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The medium term outlook

Global GDP growth is projected to gradually rise from 2.4 percent in 2013 to 2.8 percent in 2014, 3.4 percent in 2015 and 3.5 percent in 2016. Rebounding growth in high-income countries from 1.3 percent last year to 1.9 percent this year and 2.5 percent by 2016 is the main impetus for the acceleration.

The acceleration in activity among developing countries is projected to be more muted, as the recovery from the crisis of 2008 is by and large complete for these economies. In addition, economic rebalancing in China, and a gradual tightening of financial conditions as the recovery in high-income countries progresses are expected to moderate outturns. Developing-country GDP growth is projected to stay flat for the third year in a row at 4.8 percent this year and to rise only gradually to 5.5 percent by 2016.

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In the United States, the economy is projected to expand 2.1 percent in 2014, up from 1.9 percent in 2013. The first quarter contraction will weigh on the annual number — even as quarterly growth rebounds to close to 3 percent, responding to a reduced drag from fiscal consolidation, improving labor market conditions and an upturn in investment spending, which had been held back in recent years by an uncertain fiscal policy climate. Together these factors are expected to lift growth further to 3.0 percent or thereabouts in 2015 and 2016.

In the Euro Area, reduced fiscal drag is also projected to support an acceleration in activity from -0.4 percent last year to 1.1 percent in 2014 — the first annual increase in three years. In subsequent years growth is projected to firm further—reaching 1.9 percent in 2016. The recovery will be supported by positive reform momentum (including the establishment of a single supervisor and broad based backstops), and the gradual establishment of a virtuous cycle of rising confidence, improving asset values, employment and strengthening private demand.

Activity should also remain supported by a further easing of the monetary policy stance — baseline projections factor in the cut in policy rates by the ECB in June through a lowering of short term interest rate projections by some 30 basis points in 2015 and 2016, relative to projections in the January 2014 GEP and also anticipates that low spreads in the periphery economies will persist. Credit easing and other unconventional measures announced in early June are not factored in the baseline and can therefore be considered as an upside risk to the projections. Policy is not expected to tighten until deflation fears have been firmly laid to rest and there are signs of a well-entrenched recovery.

Japan is the only major developed economy expected to slow down this year (to 1.3 percent compared with 1.5 percent in 2013), partly because the growth impetus from monetary policy stimulus may be fading and because of the fiscal drag from the April sales tax hike. Growth is expected to recover to about 1.5 percent in 2016, supported by structural reforms and supportive policy. Stronger growth, along with the sales tax increase should help to improve or stabilize extremely high public debt ratios and fiscal balances. Nonetheless, over the medium to long term much more fiscal consolidation (notably for entitlement spending) will be necessary. Corporate tax reforms (including a cut) also appear to be on the cards, and if introduced, could be implemented mid-2015.

Reviving high income economies are projected to inject $6.3 trillion into global spending power between 2014 and 2016, one-and-a-half times the $3.9 trillion increase in high-income GDP between 2010 and 2013 and larger than the expected contribution from developing countries. Developing countries also stand to benefit from a change in the composition of high-income demand, namely a rotation from less import-intensive categories of spending (government spending) to more import–heavy goods and services (private consumption and investment) (World Bank, 2014B).

With the contribution to global import demand of high-income economies doubling, growth in global trade volumes is expected to accelerate from 2.6 percent in 2013, to 4.2 percent this year, rising to about 5.4 percent in 2016 (figure 13). Increased demand for consumer and investment goods, should disproportionately benefit the manufacturing intensive economies of East Asia, developing Europe and Latin America. Despite the acceleration, the dollar value of global trade will not reach pre-crisis levels, mainly because commodity prices are expected to be stable or falling in contrast to the abrupt rises of the pre-crisis period. While slower growth in China will serve as a counter-weight, the stronger demand from high-income countries will dominate (see box 4).

