WASHINGTON -- Global economic expansion is at a ''turning point," with growth slowing to 3.1 percent this year after the fastest increases in four years, the World Bank said.
Rising interest rates, led by the United States, higher oil prices, the weakening of the dollar, and increasingly lopsided trade balances between countries such as the United States and China, are contributing to the erosion, the bank said in a report made public yesterday. The world economy expanded 3.8 percent in 2004.
''Global growth momentum has peaked," the World Bank said in a statement accompanying its Global Development Finance Report. ''Developing-country gains are vulnerable to risks associated with adjustments to ballooning global imbalances."
The likelihood of slower growth means policy makers must move quickly to reduce budget deficits, and developing counties must prepare for rising interest rates and reduce debt levels. Countries that haven't taken advantage of recent economic growth to reduce their debt will probably face financial difficulties as economic conditions worsen, the World Bank said.
''There is a tendency for financial markets and policy makers to miss the warning signs and overshoot making the necessary adjustment larger when it does occur," said Uri Dadush, director of the World Bank's Development Prospects Group.
A 31 percent increase in oil prices last year, compared with an 18 percent increase in other commodities, caused the decline of output in many higher-income countries in the second half of 2004, the bank said in the report.
Oil prices, grouped with moderate wage increases in Europe, particularly hurt domestic demand there, and when factoring in the appreciation of the euro, European exports also suffered.
Developing countries are outpacing high-income countries, said the report. Growth in developing countries is expected to be 5.7 percent in 2005, compared to 6.6 percent in 2004. The 2004 pace was the fastest in 30 years.
China's 9.5 percent growth topped the list of developing countries, helping to bolster east Asia, India, and Russia, each of which grew by about 7 percent in 2004.
Net private investment, which includes equity and debt, into Brazil, China, Mexico, Russia, and other developing countries, rose $51 billion to $301.3 billion in 2004. Of that, foreign direct investment rose $13.7 billion to $165.5 billion.
The investment in developing countries could fall if there are interest rate increases or disrupting changes in exchange rates. Growth began to slow in the second half of 2004, and domestic demand is expected to continue to fall as a result of high oil prices, rising interest rates, and the lasting effects from the 2000-2001 recession.