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.
Regional Highlights:
The East Asia and Pacific region continued its gradual
adjustment to slower but more balanced growth. Regional growth slipped
to 6.9 percent in 2014 as a result of policy tightening and political
tensions that offset a rise in exports in line with the ongoing recovery
in some high-income economies. The medium-term outlook is for a further
easing of growth to 6.7 percent in 2015 and a stable outlook
thereafter, reflecting a gradual slowdown in China, which will be offset
by a pick-up in the rest of the region in 2016-17. In China, structural
reforms, a gradual withdrawal of fiscal stimulus, and continued
prudential measures to slow non-bank credit expansion will result in
slowing growth to 6.9 percent by 2017 (from 7.4 percent in 2014). In the
rest of the region, excluding China, growth will strengthen to 5.5
percent by 2017 (from 4.6 percent in 2014) supported by firming exports,
improved political stability, and strengthening investment.
Growth in developing Europe and Central Asia is estimated to
have slowed to a lower-than-expected 2.4 percent in 2014 as a sputtering
recovery in the Euro Area and stagnation in Russia posed headwinds. In
contrast, growth in Turkey exceeded expectations despite slowing to 3.1
percent. Regional growth is expected to rebound to 3 percent in 2015,
3.6 percent in 2016 and 4 percent in 2017 but with considerable
divergence. Recession in Russia holds back growth in Commonwealth of
Independent States whereas a gradual recovery in the Euro Area should
lift growth in Central and Eastern Europe and Turkey. The tensions
between Russia and Ukraine and the associated economic sanctions, the
possibility of prolonged stagnation in the Euro Area, and sustained
commodity price declines remain key downside risks for the region.
Growth in Latin America and the Caribbean slowed markedly to
0.8 percent in 2014, but with diverging developments across the region.
South America slowed sharply as domestic factors, exacerbated by
economic slowdown in major trading partners and declining global
commodity prices, took their toll on some of the largest economies in
the region. In contrast, growth in North and Central America was robust,
lifted by strengthening activity in the United States. Strengthening
exports on the back of the continued recovery among high-income
countries and robust capital flows should lift regional GDP growth to an
average of around 2.6 percent in 2015-17. A sharper-than-expected
slowdown in China and a steeper decline in commodity prices represent
major downward risks to the outlook.
Following years of turmoil, some economies in the Middle East and North Africa
appear to be stabilizing, although growth remains fragile and uneven.
Growth in oil-importing countries was broadly flat in 2014, while
activity in oil-exporting countries recovered slightly after contracting
in 2013. Fiscal and external imbalances remain significant. Regional
growth is expected to pick up gradually to 3.5 percent in 2017 (from 1.2
percent in 2014). Risks from regional turmoil and from the volatile
price of oil are considerable; political transitions and security
challenges persist. Measures to address long-standing structural
challenges have been repeatedly delayed and high unemployment remains a
key challenge. Lower oil prices offer an opportunity to remove the
region’s heavy energy subsidies in oil-importing countries.
In South Asia, growth rose to an estimated 5.5 percent in 2014
from a 10-year low of 4.9 percent in 2013. The upturn was driven by
India, the region’s largest economy, which emerged from two years of
modest growth. Regional growth is projected to rise to 6.8 percent by
2017, as reforms ease supply constraints in India, political tensions
subside in Pakistan, remittances remain robust in Bangladesh and Nepal,
and demand for the region’s exports firms. Past adjustments have reduced
vulnerability to financial market volatility. Risks are mainly domestic
and of a political nature. Sustaining the pace of reform and
maintaining political stability are key to maintaining the recent growth
momentum.
In Sub-Saharan Africa, growth picked up only moderately in
2014 to 4.5 percent, reflecting a slowdown in several of the region’s
large economies, notably South Africa. Growth is expected to remain flat
in 2015 at 4.6 percent (lower than previously expected), largely due to
softer commodity prices, and rise gradually to 5.1 percent by 2017,
supported by infrastructure investment, increased agriculture
production, and buoyant services. The outlook is subject to significant
downside risks arising from a renewed spread of the Ebola epidemic,
violent insurgencies, lower commodity prices, and volatile global
financial conditions. Policy priorities include a need for budget
restraint for some countries in the region and a shift of spending to
increasingly productive ends, as infrastructure constraints are acute.
Project selection and management could be improved with greater
transparency and accountability in the use of public resources.
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