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Overview and Main Messages

After several years of extreme weakness, high-income economies appear to be finally turning the corner, contributing to a projected acceleration in global growth from 2.4 percent in 2013 to 3.2 percent this year, 3.4 percent in 2015, and 3.5 percent in 2016 (table 1 - the summary table).

Most of the acceleration is expected to come from high-income countries, as the drag on growth from fiscal consolidation and policy uncertainty eases and private sector recoveries gain firmer footing. High-income growth is projected to strengthen from only 1.3 percent in 2013 to 2.2 percent this year and 2.4 percent in each of 2015 and 2016. This strengthening of output among high-income countries marks a significant shift from recent years when developing countries alone pulled the global economy forward. In addition to providing a second basis for global growth, stronger high-income growth and import demand will be an important tailwind for developing countries' exports. This should help compensate for the inevitable tightening of global financial conditions that will arise as monetary policy in high-income economies is normalized.

Activity and sentiment in developing countries has turned up since mid-2013, bolstered by strengthening high-income demand and a policy-induced rebound in China. These positive developments were partly offset by tighter financial conditions and reduced capital flows as long-term interest rates in the United States ticked up in response to expectations of the gradual withdrawal of quantitative easing. Other major headwinds included declining commodity prices for commodity exporters.

Overall, growth in developing countries is projected to pick up modestly from 4.8 percent in 2013 to 5.3 percent this year, 5.5 percent in 2015, and 5.7 percent in 2016. Developing-country GDP growth will be about 2.2 percentage points weaker than it was during the pre-crisis boom period. The slower growth is not cause for concern, however. More than two-thirds of the slowdown reflects a decline in the cyclical component of growth and less than one-third is due to slower potential growth.

Growth accelerations are projected to be particularly muted in East Asia and the Pacific and Latin America and the Caribbean, as economies in both these regions have already recovered from the crisis and are growing at close to potential. In the East Asia and Pacific region, GDP growth is projected to remain flat at about 7.1–7.2 percent over the projection horizon, partly reflecting a trend slowing of growth in China as it rebalances its economy. Growth in the Latin America and the Caribbean region remained broadly flat at 2.5 percent in 2013. Supported by a strong rebound in Mexico coupled with more modest firming of growth elsewhere, regional GDP is expected to pick up to around 2.9 and 3.2 percent in 2014 and 2015 before strengthening to about 3.7 percent in 2016.

Positive spillovers from a gradual upturn in high-income Europe and a reduced pace of household, fiscal, and banking sector consolidation are expected to slowly boost GDP growth in developing Europe and Central Asia from 3.4 percent in 2013 to 3.5 percent in 2014, rising further to 3.8 percent in 2016. In the Sub-Saharan Africa region, relatively robust domestic demand, notably resource-sector and infrastructure investments, should help support regional growth of about 5.4–5.5 percent in 2015 and 2016. In South Asia, weaker growth in India—following several years of rising inflation and current account deficits—has opened up a large negative output gap, which is projected to gradually close as the economy slowly recovers. Better Indian performance will be heavily reflected in the region’s growth, which is expected to strengthen from 4.6 percent in 2013 to 5.7 percent in 2014 to about 6.7 percent in 2016.

Many of the economies of the Middle East and North Africa region remain in turmoil nearly three years after the Arab Spring uprisings first began. Nascent recoveries have repeatedly faltered as political and social tensions periodically flare up. These tensions and their economic consequences are assumed to persist in the baseline forecast—holding back a more vigorous rebound. Regional GDP, estimated to have remained flat in 2013, is projected to expand by 2.8 percent in 2014 before rising to 3.6 percent in 2016. Of course, should tensions ease more quickly than anticipated (or deteriorate) outcomes could be substantially better (worse).

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The February 2014 Financial Markets Outlook report is now available.
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