The World Bank trimmed its global economic growth outlook on Wednesday, warning that developing markets faced a raft of headwinds ranging from lower commodity prices to the prospect of higher borrowing costs.
The Washington-based lender now expects the world economy to expand 2.8 percent in 2015, down from its January projection of 3 percent, according to its bi-annual Global Economic Prospects (GEP) report. It maintained its growth forecasts for 2016 and 2017 at 3.3 percent and 3.2 percent, respectively.
"Developing countries were an engine of global growth following the financial crisis, but now they face a more difficult economic environment," Jim Yong Kim, group president at World Bank, said in a statement.
It downgraded its 2015 and 2016 growth outlook for developing economies to 4.4 percent and 5.2 percent, from 4.8 percent and 5.3 percent respectively.
Lower prices of oil and other commodities have intensified the slowdown in several developing countries which rely heavily on resource exports, the World Bank said.
Emerging economies are also grappling with weakening exchange rates, triggered by a broad-based appreciation of the U.S. dollar on expectations that the U.S. Federal Reserve will soon begin hiking interest rates.
Currency depreciation has been largest in developing countries with deteriorating growth prospects—most notably commodity exporters—and elevated external vulnerabilities, the report noted.
The Brazilian real and Malaysian ringgit, for example, have tumbled 17 percent and 7 percent against the U.S. dollar this year respectively.
When the Fed's "liftoff" begins, challenges will likely grow, the World Bank noted, cautioning higher borrowing costs in emerging markets as well as financial market volatility.
If, in response to the liftoff, U.S. long-term bond yields were to jump 100 basis points as they did during the taper tantrum, capital inflows to emerging markets could decline between 18-40 percent, it calculated.
While the global economy is in a soft patch, growth is expected to pick up modestly in 2016-2017 as a recovery in advanced economies gathers steam.
High-income countries are on course to grow by 2.0 percent this year, 2.4 percent in 2016 and 2.2 percent in 2017, it said, up from 1.8 percent last year.
"The expected growth pickup reflects the recovery in the Euro Area, continued robust activity in the United States, and increased traction from Japan's monetary, fiscal, and structural policy efforts," it said.
However, the World Bank cautioned that its projection for a pickup in growth is not without risks.
On top of potential challenges stemming from a U.S. rate hike, including financial market volatility and declining capital flows, excessive appreciation of the U.S. dollar could curtail the recovery of the world's largest economy, it warned.