FIGURE 13 The contribution of high income countries to global trade volumes will more than double
Source: World Bank.

Financial conditions are easy, but will tighten in the medium term

The recent resurgence in capital flows, coupled with further easing of monetary policy in the Euro Area (see earlier discussion and box 1 in Recent developments' page) have relaxed financial conditions and unwound about half of the tightening that occurred during the summer of 2013. These conditions should support developing country demand in the short-run, but are likely to tighten over the longer-term.

The United States is already bringing its quantitative easing programs to a close, and has indicated that a gradual tightening of traditional monetary policy could begin as early as mid-2015. In Japan, monetary policy is likely to remain loose as long as it is necessary for achieving and maintaining the 2 percent inflation target. In the Euro Area, where significant further credit easing was announced in June, policy is not likely to tighten before the end of the projection period, with the ECB emphasizing at its June meeting that key rates would remain at current low levels for an extended period of time, with unconventional monetary stimulus also on the cards if low inflation persists for too long.

To what extent financial conditions will tighten is, as yet, unclear. In the scenarios outlined in the January 2014 edition of Global Economic Prospects, a gradual normalization of activity and policy was assumed to see long-term interest rates in the US rise to around to 3.8 percent by the end of 2016 (consistent with market expectations), and short term rates rising to 1.9 percent by the end of 2016. Under this scenario capital flows to developing countries are expected to increase in nominal terms but to moderate as a share of GDP (by about 0.5 percent of developing country GDP over the baseline), driven mainly by weaker portfolio investments (table 2 and box 5).

TABLE 2 Net financial flows to developing countries ($ billions)
Source: World Bank.
Note: e = estimate, f = forecast.
/a including short-term and long-term private loans, official loans, other equity and debt instruments, and financial derivatives and employee stock options.
/b Combination of errors and omissions, unidentified capital inflows to and outflows from developing countries, and change in reserves.

More recently there has been some discussion about the extent to which long-term interest rates will rise, with the IMF suggesting that a continued bias toward saving, largely explained by aging populations in the high-income world and limited declines in high savings rates in the developing world, will keep real interest rates below 2 percent (IMF, 2014). Meanwhile the Congressional Budgetary Office (CBO) in the United States projects that long rates will rise to 5.0 percent, versus just above 2.5 percent today and 1.6 percent in May 2013.

Based on these estimates, less than half of the eventual increase in U.S. long-term interest rates has occurred thus far. As U.S. long rates rise, there is likely to be additional adjustment of global asset portfolios and tightening of financial conditions. Typically as interest rates in high-income countries rise, developing country interest rates rise by even more. As this process unfolds, interest sensitive expenditures should come under pressure in developing countries which will be a medium term drag on growth.

The extent of adjustment that lies ahead for developing countries depends on the extent to which they utilize the current window of loose global financial conditions to put their domestic economies in order. If the current accommodative financial conditions lead to an unwinding of the policy and economic adjustments undertaken over the past year, or if policymakers delay additional adjustments and vulnerabilities accumulate rather than decline, then the economic costs of policy normalization risk to be much larger.

Reflecting these competing influences, developing country growth is projected to remain flat at 4.8 percent in 2014 — marking the third year of sub-5 percent growth — partly due to headwinds emanating from the conflict in Ukraine, which are projected to dent output in Europe and Central Asia (both directly and indirectly through relatively modest impacts on the Euro Area, see box 6). Overall aggregate developing country growth should slowly firm through 2016 to around 5.5 percent.

More robust growth may be elusive due to capacity constraints, particularly in the East Asia, Sub-Saharan Africa and Latin America and Caribbean regions. These constraints have been visible in recent years in the tepid growth of several middle-income countries (including, Brazil, India, South Africa and Turkey — see World Bank, 2013A). In many regions, a gradual decline in commodity prices (which have been supportive of incomes and government revenues in many economies) may also weigh on the output of commodity exporters. In addition, a necessary tightening of policy to reduce inflation and current account deficits in several middle-income countries will temper outturns.

