World Bank calls for quantitative easing to stop eurozone stagnation

The World Bank has warned of the risk of the eurozone sliding into permanent stagnation and urged the European Central Bank to embark on a money-creation programme to boost growth.

In its half-yearly health check on the global economy, the bank said there was a growing gulf in the west between the strong growth posted by the US and the UK and the weakness of the eurozone and Japan.

The bank said the problems of the eurozone and Japan had forced it to revise down its global growth forecasts for 2014 and 2015. It stressed that ingrained structural defects could be the reason for the continued failure to recover to pre-recession growth rates.

Kaushik Basu, the bank’s chief economist, said: “The global economy is still struggling to gain momentum as many high-income countries continue to grapple with the legacies of the global financial crisis and emerging economies are less dynamic than in the past.”

The bank’s report said global growth would be 2.6% in 2014, down 0.2 percentage points from predictions made last June. The growth forecast for 2015 has been shaved by 0.4 points to 3%, the fourth year in a row that the bank’s initial view of the prospects for the global economy have proved too optimistic.

“Worryingly, the weak recovery in many high-income economies and slowdowns in several large emerging markets may be a symptom of deeper structural weaknesses,” Basu said.

The bank said the collapse in oil prices would result in both winners and losers but would, on balance, be positive for global growth. It predicted growth in the UK would be 2.9% this year, up from 2.6% in 2014.

The report said: “Several major forces are driving the global outlook: soft commodity prices, persistently low interest rates but increasingly divergent monetary policies across major economies, and weak world trade. In particular, the sharp decline in oil prices since mid-2014 will support global activity and help offset some of the headwinds to growth in oil-importing developing countries. However, it will dampen growth prospects for oil-exporting countries, with significant regional repercussions.

“For now, many oil-exporting economies have substantial reserves to buffer extended periods of low prices. However, sustained low prices could severely undermine fiscal resources and external balances in several already fragile oil-exporting economies in the Middle East, Europe and Central Asia, and Latin America. Slowing growth across large oil-exporting economies, including in Russia, will have important regional repercussions.”

The bank said it expected Russia’s economy to contract by almost 3% this year.

Franziska Ohnsorge, lead author of the report, said the bank believed quantitative easing – money creation through the purchase of government bonds – was necessary for the eurozone and would work by driving down the value of the euro, thereby making exports cheaper and imports dearer.

However, it is concerned that the eurozone could get stuck in an economic rut in which persistently low growth leaves the public convinced that prices will keep falling.

“Weak consumption, anaemic investment and low inflation could feed on each other in a deflationary spiral,” the report said.

“The danger of deflation would be compounded by the difficulties already afflicting countries in the eurozone: a shrinking working-age population, slowing productivity growth (reflecting a lack of capital-embodied new technologies), and a loss of skills among the large number of long-term unemployed.”

The bank warned that stagnation in the eurozone would have global implications.

“While neighbouring high-income countries, including Switzerland and the UK, may be hardest hit by stagnation in the eurozone, it would also directly dampen activity in eastern Europe, north Africa and south Asia, which depend heavily on European export markets.”