WB Lowers Projections for Global Economic Outlook, Urges Developing Countries to Double Down On Domestic Reforms

June 10, 2014

WASHINGTON, June 10, 2014 – Developing countries are headed for a year of disappointing growth, as first quarter weakness in 2014 has delayed an expected pick-up in economic activity, according to the World Bank’s Global Economic Prospects (GEP) report, released today.

Bad weather in the US, the crisis in Ukraine, rebalancing in China, political strife in several middle-income economies, slow progress on structural reform, and capacity constraints are all contributing to a third straight year of sub 5 percent growth for the developing countries as a whole.

“Growth rates in the developing world remain far too modest to create the kind of jobs we need to improve the lives of the poorest 40 percent,” said World Bank Group President Jim Yong Kim. “Clearly, countries need to move faster and invest more in domestic structural reforms to get broad-based economic growth to levels needed to end extreme poverty in our generation.”

The Bank has lowered its forecasts for developing countries, now eyeing growth at 4.8 percent this year, down from its January estimate of 5.3 percent. Signs point to strengthening in 2015 and 2016 to 5.4 and 5.5 percent, respectively. China is expected to grow by 7.6 percent this year, but this will depend on the success of rebalancing efforts. If a hard landing occurs, the reverberations across Asia would be widely felt.

Despite first quarter weakness in the United States, the recovery in high-income countries is gaining momentum. These economies are expected to grow by 1.9 percent in 2014, accelerating to 2.4 percent in 2015 and 2.5 percent in 2016. The Euro Area is on target to grow by 1.1 percent this year, while the United States economy, which contracted in the first quarter due to severe weather, is expected to grow by 2.1 percent this year (down from the previous forecast of 2.8 percent).

The global economy is expected to pick up speed as the year progresses and is projected to expand by 2.8 percent this year, strengthening to 3.4 and 3.5 percent in 2015 and 2016, respectively.[1] High-income economies will contribute about half of global growth in 2015 and 2016, compared with less than 40 percent in 2013.

The acceleration in high-income economies will be an important impetus for developing countries. High-income economies are projected to inject an additional $6.3 trillion to global demand over the next three years, which is significantly more than the $3.9 trillion increase they contributed during the past three years, and more than the expected contribution from developing countries.

Short-term financial risks have become less pressing, in part because earlier downside risks have been realized without generating large upheavals and because economic adjustments over the past year have reduced vulnerabilities. Current account deficits in some of the hardest hit economies during 2013 and early 2014 have declined, and capital flows to developing countries have bounced back. Developing country bond yields have declined, and stock markets have recovered, in some cases surpassing levels at the start of the year, although they remain down from a year ago by significant margins in many instances.

Markets remain skittish and speculation over the timing and magnitude of future shifts in high-income macro policy may result in further episodes of volatility. Also, vulnerabilities persist in several countries that combine high inflation and current account deficits (Brazil, South Africa and Turkey). The risk here is that the recent easing of international financial conditions will once again serve to boost credit growth, current account deficits and associated vulnerabilities.

“The financial health of economies has improved. With the exception of China and Russia, stock markets have done well in emerging economies, notably, India and Indonesia. But we are not totally out of the woods yet. A gradual tightening of fiscal policy and structural reforms are desirable to restore fiscal space depleted by the 2008 financial crisis. In brief, now is the time to prepare for the next crisis,” said Kaushik Basu, Senior Vice President and Chief Economist at the World Bank.

National budgets of developing countries have deteriorated significantly since 2007. In almost half of developing countries, government deficits exceed 3 percent of GDP, while debt-to-GDP ratios have risen by more than 10 percentage points since 2007. Fiscal policy needs to tighten in countries where deficits remain large, including Ghana, India, Kenya, Malaysia, and South Africa.  

In addition, the structural reform agenda in many developing countries, which has stalled in recent years, needs to be reinvigorated in order to sustain rapid income growth.

“Spending more wisely rather than spending more will be key. Bottlenecks in energy and infrastructure, labor markets and business climate in many large middle-income countries are holding back GDP and productivity growth. Subsidy reform is one potential avenue for generating the money to raise the quality of public investments in human capital and physical infrastructure,” said Andrew Burns, Lead Author of the report.

Regional Highlights:

In the East Asia and the Pacific region, 2013 marked another year of moderating annual growth, mainly due to domestic adjustment aimed at addressing imbalances accumulated during the years of credit-fueled expansion. Adjustment is continuing into 2014 with real credit growth moderating from double digit rates, particularly in China, Malaysia and Indonesia. Prospects for the region are for a modest slowing in growth from 7.2 percent in 2013 to about 7.0 percent by 2016 – about 2 percentage points slower than the pre-crisis boom years but broadly in line with potential. Growth for China is expected to ease gradually from 7.6 percent in 2014 to 7.4 percent by 2016 reflecting continued rebalancing. Regional growth (excluding China) is projected to firm from around 5.0 percent this year to 5.5 percent by 2016 due to strengthening external demand, a reduced drag on growth from the political situation in Thailand, and an easing of the domestic adjustment elsewhere.