Box 2 and box 7 as well as the Regional Outlooks' webpages have more detail on regional economic developments and prospects.

  • In East Asia and Pacific, with output gaps closed across the region, overall growth is projected to slow insignificantly reaching 7 percent by 2016, with a modest slowing in China (from 7.7 percent growth in 2013, to 7.4 percent in 2016) offset by some strengthening among other countries in the region.
  • In developing Europe and Central Asia growth is expected to slow sharply to 2.4 percent in 2014 partly due to the conflict in the Ukraine (1.7 percent in the broader geographic region that includes transition economies like Russia, Poland and the Baltics that have already reached high-income status). Regional trade, particularly among Central Asian countries is also expected to be hit by slowing demand in Russia, a major trading partner and source of remittances for the other developing countries in the region. Assuming tensions ease growth should firm to around 3.7 and 4.0 percent in 2015 and 2016, supported by the recovery in high-income Europe.
  • Output in Latin America and the Caribbean, is projected to expand only modestly over the forecast period, weighed down by supply side constraints. Regional growth is projected to weaken to 1.9 percent in 2014, due to weakness in Argentina and Brazil. Better external demand conditions and the fruits of reforms in Mexico should strengthen regional growth in 2015-2016— although bottlenecks and limited economic slack, will constrain growth to 2.9 and 3.5 percent in 2015 and 2016.
  • Growth in the Middle-East and North Africa continues to be stymied by political and military tensions. Regional growth projections for 2014 are nearly one percentage point lower than January projections, reflecting sharp contractions in Libya for the second year running. Elsewhere in the region, a recovery is getting underway due to rebounding oil production and the high-income European recovery. Growth is expected to gradually strengthen to 3.5 percent in 2016. While encouraging, the pace of the expansion will not be fast enough to make substantial inroads into the unemployment and spare capacity accumulated over the past several years.
  • Growth in South Asia is expected to increase modestly in 2014 by 5.3 percent, mainly because of sub-par albeit improving growth in India. Regional growth should improve to 6.3 percent by 2016 helped by some progress on policy reforms in India, Bangladesh and Pakistan and a more supportive trade environment. However, medium term forecasts have been marked down by nearly half a percentage point reflecting the effects of slowing investment in recent years on potential growth, structural capacity constraints and sustained inflationary pressures.
  • Growth in Sub-Saharan Africa is expected to remain flat at around 4.7 percent in 2014 mainly due to weakness in South Africa and oil-infrastructure bottlenecks in Angola, two of the region’s largest economies. Growth in the rest of the region is expected to remain robust, boosted by resilient domestic demand. Looking forward, with most economies operating at or close to potential, growth is projected to pick up to about 5.1 percent in 2015 and 2016. Persistent fiscal and current account imbalances require a tightening of monetary and fiscal policy to contain macroeconomic stability risks in several economies, notably Ghana.

List of figures, tables and boxes you can find in this page

  1. FIGURE 13The contribution of high income countries to global trade volumes will more than double
  1. BOX 4Stronger high-income import demand should more than offset the influence of slower Chinese growth
  2. FIGURE B4.1China is a major export destination for many developing countries
  3. FIGURE B4.2Growth in East Asia has remained robust despite a slowing in China, its main trading partner
  4. TABLE 2Net financial flows to developing countries
  5. BOX 5Recent improvements in global financing conditions and capital flow projections
  1. TABLE 5.1Estimated impact of recent improvements in global financing conditions on capital flows to developing countries (percentage point difference from January 2014 GEP explained by updated financial market assumptions)
  2. BOX 6Trade spillovers from the ongoing tensions in Ukraine and Russia are slowing the recovery in Europe and Central Asia
  3. TABLE 6.1Baseline line impacts from the Ukraine crisis on the global economy
  4. BOX 7Regional Economic Outlook