Global Economic Prospects Assuring growth over the medium term Andrew Burns DEC Prospects Group January 213 1
Despite better financial conditions, stronger growth remains elusive More than 4 years after financial crisis hit, high-income countries continue to suffer from volatility and slow growth Developingcountry prospects solid, but need to focus on productivity enhancing domestic policies if they are to regain pre-crisis growth rates Risks have declined but remain and countries are vulnerable to commodity price shocks, high-income volatility, and a freezing of capital flows A steady hand is required to avoid pro-cyclical policy and in order to rebuild macroeconomic buffers so that authorities can react in case of new external (or domestic) shocks 2
Recent Developments 3
Financial market jitters have eased significantly Credit default swap rates, basis points 18 16 14 12 1 Portugal Ireland Spain Italy Euro Area (GDP weighted) 8 6 4 2 Jan '1 Jul '1 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Source: World Bank, Datastream. 4
7 6 5 4 3 2 1 After declining in May/June, capital flows to developing countries have rebounded Gross international capital flows to developing countries, billions USD New equity issuance Bond issuance Syndicated Bank-lending Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Mar-12 Sep-12 Source: World Bank, Dealogic. 5
A secular recovery in equity and bank lending, more volatile bond flows Gross international bond issues 28 28 Gross syndicated bank lending 28 Gross new equity issues 23 23 23 18 18 18 13 13 13 8 8 8 3 3 3-2 29 21 211 212-2 29 21 211 212-2 29 21 211 212 Source: World Bank, Dealogic.
Because of bonds, middle-income regions had most volatile flows Quarterly gross international capital flows in 212, billions of USD 25 2 Syndicated Bank lending New equity issuance Bond issuance 15 212 Q1 Q2Q3 Q4 1 5 East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle-East & North Africa South Asia Sub-Saharan Africa Source: World Bank, Dealogic. 7
Developing countries may be escaping from high-income weakness Industrial production, percent growth, 3m/3m saar 25 2 15 1 5-5 China Other developing Other High income -1 Jan '11 Jul '11 Jan '12 Jul '12 Source: World Bank, Datasteam. Euro Area 8
3 25 2 15 1-5 -1 Outside Europe, middle-income industrial activity is strengthening Industrial production growth 3m/3m, saar 5 India Turkey -15 Jan '11 Jul '11 Jan '12 Jul '12 China Brazil Russia Note: Turkish data is 4m/4m saar Source: World Bank, Datastream. 9
Purchasing manager s indexes better but still weak Manufacturing purchasing managers index (PMI), points 61 59 57 55 53 51 49 47 Other developing China Other high-income 45 43 Jan '1 Jul '1 Jan '11 Jul '11 Jan '12 Jul '12 Source: World Bank, Markit/Haver Analytics. Euro Area 1
Outlook 11
8 Annual GDP growth, % Projections have been downgraded in both 212 and 213 7 6 Developing countries 5 June 212 forecasts 4 High-income countries 3 2 1 21 211 212 213 214 215 Source: World Bank, Global Economic Prospects 213A. 12
Modest regional growth through 215 Annual GDP growth, % 1 211 212 213 214 215 8 6 4 2-2 High-income East-Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle-East & North Africa South Asia Sub-Saharan Africa -4 Source: World Bank, Global Economic Prospects 213A. 13
Capital flows expected to strengthen but remain stable as % of GDP $ trillion 1.4 1.2 1..8.6.4.2. -.2 % of GDP 9 8 7 6 5 4 3 2 1 26 27 28 29 21 211e 212f 213f 214f ST Debt Bank Lending Bond Flows Portfolio Equity FDI Inflows Total (% GDP, RHS) Source: World Bank, Global Economic Prospects 213A. 14
Barring further supply disruptions, high food and metals prices should ease USD price, nominal index 25=1 25 2 Food Energy 15 Metals & Minerals 1 5 2 23 26 29 212 215 Source: World Bank, Global Economic Prospects 213A.
Outlook remains precarious So far developing countries have weathered great recession relatively well Continued strong growth is not guaranteed and requires renewed focus on structural policies Risks have declined and are more balanced, but remain: Persistent fiscal uncertainty in the U.S. Euro Area risks A sharp drop of investment in China Oil or food supply shock 16
Future growth is not guaranteed Since the crisis, developing country growthhas been 1% slower than during the 2/7 period Regaining or surpassing those growth rates requires sustained progress in raising supply potential by: Maintaining macroeconomic sustainability Improving governance Investing in Infrastructure Health Education 17
Small improvements in potential growth result in substantial long run gains Developing country, per capita income, % of 21 high-income level.8 Rapid growth (+ 1. ppper annum).7.6 High growth scenario results in developingcountry incomes of 75% high-income 21 levels in 25 vs52% in baseline Faster growth (+.5 pppa).5.4 Baseline projection Weaker growth (-.5 pp pa).3.2.1 Slow growth (-1. pppa) 199 2 21 22 23 24 25 Source: World Bank, Global Economic Prospects 213A.
