Global economic growth is expected to edge up to 3.1% in 2018 thanks to a rebound in investment, manufacturing activity and trade, a new report shows – but adds there are risks to long-term growth.

The global economy is experiencing a cyclical recovery thanks to stronger-than-expected growth in 2017, according to the latest World Bank report 'Global Economic Prospects'.

The upswing, however, will be largely short-term, the report warns. Over the longer term, a more pronounced slowdown in potential output growth in both advanced economies and emerging market and developing economies (EMDEs) would make the global economy more vulnerable to shocks and worsen prospects for improved living standards.

Growth in advanced economies is forecast to moderate slightly to 2.2% in 2018 as central banks gradually remove their post-crisis accommodations and as an upturn in investment levels off. While growth in EMDEs as a whole is projected to strengthen to 4.5%, as activity in commodity exporters continues to recover.

"To arrest and possibly reverse this decline in potential growth, emerging market and developing economies need to accelerate investment in both physical and human capital, especially if total factor productivity (TFP) growth is likely to remain anaemic," the report states. "This may sound like the standard prescriptions of development economics. There's a reason for that: they are fundamental to economic growth. Today, the costs of neglecting these principles have gone sky-high."

Risks to the outlook continue to be tilted to the downside. An abrupt tightening of global financing conditions or a sudden rise in financial market volatility, could trigger financial turbulence and potentially derail expansion. While escalating trade protectionism or rising geopolitical risk could also negatively affect confidence, trade, and overall economic activity.

The risks, however, are more balanced than in previous forecast, the report points out, primarily due to the possibility of stronger-than-expected growth in the largest advanced economies and EMDEs – reflecting, for instance, a more pronounced investment-led recovery in the US and the Euro area, or a faster rebound in large commodity exporters. If these positive surprises were to materialise, they could have beneficial international spillovers.

The focus should turn to the structural policies needed to boost potential growth and living standards, the report says.

In the US, growth picked up in 2017 to an estimated 2.3%, supported by strengthening private investment. The recovery reflected a diminished drag from capacity adjustments in the energy sector, rising profits, a weakening dollar, and robust external demand.

Barring major additional policy changes, US growth is expected to reach 2.5% in 2018, above previous expectations, and then to moderate to an average of 2.1% in 2019-20. Low labour participation and weak productivity trends remain the most significant drag on US growth over the longer term.

In East Asia and the Pacific, regional growth in 2017 edged up to an estimated 6.4% in 2017, up 0.2 percentage point from previous forecasts, reflecting an improving external environment. Notwithstanding this cyclical upturn, growth is projected to moderate to 6.2% in 2018 and to an average of 6.1% in 2019-20, as a structural slowdown in China offsets a modest pickup in the rest of the region.

In Europe and Central Asia, growth is estimated to have accelerated to 3.8% in 2017, 1.3 percentage points above June projections, reflecting a stronger-than-envisioned recovery across the region – including in Poland, Russia, and particularly Turkey – mainly due to firming domestic demand. Growth is likely to decelerate to 2.9% in 2018, as the recovery in Turkey moderates, and settle at 3% in 2019-20. This stable outlook reflects continued recovery in the eastern part of the region, driven by commodity exporters.

In South Asia, regional growth decelerated but remained strong in 2017, at an estimated 6.5% – below June forecasts, mainly due to temporary disruptions associated with the adjustment in India to the new Goods and Services Tax (GST). Growth is expected to pick up to 6.9% in 2018 and stabilise at around 7.2%, on average, in 2019-20, as consumption remains strong, exports recover, and investment revives with ongoing policy reforms and infrastructure improvements.

The main downside risks to the outlook include fiscal slippages (Bangladesh, Maldives, Pakistan), a setback in implementation of reforms to improve corporate and financial sector balance sheets (Bangladesh, India), an abrupt rise in global financial market volatility, and disruptions due to natural disasters. On the other hand, stronger-than-expected global growth in the near term could result in positive spillovers to the more open economies in the region.

Click here to view the full report.