Developing economies need robust blueprints to sustain growth

January 14, 2014  – Five years after the global financial crisis, the world economy is showing signs of bouncing back this year, pulled along by a recovery in high-income economies, says the World Bank’s latest Global Economic Prospects report, issued today.

Developing-country growth is also firming, thanks in part to the recovery in high-income economies as well as moderating, but still strong, growth in China.

Growth prospects for 2014 are, however, sensitive to the tapering of monetary stimulus in the United States, which began earlier this month, and to the structural shifts taking place in China’s economy.

The report forecasts growth in developing countries to 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. While the pace is about 2.2 percentage points lower than during the boom period of 2003-07, the slower growth is not a cause for concern. Almost all of the difference reflects a cooling off of the unsustainable turbo-charged pre-crisis growth, with very little due to an easing of growth potential in developing countries. Moreover, even this slower growth represents a substantial (60 percent) improvement compared with growth in the 1980s and early 1990s.

Global GDP is projected to grow 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 a pick-up in high-income economies.

For high-income countries, the drag on growth from fiscal consolidation and policy uncertainty will continue to ease, accelerating 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. Amongst high-income economies, the recovery is most advanced in the US, with GDP expanding for 10 quarters now. The US economy is projected to grow by 2.8 percent this year (from 1.8 percent in 2013), firming to 2.9 and 3.0 percent in 2015 and 2016, respectively. Growth in the Euro Area, after two years of contraction, is projected to be 1.1 percent this year, and 1.4 and 1.5 percent in 2015 and 2016, respectively.

“Global economic indicators show improvement. But one does not have to be especially astute to see there are dangers that lurk beneath the surface. The Euro Area is out of recession but per capita incomes are still declining in several countries. We expect developing country growth to rise above 5 percent in 2014, with some countries doing considerably better, with Angola at 8 percent, China 7.7 percent, and India at 6.2 percent. But it is important to avoid policy stasis so that the green shoots don't turn into brown stubble,” said Kaushik Basu, Senior Vice President and Chief Economist at the World Bank.

The report urges developing countries to implement structural reforms that would help raise the capacity of their economies, if they are to regain their pre-crisis growth rates. It outlines some measures that policymakers could implement to set in motion a virtuous cycle of stronger investment, including foreign investment, and output growth over the medium term.

Regional Highlights:

Growth in East Asia & the Pacific eased for the third year to an estimated 7.2 percent in 2013, reflecting slower growth in Indonesia, Malaysia and Thailand, where weak commodity revenues, and policy tightening to address domestic overheating cut into activity. Domestic vulnerabilities generated during the years of expansionary policies remain a damper for the region. GDP in China is projected to stay flat in 2014 at 7.7 percent, slowing to 7.5 percent for the next two years, reflecting deleveraging and less reliance on policy-induced investment. The region is vulnerable to risks of disorderly unwinding in Chinese investment and abrupt tightening in global financing conditions. Commodity exporters are also vulnerable to sharper than expected declines in commodity prices.

Growth in developing Europe & Central Asia strengthened in 2013 to an estimated 3.4 percent, bolstered by improved exports to high-income Europe and continued strength in energy-exporting Central Asian countries. With strong trade and financial links with high-income Europe, the Central and Eastern European economies will benefit most from the recovery but the growth impetus from stronger exports will be partly offset by weaker domestic demand due to ongoing banking sector restructuring, tighter international financial conditions, and ongoing or planned fiscal consolidation in several countries. The mix will keep growth stable at 3.5 percent in 2014, gradually lifting to 3.7 and 3.8 percent in 2015 and 2016, respectively. Risks include a return to weakness in the Euro Area or Russia, disorderly adjustment to tighter global financial conditions, and further sharp declines in commodity prices.

Subdued global trade, tighter financing conditions and less supportive commodity markets in 2013, have left many countries in Latin America & Caribbean struggling with relatively weak growth. Domestic demand growth has moderated, notably in Brazil, although activity is starting to recover in Mexico and exports are rebounding in Central America, partly supported by the Panama Canal expansion. Regional growth is projected to pick up from 2.9 percent in 2014, to 3.2 percent in 2015, before accelerating to 3.7 percent by 2016. Strong export growth, along with steady consumption growth, is expected to nudge Brazil’s growth to 3.7 percent in 2016. Hinging on the pickup in the United States, Mexico is expected to grow by 3.4 percent in 2014, accelerating to 4.2 percent in 2016. Downside risks for the region include a disorderly jump in global interest rates and a prolonged and deeper slump in commodity prices.

The developing economies of the Middle East & North Africa remain depressed. Political turmoil in Egypt, stalemate in Tunisia, and an escalation of the civil war in Syria, with spillovers to neighboring Lebanon and Jordan, have weakened activity in the oil importing countries. At the same time, security setbacks, strikes, infrastructure problems, and in the case of Iran, international sanctions, have negatively affected oil exporting countries. Regional growth, which contracted by 0.1 percent in 2013, is expected to remain weak with the outlook shrouded in uncertainty. Aggregate growth for the region is projected at 2.8 percent in 2014, firming to 3.3 in 2015 and 3.6 percent in 2016, well below the region’s potential.

Growth in South Asia expanded a modest 4.6 percent in 2013, reflecting weakness in India amid high inflation, and current account and government deficits. More recently, regional exports have recovered, because of strengthening external demand and the earlier depreciation of the Indian rupee. Regional growth is projected to improve to 5.7 percent in 2014, rising to 6.7 percent in 2016, led mainly by recovering import demand by high-income economies and regional investment. The projected pickup, however, will depend on macroeconomic stability, sustained policy reforms, and progress in reducing supply side constraints. India’s growth is projected to rise to over 6 percent in FY2014-15, increasing to 7.1 percent by FY2016-17. The main risks to the outlook are fiscal and policy reforms going off-track; uncertainties related to elections in Afghanistan, Bangladesh and India; entrenchment of inflation expectations; and a disorderly adjustment of capital flows in response to US tapering.

Economic growth picked up in Sub-Saharan Africa in 2013, supported by strong resource-based investments. Real GDP growth strengthened to an estimated 4.7 percent for the region. Excluding South Africa, the average growth for the rest of the region was 6.0 percent. The recovery during the first half of 2013 was weak among oil exporters (Angola, Gabon, Nigeria), while industrial output in South Africa contracted in Q3. Robust domestic demand, relatively resilient FDI flows and lower inflation should help support regional growth of about 5.3 percent in 2014, 5.4 percent in 2015, firming to 5.5 percent in 2016. The region is relatively insensitive to rising global interest rates, but very vulnerable to sharper than projected declines in commodity prices and domestic risks related to weather shocks to local harvests and food prices, political strife, security risks in northern Nigeria, and pirate attacks along the gulf of Guinea, which could raise shipment costs and disrupt regional trade.