Global economic prospects to improve in 2015, but divergent trends pose downside risks, says WB
WASHINGTON, January 13, 2015
– Following another disappointing year in 2014, developing countries
should see an uptick in growth this year, boosted in part by soft oil
prices, a stronger U.S. economy, continued low global interest rates,
and receding domestic headwinds in several large emerging markets, says
the World Bank Group’s
Global Economic Prospects (GEP) report, released today.
After
growing by an estimated 2.6 percent in 2014, the global economy is
projected to expand by 3 percent this year, 3.3 percent in 2016 and 3.2
percent in 2017
[1],
predicts the Bank’s twice-yearly
flagship. Developing countries grew by 4.4 percent in 2014 and are
expected to edge up to 4.8 percent in 2015, strengthening to 5.3 and 5.4
percent in 2016 and 2017, respectively.
“In
this uncertain economic environment, developing countries need to
judiciously deploy their resources to support social programs with a
laser-like focus on the poor and
undertake structural reforms that invest in people,” said
World Bank Group President Jim Yong Kim. “It’s also critical
for countries to remove any unnecessary roadblocks for private sector
investment. The private sector is by far the greatest source of jobs and
that can lift hundreds of millions of people
out of poverty.”
Underneath
the fragile global recovery lie increasingly divergent trends with
significant implications for global growth. Activity in the United
States and the United Kingdom
is gathering momentum as labor markets heal and monetary policy remains
extremely accommodative. But the recovery has been sputtering in the
Euro Area and Japan as legacies of the financial crisis linger. China,
meanwhile, is undergoing a carefully managed
slowdown with growth slowing to a still-robust 7.1 percent this year
(7.4 percent in 2014), 7 percent in 2016 and 6.9 percent in 2017. And
the oil price collapse will result in winners and losers.
Risks
to the outlook remain tilted to the downside, due to four factors.
First is persistently weak global trade. Second is the possibility of
financial market volatility as
interest rates in major economies rise on varying timelines. Third is
the extent to which low oil prices strain balance sheets in
oil-producing countries. Fourth is the risk of a prolonged period of
stagnation or deflation in the Euro Area or Japan.
“Worryingly,
the stalled recovery in some high-income economies and even some
middle-income countries may be a symptom of deeper structural malaise,”
said Kaushik Basu, World Bank Chief Economist and Senior Vice President.
“As population growth has slowed in many countries, the pool of
younger workers is smaller, putting strains on productivity. But there
are some silver linings behind the clouds. The lower oil price, which is
expected to persist through 2015, is lowering
inflation worldwide and is likely to delay interest rate hikes in rich
countries. This creates a window of opportunity for oil-importing
countries, such as China and India; we expect India’s growth to rise to 7
percent by 2016. What is critical is for nations
to use this window to usher in fiscal and structural reforms, which can
boost long-run growth and inclusive development.”
On
the back of gradually recovering labor markets, less budget tightening,
soft commodity prices, and still-low financing costs, growth in
high-income countries as a group
is expected to rise modestly to 2.2 percent this year (from 1.8 percent
in 2014) in 2015 and by about 2.3 percent in 2016-17. Growth in the
United States is expected to accelerate to 3.2 percent this year (from
2.4 percent last year), before moderating to
3 and 2.4 percent in 2016 and 2017, respectively. In the Euro Area,
uncomfortably low inflation could prove to be protracted. The forecast
for Euro Area growth is a sluggish 1.1 percent in 2015 (0.8 percent in
2014), rising to 1.6 percent in 2016-17. In Japan,
growth will rise to 1.2 percent in 2015 (0.2 percent in 2014) and 1.6
percent in 2016.
Trade
flows are likely to remain weak in 2015. Since the global financial
crisis, global trade has slowed significantly, growing by less than 4
percent in 2013 and 2014, well
below the pre-crisis average growth of 7 percent per annum. The
slowdown is partly due to weak demand and to what appears to be lower
sensitivity of world trade to changes in global activity, finds analysis
in the report. Changes in global value chains and
a shifting composition of import demand may have contributed to the
decline in responsiveness of trade to growth.
Commodity
prices are projected to stay soft in 2015. As discussed in a chapter in
the report, the unusually steep decline in oil prices in the second
half of 2014 could significantly
reduce inflationary pressures and improve current account and fiscal
balances in oil-importing developing countries.
“Lower
oil prices will lead to sizeable real income shifts from oil-exporting
to oil-importing developing countries. For both exporters and importers,
low oil prices present
an opportunity to undertake reforms that can increase fiscal resources
and help broader environmental objectives,”
said
Ayhan Kose, Director of Development Prospects
at the World Bank.
Amongst
large middle-income countries that will benefit from lower oil prices
is India, where growth is expected to accelerate to 6.4 percent this
year (from 5.6 percent in
2014), rising to 7 percent in 2016-17. In Brazil, Indonesia, South
Africa and Turkey, the fall in oil prices will help lower inflation and
reduce current account deficits, a major source of vulnerability for
many of these countries.
However,
sustained low oil prices will weaken activity in exporting countries.
For example, the Russian economy is projected to contract by 2.9 percent
in 2015, getting barely
back into positive territory in 2016 with growth expected at 0.1
percent.
In
contrast to middle-income countries, economic activity in low-income
countries strengthened in 2014 on the back of rising public investment,
significant expansion of service
sectors, solid harvests, and substantial capital inflows. Growth in
low-income countries is expected to remain strong at 6 percent in
2015-17, although the moderation in oil and other commodity prices will
hold growth back in commodity exporting low-income
countries.
“Risks
to the global economy are considerable. Countries with relatively more
credible policy frameworks and reform-oriented governments will be in a
better position to
navigate the challenges of 2015,” concluded
Franziska Ohnsorge, Lead Author of the report.
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