Global Economic Prospects South Asia June 214 Andrew Burns
Main Messages 214 Global forecast has been downgraded, mainly reflecting one-off factors Financing conditions have eased temporarily, but are expected to tighten once again carrying with them risks Medium-term outlook is for growth to remain flat in 214 and to rise moderately in 214 and 215. Growth in South Asia has been disappointing, and although vulnerabilities are declining they remain Inflation, fiscal sustainability and the pace of structural reform are central challenges
First quarter GDP data in high-income countries was mixed Percent quarterly GDP growth, annualized pace 7 6 5 4 3 2 1-1 -2 Euro Area: Stable but weak growth Japan: Sharp uptick in advance of April VAT hike United States: Weather sharply lowered growth Euro Area Japan United States Source: World Bank, Haver Analytics. 213Q1 213Q2 213Q3 213Q4 214Q1
Despite first quarter, business confidence in high-income countries remains strong Purchasing Managers, indexes (5 or more indicates expansion) 6 55 Other high-income 5 Euro Area 45 Jan '12 Jul '12 Jan '13 Jul '13 Jan '14 Source: World Bank, Markit, Haver Analytics.
Developing countries Real data still positive for most countries, but confidence measures have weakened perhaps because of Ukraine Financial turmoil has eased, borrowing costs are up, but remain low Forecast is for modest pickup in growth Growth has been disappointing in some regions
First quarter growth in most developing countries about the same as 213Q4 Industrial production growth, 3m/3m saar 2 15 China 1 5-5 Other developing (ex China, India) -1-15 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Jul '13 Jan '14 Source: World Bank, Haver Analytics.
Regional industrial production appears to be stabilizing South Asian Industrial production growth, 3m/3m saar 2 15 1 5-5 -1-15 Jan '1 Jul '1 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Jul '13 Jan '14 Source: World Bank, Haver Analytics.
Financial conditions have loosened since January in contrast to earlier expectations Most developing countries not affected by turmoil Capital flows have recovered Developing country yields have returned to fall levels, and are actually 55 basis points lower than before the crisis Market remains volatile, in part because rising rates will change portfolio decisions Vulnerabilities have declined but remain
Rather than rising further, developing country borrowing have declined Yields on sovereign debt, basis points 14 12 1 8 6 4 2 Developing yields Levels Change April 213 467 Peak 667 2 Today 522 55 Developing Yield USA 1 year yield 25 26 27 28 29 21 211 212 213 Source: World Bank, JPMorgan, Haver Analytics.
Capital inflows declined abruptly in February, but recovered in March & April Gross capital flows, billions USD 8 7 Syndicated Bank loans Bond Issuance Equity Issuance 6 5 4 3 2 1 Jan '12 Jul '12 Jan '13 Jul '13 Jan '14 Source: World Bank, Dealogic.
Gross capital flows to South Asia have also recovered Gross capital flows, $ billions 1 9 Equity issuance Bond issuance Syndicated bank lending 8 7 6 5 4 3 2 1 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 Jul '13 Oct '13 Jan '14 Apr '14 Source: World Bank and Dealogic
Local currency valuations of stock markets have recovered from last summer Stock market valuations (USD, LUC), indexes, Jan 1. 213=1 16 15 14 India Pakistan Sri Lanka India (USD) Pakistan (USD) Sri Lankla (USD) 13 12 11 1 9 8 7 6 Jan '13 Apr '13 Jul '13 Oct '13 Jan '14 Apr '14 Source: World Bank and Dealogic
Tailwinds to support growth High-income acceleration will double their contribution to global import demand growth Growth impact of eventual tightening of financial conditions has been postponed Commodity prices are stable or falling (good for importers, modest headwind for exporters)
Contribution of high-income countries to global trade growth will more than double Contribution to annual growth of global trade 15 1 5-5 -1-15 Contributions of imports from group to growth of global trade volumes Developing High-income 2 22 24 26 28 21 212 214 216 Source: World Bank.
Commodity prices are critical to region and expected to remain stable or decline USD price of internationally traded commodities, index 21=1 18 16 14 Energy 12 1 Food 8 Metals and Minerals 6 4 Jan '5 Jan '6 Jan '7 Jan '8 Jan '9 Jan '1 Jan '11 Jan '12 Jan '13 Jan '14 Source: World Bank.
Outlook Projected pick up in growth to be led by high-income countries Developing-country growth in line with underlying potential Regional growth shows strengthening or stability going forward Slower growth in middle-income countries may reflect weaker than thought potential
A gradual pick up in growth, led by highincome countries Percent annual GDP growth 1 Developing 8 6 4 World 2 High Income -2-4 2 22 24 26 28 21 212 214 216 Source: World Bank.
