Global Growth Disappointing – Questions over Fundamentals
Thank you. I am very pleased to be here with you today.
The picture has changed, and 2014 could turn out to be a disappointing year for the global economy. Global growth has been revised downwards and is now expected at 2.6 percent this year, only marginally up from 2.4 percent in 2013. Over the past three years forecasts have been following a pattern of repeated revisions, pointing towards a systematic underestimation of global headwinds and inadequacies of policy responses.
Sentiments are clearly changing, and in my view this raises questions over the fundamentals in developed countries. Many are getting skeptical of the growth story going forward, especially in Europe. We should not be surprised if we are heading towards another downward revision of our forecasts, especially for 2015.
At the World Bank we are of course looking into what this means for emerging and developing economies. Growth in major emerging countries has been slowing down since the crisis, with some improvements and new pockets of vulnerabilities. In good news, India’s economy is picking up, while growth in China is slowly moderating and headwinds have strengthened in Latin America and emerging Europe.
In China, growth will gradually moderate to 7.4 percent in 2014 and 7.1 percent in 2016, reflecting intensified policy efforts to address financial vulnerabilities and structural constraints, in an effort to place the economy on a more sustainable growth path.
Developing East Asia and Pacific will remain the fastest-growing region in the world. APEC emerging markets and developing economies are expected to account for about 1/3 of world growth. The rest of the region, growth will bottom out in 2014.
So what needs to be done in emerging and developing countries?
The question is whether we are looking at a cyclical or structural slowdown. There are certainly some cyclical headwinds. As global financial conditions are set to tighten, developing countries have to step up their level of preparedness and strengthen resilience to adjust to the new monetary policy environment. But there are also structural issues at play. As most emerging economies are facing capacity constraints, stronger growth will require accelerated reforms.
Let me highlight some of these constraints. Unreliable energy supply hampers manufacturing activity in India, Pakistan, Brazil, and the Philippines. Burdensome business and labor regulations and taxation encourage informality and constrains firm size in Brazil, Bangladesh, and India. We see restrictive trade and investment policies introducing policy uncertainty in Russia. State-owned enterprises and parastatals lead to low-productivity in Eastern Europe and India. Infrastructure bottlenecks hamper market access in parts of East Asia, parts of Sub-Saharan Africa, and Mexico. Weak banking systems constrain lending to productive investments again, in Eastern Europe and India. And unequal access to education reduces labor force participation in Malaysia, parts of the Middle East and North Africa.
Despite high growth rates in the last decades, low-income countries could feel the headwinds and could become vulnerable to a slowdown in the rest of the world. For example, Sub-Saharan Africa is still showing strong growth rates, but the cooling down in high-income and emerging economies like China as well as other external shocks could have an adverse impact.
I want to highlight a few areas that are of risks:
First, commodity prices. Growing concern over a slowdown in the Euro Area and emerging economies - including China-, a strong US dollar, a well-supplied oil market and good crop prospects have contributed to a weakening of many commodity prices since the summer. The World Bank energy price index declined by about 6 percent during the third quarter after being broadly stable in the first half of the year. While lower commodity prices will help ease balance of payments pressures in food and energy importing countries, but commodity-exporting countries may feel the pinch because of lower export earnings.
Countries with more space for counter cyclical policies, such as Chile and Peru, would be less affected than others, such as Brazil, which have less fiscal buffer space. In East Asia, commodity exporters like Mongolia and Indonesia are examples of countries that could lose as a result of continued price weakness while Cambodia could likely gain as its oil imports become cheaper.
Second, Ebola. This is an external shock playing out right now in West Africa. We are not only witnessing a very high human and social toll, we also see a real and anxiety-driven impact. Our analysis shows that if the virus continues to surge in the three worst-affected countries and spreads to neighboring countries, the two-year regional financial impact could reach $32.6 billion by the end of 2015, dealing a potentially catastrophic blow to already fragile states.
We’re seeing a major disruption of economic activity and people’s livelihoods, with businesses and schools closing, farmers abandoning their fields, and cross-border commerce and international travel declining. We also see the fear factor taking its toll way beyond the actually affected countries. Contagion – not in the medical, but in the psychological sense could have a significant negative impact on fast-growing low-income countries in Africa whose growth is becoming more important for the global economy.
Third, political instability. We see serious pockets of concern. In the Middle East, ISIS is causing major disruptions. Another case is the crisis in Ukraine. Combined with the related sanctions it will have a significant impact on that region. Our latest assessment says that Ukraine’s economy will shrink by 8% this year, much more than expected. We are concerned over the stability of banks, the disintegration of key industries and a deterioration of the fragile ceasefire.
Overall, the situation has a profound impact on financial flows, economic activities, and growth prospects, all of which could have implications for Europe’s recovery.
In sum, we are seeing an increasingly fragile recovery of the global economy with major risks out there. Policymakers in high-income and emerging economies need to send a signal of confidence by taking necessary policy steps and tackling reforms to improve their fundamentals.