Still, risks from Iraq to SARS continue to weigh heavily and could threaten expansion, the World Bank said in a report.

Global economic output is expected to rise 3% next year, up from a forecast 2% expansion in 2003. The US economy has enjoyed early signs of recovery with production gaining and stock markets hovering at 14-month highs.

“The world economy is not firing on all cylinders but current trends point to a better 2004,” World Bank global trends analyst Hans Timmer told AFP.

“But risks to the outlook remain," the Bank said in its report. “If these risks materialize, all bets are off.”

The key threats to the tepid global recovery are instability in the Middle East, a possible re-emergence of SARS in China and an ever-widening US current account deficit.

Industrialised nations

As finance ministers predicted
in a July meeting, growth should
pick up

Highly industrialised countries should enjoy growth of about 2.5% in 2004, up from an expected 1.5% in 2003 with the US set to expand at 3.4% next year.

Still, conditions in Europe and Japan remain “extremely slack,” the Bank said.

The Bank projects growth in Japan’s economy, the world’s second largest, of 1.3% in 2004, that is up from 0.8% in 2003, while the Euro zone should benefit from modest expansion of 1.7% next year, according to the Bank's Global Economic Prospects 2004 report.

"A reversal of the short-term capital flows that are currently helping finance the US deficit could derail growth"

World Bank

Japan has suffered two crippling recessions over the past ten years, forcing the central bank to cut interest rates to almost  nothing. Unemployment remains at historic highs though a weaker currency is supportiung growth. 

Risks remain

“Persistent structural problems in rich countries - such as the twin deficits (shortfalls in the current account and the budget) in the US and weaker performance of Japanese and European banks - risk precipitating a disruptive fall in the US dollar or other unexpected confidence shock that cuts off the investment recovery,” the report said.

The global economy is grappling two consecutive years of plunging stock markets and slow growth.

France and Germany remain on the verge of recession, while the US has added impetus to its economy by introducing sweeping tax rebates and cutting interest rates to historic lows.

A reversal of the short-term capital flows that are currently helping finance the US deficit could derail growth, the Bank said.

Developing world

Meanwhile, the developing world should help stabilize the outlook by ramping up growth to 4.9% next year from 4.0% this year, gaining traction from a revival of world trade, receding global threats and a boost in domestic demand.

“The much-improved underlying policy fundamentals in most regions - progress on budget deficits, contained inflation, and greater trade openness - are a solid foundation for realizing productivity growth in 2004,” Timmer told AFP.

A stronger economy in India is expected to support growth of 5.4% both this year and next in South Asia. In East Asia and the Pacific growth should rise from a robust 6.1% this year to 6.7% in 2004.

Latin American/Caribbean expansion is expected to more than double to 3.7% from 1.8% in 2004. Sub-Saharan Africa should grow by 3.5% in the coming year.

Cancun meeting

Separately, the bank predicted that should a sensible trade deal be struck at the Cancun meeting of the World Trade Organisation at the end of this month, as many as 144 million people could be brought out of poverty by 2015.

Reducing protectionism in agriculture and ensuring poor countries have access to cheap medicines to deal with diseases such as AIDS, would boost incomes in rich and poor nations by up to $520 billion, the bank said in the report.