Regional Outlook Medium-term outlook for the region is for growth to remain flat in 214 and pick up moderately in 215 and 215. Growth is projected to remain weak in South Africa, owing to tight monetary policy, tense labor relations, and electricity constraints. Excluding South Africa, outlook is for growth to remain robust in the rest of the region, with FDI flows in the natural resources sector, public investment in infrastructure, expansion in agriculture, and firming external demand as key drivers of growth. Mozambique s GDP is projected to grow faster than the regional average, supported by strong investment and production in the coal sector. Source: World Bank
Despite slowdown, South Asia continues to outperform developing country average Percent annual GDP growth 12 11 1 9 8 South Asia 7 6 5 4 3 2 Developing 25 27 29 211 213 215 Source: World Bank.
Despite slowdown South Asia continues to outperform developing country average Percent annual GDP growth 12 11 1 India 9 8 South Asia 7 6 5 4 3 2 Developing 25 27 29 211 213 215 Source: World Bank.
Despite slowdown South Asia continues to outperform developing country average Percent annual GDP growth 12 11 1 India 9 8 South Asia 7 6 5 4 3 2 Developing Rest of South Asia 25 27 29 211 213 215 Source: World Bank.
Risks Today s loose financial conditions could regenerate vulnerabilities (longer term they will tighten, increasing weaker financial flows, higher capital costs). Fiscal conditions have deteriorated External financing requirements have risen A key near term risk for the region is weak monsoon rains due to El Nino weather conditions. Longer term growth has to come from structural reforms: improving education quality; health and infrastructure.
Malaysia Moldova Jordan Brazil India Romania Hungary Kyrgyz Republic Indonesia Costa Rica Dominica Kenya Albania Niger Tanzania Mongolia Madagascar Jamaica Pakistan El Salvador Nicaragua Ghana Ukraine Turkey Kazakhstan Belarus Mozambique Financial vulnerabilities have declined but remain % of GDP 6. 5. 4. 3. 2. 1. Estimated external financing need in 214 (% of international reserves) Estimated external financing need in 214 (% of GDP, LHS) % of reserves 3. 25. 2. 15. 1. 5... Source: World Bank
Partly as a result, developing country debt to GDP ratios have been rising # of countries Rising debt to GDP ratio 16 14 12 1 8 6 4 2 Source: World Bank.
Fiscal deficits have declined but remain high General government balance, % of GDP 4 India Pakistan Bangldesh Nepal Sri Lanka 2-2 -4-6 -8-1 -12 25 26 27 28 29 21 211 212 213 Source: World Bank
Inflation in India has eased somewhat, but remains high Inflation y/y, percent 14 12 1 8 6 4 2 Jan ' Jul '1 Jan '3 Jul '4 Jan '6 Jul '7 Jan '9 Jul '1 Jan '12 Jul '13 Source: World Bank, Haver, national sources
Stressed loans (including restructured loans) are more than 1 percent of total loans in four South Asian countries Stressed loans as percent of total loans (H2 213) 14 12 1 Restructured loans Non-performing loans 8 6 4 2 Nepal Sri Lanka Afghanistan India Bangladesh Bhutan Pakistan Source: IMF and World Bank estimates based on national sources
Structural policies will be key for sustaining stronger growth India GDP growth, output gap (%) 12 1 2: But output gap closes, inflation rises, and GDP slows 3: Policy tries to stimulate again, but generates overheating 8 6 4 2-2 Potential GDP growth 1: Initial output gap allows GDP growth in excess of potential Actual GDP growth 4: Forecast of growth rising above potential growth closes output gap by 216 Model estimate of output gap -4 2 22 24 26 28 21 212 214 216 Source: World Bank
Decomposing potential output GDP and potential Growth, and contributions to potential, percent 12 Contribution to potential growth Growth rate Actual Potential 1 8 6 4 2 199 1995 2 25 21 215 Source: World Bank.
Decomposing potential output GDP and potential Growth, and contributions to potential, percent 12 Contribution to potential growth Growth rate Labour Actual Potential 1 8 6 4 2 199 1995 2 25 21 215 Source: World Bank.
Decomposing potential output GDP and potential Growth, and contributions to potential, percent 12 Contribution to potential growth Growth rate TFP Labour Actual Potential 1 8 6 4 2 199 1995 2 25 21 215 Source: World Bank.
Investment growth in India slowed sharply since 212, dragging down the investment rate (as % of GDP) and overall GDP growth Percent (y/y) 3 25 2 15 1 5 India investment growth India Industrial Production growth India inv./gdp 2Q-m.a. [Right] Percent of GDP 4 35 3 25-5 2-1 15 22Q1 24Q1 26Q1 28Q1 21Q1 212Q1 214Q1 Note: Investment excludes acquisition of valuables such as gold
Decomposing potential output GDP and potential Growth, and contributions to potential, percent 12 Contribution to potential growth Growth rate Capital TFP Labour Actual Potential 1 8 6 4 2 199 1995 2 25 21 215 Source: World Bank.
Concluding remarks Downgrade in 214 growth mainly explained by weak first quarter and situation in Ukraine Looser than expected financial conditions now could mean faster tightening in the future Developing country growth has disappointed for 3 years running reinforcing the need to focus on structural policies to speed growth Vulnerabilities have declined but remain, macro cushions should be gradually rebuilt
Global Economic Prospects South Asia June 214 Andrew Burns