poverty-fighting institution predicted global gross domestic product will expand 3.2 percent this year, from 2.4 percent in 2013, according to its twice-yearly "Global Economic Prospects." In the bank's last forecast in June, it expected global growth to reach 3 percent in 2014.

The bank said the global economy had come to a "turning point," as fiscal austerity and policy uncertainty no longer weighed as heavily on most richer economies. The bank expected stronger growth in the United States in particular, of 2.8 percent in 2014, from 1.8 percent last year.

"For the first time in five years, there are indications that a self-sustaining recovery has begun among high-income countries  suggesting that they may now join developing countries as a second engine of growth in the global economy," the bank's chief economist Kaushik Basu said in the report.


The bank again shaved its forecasts for developing countries, to 5.3 percent for 2014, from the 5.6 percent it predicted in June.

Emerging markets have grown at their slowest pace in a decade for the past two years, after chalking up growth rates of around 7.5 percent before the global financial crisis hit in 2008.

Andrew Burns, the report's lead author, said frothy growth before the crisis reflected cyclical factors.

"We're moving into a new phase where developing countries are growing at a rate much closer to their underlying sustainable rate of growth," he told reporters.

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SMOOTH UNWINDING

As advanced economies strengthen, countries may begin pulling back from the massive monetary stimulus launched at the height of the crisis. The U.S. Federal Reserve has started winding down its monthly asset-purchase plan this month, though it expects to keep interest rates low for at least another year.

The World Bank said it expects rates around the world to inch up gradually, causing minimal disruptions for developing countries as capital inflows slow down.

"Whatever drag this implies for developing country growth is more than offset by the additional export demand due to stronger high-income country growth," the report said.

However, if rates jump suddenly, countries with high debt levels or large current account deficits such as Thailand and Malaysia would be most vulnerable.

The bank said that while risks to its global outlook, including a sharp rebalancing in China, a protracted recovery in the euro zone, and fiscal policy uncertainty in the United States, have not been eliminated, they have subsided.

(Reporting by Anna Yukhananov; editing by Andrea Ricci)

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