Prospects are vulnerable to a range of external risks Change in level of real GDP from baseline, percent Prolonged fiscal paralysis Contained Euro crisis Abrupt decline in Chinese investment -.2 -.4 -.6 -.8-1 -1.2-1.4 East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle-East & North Africa South Asia Sub-Saharan Africa Source: World Bank, Global Economic Prospects 213A. 19
Near record low stocks of maize, but wheat and rice markets are relatively well supplied End of crop-year stocks as a % of total consumption 5 45 4 35 3 25 2 15 1 5 6 28 75 9 8 Maize Rice Wheat Source: World Bank, USDA 2
Developing countries should focus on supply side and buffers Overall aggregates hide vulnerabilities at the country level Current account deficits in oil-importing countries have deteriorated 3.2 percentage points since 27 Fiscal deficits of all developing countries have deteriorated by 2.9 pp. Buffers may reduce vulnerability to external shocks by as much as 33 percent 21
Many countries would be vulnerable to a drop-offin exports or external finance Months of imports covered by reserves Short-term debt as a % of reserves Lithuania Pakistan El Salvador Gambia Congo Maldives Seychelles Venezuela, B. R. Panama Ghana Dominican Republic Viet Nam Egypt Mauritania Ecuador Benin Belarus 2 4 India Egypt Uruguay Vietnam Costa Rica Ecuador Guyana Dominican Republic Chile El Salvador Turkey Sudan Belize 1 2 Source: World Bank, Global Economic Prospects 213A.
Many developing countries need to continue growing fiscal space # of developing economies 25 2 15 1 5 27 212 27 212 * 25% had a deficit greater than 3% of GDP * 49% were in balance or running a surplus * 52% have a deficit in excess of 3% of GDP * 23% are in balance or running a surplus -1-9 -8-7 -6-5 -4-3 -2-1 1 2 3 4 5 6 7 8 9 1 General government balance, % of GDP More Source: World Bank, Global Economic Prospects 213A. 23
Developing country fiscal deficits are now mostly structural not cyclical Total, cyclical and structural Fiscal balance, % of GDP 3 2 Cyclical balance 1-1 -2 Structural balance -3-4 -5 Overall balance 27 28 29 21 211 212 Source: World Bank, Global Economic Prospects 213A.
Economies with fiscal space can reduce the impacts of external shocks Impact on developing country GDP of a 5% decline in high-income activity, with and without adequate fiscal space for automatic stabilizers to operate Impact, % of GDP -1-2 -3-4 -5 East Asia & Pacific Europe & Central Asia Latin America & Caribbean with adequate fiscal space without adequate fiscal space Middle East & North Africa South Asia Sub-Saharan Africa Source: World Bank, Global Economic Prospects 213A. 25
Concluding remarks May-June Euro Area pessimism has had larger than expected real-side effects, global economy is much weaker Financial conditions have improved but developing country growth is being sapped by high-income weakness In a slow and volatile external environment, sustained strong growth in developing countries will depend on productivity enhancements, investments in infrastructure, human capital and governance Developing countries need to focus on domestic policy needs, including a rebuilding of buffers in many cases 26
Global Economic Prospects Assuring growth over the medium term Andrew Burns DEC Prospects Group January 213 27
Commodity prices have stabilized 5 45 4 35 3 25 2 15 1 5 Jan '1 Jul '1 Jan '11 Jul '11 Jan '12 Jul '12 28 Maize Copper Crude oil Wheat Rice (Monthly)
Commodity prices have stabilized 5 45 4 35 3 25 2 15 1 5 Maize Crude oil Wheat Rice (Monthly) Jan '1 Jul '1 Jan '11 Jul '11 Jan '12 Jul '12 29
Imports are recovering 4 3 2 1 3-1 -2-3 -4 Jan '11 Apr '11 Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct '12
Exports are recovering 4 3 2 1-1 31-2 -3-4 Jan '11 Apr '11 Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct '12 HIODXGSRMRCHSAKD_SAAR3M EMUDXGSRMRCHSAKD_SAAR3M DEVDXGSRMRCHSAKD_SAAR3M
High-spread sovereign yields 18 16 14 12 1 8 6 4 2 United States Italy Spain Germany Portugal 32 Jan '9 Jul '9 Jan '1 Jul '1 Jan '11 Jul '11 Jan '12 Jul '12