DUSHANBE, January 15, 2014, Asia-Plus — The world economy is projected to strengthen this year, with growth picking up in developing countries and high-income economies appearing to be finally turning the corner five years after the global financial crisis, says the World Bank’s
Global Economic Prospects
(GEP) report that was published on January 14.
Global GDP growth is projected to firm from 2.4 percent in 2013 to 3.2 percent this year, stabilizing at 3.4 percent and 3.5 percent in 2015 and 2016 respectively, with much of the initial acceleration reflecting stronger growth in high-income economies.
Growth in developing countries will pick up from 4.8 percent in 2013 to a slower than previously expected 5.3 percent this year, 5.5 percent in 2015 and 5.7 percent in 2016.
For high-income countries, the drag on growth from fiscal consolidation and policy uncertainty will ease, helping to boost economic growth from 1.3 percent in 2013 to 2.2 percent this year, stabilizing at 2.4 percent for each of 2015 and 2016.
Developing countries face counterbalancing forces from high-income countries. The strengthening in high-income countries will boost demand for developing country exports, on the one hand, while rising interest rates will dampen capital flows, on the other. The report projects global trade to grow from an estimated 3.1 percent in 2013 to 4.6 percent this year and 5.1 percent in each of 2015 and 2016.
However, weaker commodity prices will continue to temper trade revenues. Between their early-2011 peaks and recent lows in November 2013, the real prices of energy and food have declined by 9 and 13 percent, respectively, while those of metals and minerals have fallen by 30 percent. These downward pressures on commodity prices are expected to persist, in part reflecting additional supply.
Private capital inflows to developing countries remain sensitive to global financial conditions. As high -income monetary policy normalizes in response to stronger growth, global interest rates are projected to slowly rise. The impact of an orderly tightening of financial conditions on developing-country investment and growth is expected to be modest, with capital flows to developing countries projected to ease from about 4.6 percent of developing country GDP in 2013 to 4.1 percent in 2016. Depending on the severity of the market reaction, capital flows to developing countries could be cut by 50 percent or more for several months. In such a scenario, countries that have large current account deficits, large proportions of external debt and those that have had big credit expansions in recent years would be among the most vulnerable.
The report points out that, although the main tail risks that have preoccupied the global economy over the past five years have subsided, the underlying challenges remain. Moreover, while developing countries responded to the global financial crisis by deploying fiscal and monetary stimuli, the scope for such actions has declined, with government budgets and current account balances in the red in most countries.
Policy makers need to give thought now to how they would respond to a significant tightening of global financing conditions. Countries with adequate policy buffers and investor confidence may be able to rely on market mechanisms, counter-cyclical macroeconomic and prudential policies to deal with a decline in flows. In other cases, where the scope for maneuvering is more limited, countries may be forced to tighten fiscal policy to reduce financing needs or raise interest rates to incite additional inflows. Where adequate foreign reserves exist, these can be used to moderate the pace of exchange rate adjustments, while a loosening of capital inflow regulation and incentives for foreign direct investment might help smooth adjustment. Finally, by improving the longer term outlook, credible reform agendas can go a long way towards boosting investor and market confidence. This could set in motion a virtuous cycle of stronger investment, including foreign investment, and output growth over the medium term.
