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Andrew Burns World Bank March 2013 Global Economic Prospects Assuring growth over the medium term 1
Andrew Burns World Bank March 2013
Global Economic Prospects
Assuring growth over
the medium term
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
• Developing country 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
Financial market jitters have eased significantly
3
Credit default swap rates, basis points
0
200
400
600
800
1000
1200
1400
1600
1800
Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13
Portugal
Ireland
Spain
Italy
Euro Area (GDP weighted)
Source: World Bank, Datastream.
4
Reduced cost of borrowing helps fiscal sustainability
Yield on 10 year sovereign debt, percent
Source: World Bank, Datastream
0
2
4
6
8
10
12
14
16
18
Jan '09 Jul '09 Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13
United States
Italy
Spain
Germany
Portugal
5
Developing-country CDS rates also moderated
Credit default swap rates, basis points
Source: World Bank, Datastream.
0
50
100
150
200
250
300
350
400
450
500
Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13
Latin America & Caribbean
Europe & Central Asia
Middle East & N. Africa
East Asia & Pacific
Euro Area (GDP
After declining in May/June, capital flows to developing countries have rebounded
6
Gross international capital flows to developing countries, billions USD
0
10
20
30
40
50
60
70
Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12
New equity issuance
Bond issuance
Syndicated Bank-lending
Source: World Bank, Dealogic.
-2
3
8
13
18
23
28
2009 2010 2011 2012
Gross syndicated bank
lending
-2
3
8
13
18
23
28
2009 2010 2011 2012
Gross new equity issues
-2
3
8
13
18
23
28
2009 2010 2011 2012
Gross international bond issues
A secular recovery in equity and bank lending, more volatile bond flows
Source: World Bank, Dealogic.
0
1
2
3
4
5
6
7
8
9
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
2004 2005 2006 2007 2008 2009 2010 2011 2012e 2013f 2014f 2015f
ST Debt Bank Lending Bond Flows Portfolio Equity FDI Inflows$ trillion % GDP
Capital flows expected to strengthen but remain stable as % of GDP
8 Source: World Bank, Global Economic Prospects 2013A.
Total as a share of GDP (RHS)
9
Developing countries may be escaping from high-income weakness
Industrial production, percent growth, 3m/3m saar
Source: World Bank, Datastream.
-15
-10
-5
0
5
10
15
20
25
Jan '11 Jul '11 Jan '12 Jul '12
China
Other developing
Other High income
Euro Area
Manufacturing purchasing managers index (PMI), points
10
Purchasing manager’s indexes better but still weak
Source: World Bank, Markit/Haver Analytics.
43
45
47
49
51
53
55
57
59
61
Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13
Other developing
China
Other high-income
Euro Area
Projections have been downgraded in both 2012 and 2013
Annual GDP growth, %
11
0
1
2
3
4
5
6
7
8
2010 2011 2012 2013 2014 2015
Developing countries
High-income countries
June 2012 forecasts
Source: World Bank, Global Economic Prospects 2013A.
Modest regional growth through 2015
-4
-2
0
2
4
6
8
10
High-income East-Asia &Pacific
Europe &Central Asia
Latin America& Caribbean
Middle-East &North Africa
South Asia Sub-SaharanAfrica
2011 2012 2013 2014 2015
12
Annual GDP growth, %
Source: World Bank, Global Economic Prospects 2013A.
Outlook remains precarious
• 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
13
Prospects are vulnerable to a range of external risks
-1.4
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0Prolonged fiscal paralysis Contained Euro crisis
East Asia & Pacific Europe & Central Asia Latin America & Caribbean
Middle-East & North Africa South Asia Sub-Saharan Africa
14
Change in level of real GDP from baseline, percent
Source: World Bank, Global Economic Prospects 2013A.
Recent upswings in Chinese investment rate pose serious challenges going forward
0
5
10
15
20
25
30
35
40
45
50
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
China
Other developing
High-income
Bringing investment rate down to pre-boom and crisis
level of 35% implies a 10% of GDP reallocation of
demand
China 2030 sees 35% investment rate as consistent
with China’s long-term production potential
Source: Global Economic Prospects 2013A.
2005/8
boom period
Post-crisis
stimulus
Prospects are vulnerable to a range of external risks
-1.4
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0Abrupt decline in Chinese investment
China Other East Asia & Pacific Europe & Central Asia
Latin America & Caribbean Middle-East & North Africa South Asia
16
Change in level of real GDP from baseline, percent
Source: World Bank, Global Economic Prospects 2013A.
Near record low stocks of maize, but wheat and rice markets are relatively well supplied
0
5
10
15
20
25
30
35
40
45
50
Maize Rice Wheat‘75 ‘90 ‘08
17
End of crop-year stocks as a % of total consumption
Source: World Bank, USDA
‘60
2008
18
0
50
100
150
200
250
300
350
400
450
500
Jan '05 Jan '06 Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13
Maize
Copper
Crude oil
Wheat
Rice (Monthly)
Commodity prices display no clear trend since 2011
US dollar price of selected commodities, Jan. 2005=100
Source: World Bank.
Near record low stocks of maize, but wheat and rice markets are relatively well supplied
0
5
10
15
20
25
30
35
40
45
50
Maize Rice Wheat‘75 ‘90 ‘08
19
End of crop-year stocks as a % of total consumption
Source: World Bank, USDA
‘60
2008
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 2007
• 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
20
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
1992 2002 2012 2022 2032 2042
Baseline forecast
Slow growth (- 1.0 pp pa)
Assuming continued strong productivity growth, per capita incomes in developing countries could rise to 52% of high-income
Baseline projection
Developing country, per capita income, % of 2010 high-income level
Small improvements in potential growth result in substantial long run gains
Source: World Bank, Global Economic Prospects 2013A.
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
1992 2002 2012 2022 2032 2042
Weaker growth (-0.5 pp pa)
However, that progress is not guaranteed and even small under performance can have large negative consequences
Baseline projection
Developing country, per capita income, % of 2010 high-income level
Small improvements in potential growth result in substantial long run gains
Source: World Bank, Global Economic Prospects 2013A.
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
1992 2002 2012 2022 2032 2042
Slow growth (- 1.0 pp pa)
Weaker growth (-0.5 pp pa)
However, that progress is not guaranteed and even small under performance can have large negative consequences
Baseline projection
Developing country, per capita income, % of 2010 high-income level
Small improvements in potential growth result in substantial long run gains
Source: World Bank, Global Economic Prospects 2013A.
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
1992 2002 2012 2022 2032 2042
Rapid growth (+ 1.0 pp per annum)
Faster growth (+ 0.5 pp pa)
Slow growth (- 1.0 pp pa)
Weaker growth (-0.5 pp pa)
By the same token relatively small increases in potential growth can have large long-term payoffs
Baseline projection
Developing country, per capita income, % of 2010 high-income level
Small improvements in potential growth result in substantial long run gains
Source: World Bank, Global Economic Prospects 2013A.
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
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Andrew Burns World Bank March 2013
Global Economic Prospects
Assuring growth over
the medium term
26
