Slowing U.S. Economy Weighs On World Bank 2008 Forecast

Global economic growth is forecast to slow this year to 3.3 percent, down from last year's 3.6 percent...

GENEVA — Global economic growth is forecast to slow this year to 3.3 percent, down from last year’s 3.6 percent, partly due to the U.S. downturn aggravated by the subprime mortgage crisis, but strong expansions in China and India are expected to help limit the impact, according to a World Bank report released Tuesday.

This story first appeared in the January 11, 2008 issue of WWD.  Subscribe Today.

“Weak domestic demand is expected to keep U.S. GDP growth below 2 percent in 2008,” the “Global Economic Prospects 2008” report said.

It estimates growth in developing countries to ease to 7.1 percent in 2008, down from 7.4 percent last year, while rich industrialized countries are projected to grow by a modest 2.2 percent, down from 2.6 percent in 2007.

Growth in the U.S. is forecast to weaken to 1.9 percent, down from 2.2 percent in 2007, and to ease in the European Union to 2.1 percent and in Japan to 1.8 percent. Growth in China is expected to slow to 10.8 percent in 2008 from 11.3 percent last year, and in India to grow by 8.4 percent, slightly lower than the 9 percent expansion posted in 2007.

Strong economic performances in 2008 are also anticipated in other emerging nations with major textiles and apparel exporting industries. Pakistan is forecast to grow 6.5 percent, Bangladesh 5.5 percent, Sri Lanka 6.2 percent, Turkey 5.4 percent, Egypt 7 percent, Cambodia 8 percent and Vietnam 8.2 percent.

But in China, World Bank economists said “efforts to slow growth may not succeed in quickly reversing a recent acceleration in inflation.” China’s vibrant growth, noted the report, is underpinned by strong net export gains and buoyant domestic demand, led by investment.

However, China’s soaring current account surplus, which reached about $380 billion in 2007, or about 12 percent of Gross Domestic Product, observed the report, is “adding to domestic liquidity and contributing to asset price increases, while supporting, along with other factors such as sharp gains in food prices, an upward drift in consumer price inflation.”

It also forecasts the price of oil, which spiked to almost $100 a barrel late last year and averaged $71.20 for 2007, to average $84.10 in 2008, up 18.1 percent.

“Because OPEC has limited spare capacity and is holding down production, oil prices will remain quite elevated and volatile,” the report noted.

The World Bank also expects agricultural prices to “remain nearly flat at high levels in 2008, as biofuels consumption continues to ramp up response to consumption mandates and production subsidies, drawing resources from other crops.”

The report cautioned that there are risks to the basic outlook scenario and that the likelihood of financial problems “would increase rapidly if home prices in the U.S. were to fall precipitously, an event that could push the U.S. economy into recession.”

Such a development would reinforce the slide of the dollar and have a destabilizing effect on global markets, it added. A much sharper U.S. slowdown “is a real risk that could weaken medium-term prospects in developing countries,” said Uri Dadush, World Bank director.

In global textile and apparel trade, the report noted that with the dismantling of quota restrictions on certain categories of Chinese textiles and apparel exports in 2008 by the European Union and in 2009 by the U.S., Chinese exports of these products “will grow significantly.”

Exports to the EU that are most at risk of losing market share are Colombia, the Dominican Republic, Mauritius, Peru and Sri Lanka.

However, exposure in the U.S. market, said the report, is generally much lower and adds that only the Dominican Republic, India and Sri Lanka export more than 20 percent of their textiles and apparel in categories where Chinese exports are still subject to quotas.

The report draws parallels with the elimination of global quotas at the end of 2004 — the EU and U.S. reinstated quotas under safeguard provisions of China’s entry into the World Trade Organization — where many competitors managed to retain their market shares.

“The countries best able to expand their exports of clothing will be those that have a supportive business environment, low trade costs (efficient customs, ports and transport infrastructure) and competitive firms that are flexible enough to meet the changing demands of global buyers that now dominate the industry,” the report concluded.