TRADE conflict between the world’s two largest economic powers already is inflicting collateral damage and threatens to do yet more harm to the global economy, the World Bank warned on Tuesday.

And the global slowdown is beginning as government and corporate debt rise, especially among the poorest countries, while mounting interest rates increase borrowing costs, the bank said in its semi-annual Global Economic Prospects report.

The report was markedly more pessimistic than a year ago – when the outlook was for synchronised global growth – and peppered with exhortations to take “urgent”, “imperative” or “critical” action.

“Risks are rising,” said senior World Bank economist Ayhan Kose. “The global economy is going through a difficult period. Skies are darkening and we see the global economy slowing.”

Growth of the world economy is expected to slow to 2.9 per cent this year, and 2.8 per cent next year, slightly below the previous forecast, and the estimates for nearly all regions and countries were downgraded.

At the centre of the turmoil, US economic growth is expected to slow this year by four tenths of a point, falling to 2.5 per cent down from 2.9 per cent last year, and to slow even further next year to 1.7 per cent.

China’s economy also is slowing amid the trade dispute, and growth should slip to 6.2 per cent this year and next.

Kose, who heads the World Bank’s Development Prospects Group – which twice a year produces the global economic forecasts – said he hoped for a resolution but meanwhile urged governments to prepare for a difficult road ahead.

“Global growth is still robust but whether a storm will hit or it will clear highly depends on how policymakers are going to react,” he said.

Trade war damage

Though the bank still sees a low probability of recession in the US, even a small slowdown has an outsize effect. And if the US and China slow by a full percentage point, it will cut global growth by nearly the same amount, with dire consequences for many countries.

“Trade tensions are already affecting activity around the world,” Kose said, adding that it could get worse.

The report sharply downgraded the growth forecasts for key emerging market economies like Mexico, South Africa and Russia, as well as for crisis-struck countries Turkey and Argentina. So far India and Indonesia have escaped that fate.

But the US and China together account for about a third of global GDP and 20 per cent of global trade.

“How they resolve their differences is going to be very important how global economy is going to shape this year,” said Kose.

Trade is an engine of growth and has been “a driving force in terms of poverty reduction”, he said. “Our hope is that these differences are going to be resolved.”

But the sharp decline in global equities markets at the end of last year showed the uncertainty generated by the trade conflict undermines business confidence and slows investment, Kose said.

Looking at the data, “you definitely see that in 2018 manufacturing has slowed [and] export orders have slowed”.

After rising last year, confidence is ebbing and “this is cause for concern”.

Policy buffers

With growing risks dominating the outlook, the World Bank urged member countries to prepare themselves, with changes in spending, investment and borrowing to establish “policy buffers” against coming headwinds.

“The sense of urgency has to be there,” Kose said. “Ultimately a robust policy framework is the most important insurance when you have a slowing economy and rising risks.”

That is especially true with rising debt levels, as interest rates are moving higher.

The report highlights with concern a big jump in borrowing by the poorest nations, debt that increasingly coming from lenders that unlike the World Bank do not provide concessional terms.