A modest recovery in the developing countries of Europe and Central Asia region remained on track in the first quarter of 2014, despite headwinds from global financial turbulence and the situation in Ukraine. Industrial output accelerated, boosted by rising exports to the Euro Area. In Central Asia, much weaker Russian growth (a major trade partner and source of remittances) and declining metal and mineral prices and domestic capacity constraints have slowed growth in 2014. Overall, the Ukraine situation is estimated to have knocked 1 percentage point off growth among low and middle-income countries in the region. As this effect eases, output is projected to accelerate from a weak 2.4 percent in 2014 (3.6 percent in 2013), to 3.7 and 4.0 percent in 2015 and 2016, respectively. Growth in Russia, now a high-income country, will be barely positive at 0.5 percent in 2014, rising to 1.5 percent and 2.2 percent in 2015 and 2016, respectively.

Activity in the Latin America and the Caribbean region has been weak, reflecting stable or declining commodity prices, the drop in first quarter US GDP growth and domestic challenges. The regional weakness carries over from 2013, weighing on merchandise exports in a number of countries. First quarter data for Argentina, Brazil, Mexico and Peru was weak, reflecting a variety of influences including the weather-related decline in US GDP, the recent tax increase in Mexico and slower Chinese growth. In contrast, Bolivia and Panama are expected to grow by more than 5 percent this year. Regional exports, including tourism receipts in the Caribbean, are expected to firm due to stronger growth in advanced countries, and improved competitiveness following earlier currency depreciations. This, coupled with continued robust investment growth along the Pacific coast of South America, and strong capital inflows should overcome first quarter weakness and generate a modest 1.9 percent increase in regional GDP in 2014, with growth accelerating to 2.9 percent in 2015 and 3.5 percent in 2016. Brazil, the region’s largest economy, is projected to grow at a weaker-than-expected 1.5 percent this year, strengthening to 2.7 percent and 3.1 percent in 2015 and 2016, respectively.

Growth in the developing countries of the Middle East and North Africa region is expected to strengthen gradually but remain weak during the forecast period following a 0.1 percent contraction in 2013. In oil-importing countries, economic activity is stabilizing. Exports in several Mediterranean economies are rebounding due to the recovery in the Euro Area. While activity has picked up from low levels in Egypt, in Lebanon spillovers from the conflict in Syria continue to depress activity, exports and sentiment. Output in the region’s developing oil-exporters show signs of strengthening following earlier disruptions, notably in Iraq. Nevertheless, aggregate production remains below the 2013 average. The outlook for the region is shrouded in uncertainty and subject to a variety of domestic risks linked to political instability and policy uncertainty. Growth in the developing countries of the region is projected to pick up gradually to 1.9 percent in 2014 and 3.6 percent and 3.5 percent in 2015 and 2016, respectively, helped by a rebound in oil production among oil exporters and a modest recovery among oil importing economies.

GDP growth in South Asia slowed to an estimated 4.7 percent in market price terms in calendar year 2013 (2.6 percentage points below average growth in 2003-12). This weakness mainly reflects subdued manufacturing activity and a sharp slowing of investment growth in India. Growth in Pakistan is estimated to have remained broadly stable, notwithstanding fiscal tightening, but remains significantly below the regional average, due in part to energy supply bottlenecks and security uncertainties. Firming global growth and a modest pickup in industrial activity should help lift South Asia’s growth to 5.3 percent in 2014, rising to 5.9 percent in 2015 and 6.3 percent in 2016. Most of the acceleration is localized in India, supported by a gradual pickup of domestic investment and rising global demand. The forecasts assume that reforms are undertaken to ease supply-side constraints (particularly in energy and infrastructure) and to improve labor productivity, fiscal consolidation continues, and a credible monetary policy stance is maintained. Growth in India is projected at 5.5 percent in FY2014-15, accelerating to 6.3 percent in 2015-16 and 6.6 percent in 2016-17.

In Sub-Saharan Africa strong domestic demand underpinned GDP growth of 4.7 percent in 2013, up from 3.7 percent the previous year. The regional aggregate was depressed by weak 1.9 percent growth in South Africa due to structural bottlenecks, tense labor relations and low consumer and investor confidence. Excluding South Africa, average regional GDP growth was 6.0 percent in 2013. Fiscal and current account deficits widened across the region, reflecting high government spending, falling commodity prices, and strong import growth. Medium-term prospects for the region remain favorable, with GDP growth projected to remain broadly stable at 4.7 percent in 2014, before rising moderately to 5.1 percent in each of 2015 and 2016, supported by firming external demand and investments in natural resources, infrastructure, and agricultural production. Growth is expected to be particularly strong in East Africa, increasingly supported by FDI flows into offshore natural gas resources in Tanzania, and the onset of oil production in Uganda and Kenya. Although growth will remain subdued in South Africa, it will pick up modestly in Angola and remain robust in Nigeria, the region’s largest economy.

[1] Using 2010 purchasing power parity weights, global growth would be 3.4, 4.0 and 4.2 percent in 2014. 2015 and 2016, respectively.

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