Global Growth Is Stabilizing but at a Weak Level | World Bank Expert Answers

Transcript

[00:00] - We are expecting 60% of economies to have slower growth than what they actually experienced in the decade prior to the pandemic on average. (upbeat theme music)

- Hello everyone, welcome back to "Expert Answers." It's June, so it's time to delve into the World's Bank flagship Global Economic Prospects Report published twice a year. Back in January, the world faced the weakest half decade of growth in 30 years. Today, we'll be asking Ayhan Kose, World Bank Deputy Chief Economist, whether the clouds are beginning to clear. In other words, is the world and are developing economies in particular, back on a reliable path to prosperity?

[00:51] - Ayhan, welcome back to "Expert Answers." Let's dive right in. Can you tell us what are the headlines from this report and how have things changed since January?

- So the good news is that global economy is stabilizing. We see after three years consecutive weakness. In terms of growth, we will see stable growth this year. Growth is going to be around 2.6%. And in fact, next year we are expecting a little bit of a pick up. Advanced economies are doing well in the sense that monetary policy, we are expecting gradually ease, and that will help especially next year. In the case of emerging developing economies, growth is going to be around 4%. So all in all, we see a soft landing is set for the global economy. Having said this, there are significant growth challenges. Against the background of stability, growth is weak relative to what we have seen in the previous decade.

[01:46] - So tell us more about that challenge for emerging and developing economies.

- So, I mentioned growth is stabilizing. That number is around 2.6. But when you look at the average growth in the decade prior to the pandemic, growth averaged around 3.1%. So when you look at our forecast horizon all the way to 2026, we are expecting 60% of economies to have slower growth than what they actually experienced in the decade prior to the pandemic on average. These 60% of economies account for 80% of global output, and of course, they are home to 80% of global population. So there is weakness when it comes to growth around the world, and of course, that weakness comes with significant risks as well.

[02:39] - Indeed. This is a very difficult picture that you're painting for developing and emerging economies. But what about global risks? Every day we hear about trade tensions between major economies. What can you tell us about this?

- Multiple risks actually threatening the recovery as we see stability in economic growth. One of them, of course, as you mentioned, trade tensions, especially between major economies. This year, we're expecting growth to actually pick up a little bit. Last year, it was flat, close to zero growth. But at the same time, we see significant increase in the number of trade protectionist measures. And of course, major economies are becoming inward looking in the sense that they are imposing all types of restrictions on cross-border commerce. In fact, number of trade restrictions doubled since the pandemic, and when you look around the world, trade policy uncertainty skyrocketed. When you compare it, during major elections, what happened to trade policy uncertainty, this year we have seen unprecedented level of trade policy uncertainty in a major election year since 2000.

- And what about inflation? Should we still be concerned about high interest rates?

- When we look at the bigger picture when it comes to inflation, inflation has been coming down. But mostly because of the inflation declining in the context of energy and food crisis. When you look at core prices, inflation in the context of core prices remains sticky. What does that mean? Central bankers, of course, look at the numbers. They would like to get inflation to their target levels and they would like to adjust the interest rates. But given the kind of the core inflation remains sticky, they are going to be very cautious. There is possibility we see higher for longer interest rates, and that has, of course, implications when it comes to financing conditions, when it comes to economic growth, in an environment really we have very high debt levels.

[04:50] - The report makes the case for public investment. Why is this so crucial now and what benefits can it bring?

- However you look at it, investment needs are enormous. Investment needs in the context of climate change, investment needs in the context of broader development goals we would like to see these developing economies to deliver, they need significant investment. In the context of low-income countries, they need to invest 8% of GDP to meet climate goals as well as broader development goals as far as the eye can see. So the one thing governments can do, of course, invest using public resources. This will not necessarily solve the problem, but it can make a little bit of progress. Public investment as well can help facilitate private investment. So the report basically looks at comprehensively how public investment helping countries, especially emerging developing economies, if investment is done under certain conditions. What those conditions are? You need to have fiscal space, you need to have, in a sense, financial resources to invest. And you need to have public investment efficiency. And these are not necessarily easy conditions to meet, but we also see public investment helping private investment, accelerating private investment. We see public investment accelerating productivity. So there are many benefits, but the emerging developing economies need to undertake reforms and need to take care of fiscal balances to effectively undertake investment.

[06:41] - Right. And this GEP report also returns to the plight of small states. And as you know, those are countries with populations of 1.5 million people or less, which tend to face similar challenges. It's been a year and a half since the last forensic examination took place, and over four years since the pandemic. So what's the picture in terms of recovery, building resilience to external shocks, and what recommendations does the report make?

- Small states had a very rough five years. Fiscal positions were not in good shape prior to the pandemic, but then the pandemic hit and the multiple shocks hit these economies. They are already subject to very frequent, very costly natural disasters related to climate change. When it comes to climate change, they are literally on the front lines of the kind of the fight. So when we look at their fiscal positions, fiscal position have deteriorated significantly since the pandemic. A large number of them have much larger deficits than what they used to before. And when you compare the small states' fiscal deficits, those deficits look much worse relative to other emerging market developing economies' deficits. And in the context of debt, we have very serious challenges. 40% of small states are in debt distress or they are in a high risk of falling into debt distress. So what should be done? Of course, they have to do certain things in terms of addressing these fiscal challenges. On the spending side, spending efficiency has to be improved. On the revenue side, revenue bases should be expanded. But the big message is for the global community. Global community should be even more forceful in terms of helping these countries to deal with climate change and providing the necessary help when it comes to financial resources and the technical policy advice.

[08:47] - Ayhan, thank you so much for walking us through the main takeaways from this report. I'm looking forward to speaking with you again.

- Thank you.

- Thank you. Thanks again to Ayhan Kose, World Bank Deputy Chief Economist, and thanks for watching "Expert Answers." Don't forget you can read this year's Global Economics Prospects Report by visiting the link on the screen. See you next time.