WORLD BANK EXPECTS MUTED GLOBAL GROWTH, LED BY DEVELOPING WORLD

Washington, June 13- Risks from advanced economies have eased and growth is firming, despite ongoing contraction in the Euro Area. However, the pick-up in developing countries will be modest because of capacity constraints in several middle income countries, says the World Bank in the newly-released Global Economic Prospects (GEP) report.

Global GDP is expected to expand about 2.2 percent this year and strengthen to 3.0 percent and 3.3 percent in 2014 and 2015.

Developing-country GDP is now projected to be around 5.1 percent in 2013, strengthening to 5.6 percent and 5.7 percent in 2014 and 2015, respectively. Growth in Brazil, India, Russia, South Africa and Turkey has been held back by supply bottlenecks. While external risks have eased, growth in these countries is unlikely to reach pre-crisis rates unless supply-side reforms are completed. In China also, growth has slowed as authorities seek to rebalance the economy. Looking at broader region-wide trends, the East Asia & Pacific region is expected to grow by 7.3 percent this year; Europe & Central Asia by 2.8 percent; Latin America & the Caribbean by 3.3 percent; Middle East & North Africa by 2.5 percent; South Asia by 5.2 percent; and Sub-Saharan Africa by 4.9 percent.

For high-income countries, fiscal consolidation, high unemployment and still weak consumer and business confidence will keep growth this year to a modest 1.2 percent, firming to 2.0 percent in 2014 and 2.3 percent by 2015. Economic contraction in the Euro Area is projected to be 0.6 percent for 2013, compared with the previous projection of 0.1 percent. Euro Area growth is expected to be a modest 0.9 percent in 2014 and 1.5 percent in 2015.

“While there are markers of hope in the financial sector, the slowdown in the real economy is turning out to be unusually protracted,” Kaushik Basu, Senior Vice President and Chief Economist at the World Bank. “This is reflected in the stubbornly high unemployment in industrialized nations, with unemployment in the Eurozone actually rising, and in the slowing growth in emerging economies, with India’s annual growth having dropped below 6 percent for the first time in 10 years. Also, there is heightened speculation that the US may withdraw QE and widespread concern about its consequences. By going into these topical matters, the World Bank’s latest Global Economic Prospects alerts us to both the hopes and the risks in the global economy, and also gives valuable instructions on policy.” Global trade, after contracting for several months, is expanding once again, but trade is expected to expand only 4.0 percent in 2013, well off the pre-crisis pace of 7.3 percent. Not only will the volume of trade grow less quickly than in the past, the value of trade will grow even less quickly as commodity prices begin to ease in response to rapidly increasing supply. The prices of metals and minerals are already down by 30 percent and that of energy by 14 percent since their peaks in early 2011.

“The coming on stream of new mines and energy sources is putting downward pressure on most industrial commodity prices. If commodity prices were to decline even faster than expected, commodity exporting developing countries could experience serious fiscal setbacks and weaker growth,” said Hans Timmer, Director, Development Prospects Group.

Part of the resilience of global trade, despite the weakness in high-income economies, has been due to rapid expansion in South-South trade. More than 50 percent of developing country exports now go to other developing countries. Even when China is excluded, South-South trade has been growing at an average rate of 17.5 percent a year over the past decade, with manufacturing trade expanding as rapidly as commodities trade.

Gross capital flows to developing countries, which were relatively weak for most of the post-crisis period, have reached record levels. International bond issuance by developing countries is also at record levels, while bank lending and equity issuance for developing countries is up by almost 70 percent as compared with first 5 months of 2012. The rebound in bank-lending suggests that for developing countries the most acute effects of high-income banking-sector deleveraging have passed. Despite the uptick, as a percent of developing-country GDP, capital flows remain well below pre-crisis levels.

Prospects for developing countries are varied. In several developing countries, notably in East Asia & the Pacific, demand appears to be expanding faster than supply, resulting in growing imbalances, such as inflation, asset-price bubbles, rising debt levels and deteriorating current account balances. Most countries in Sub-Saharan Africa are also running at or close to full capacity, risking a build-up of inflationary pressures. In developing Europe, although activity has picked up, growth has not been fast enough to quickly reduce post-crisis output gaps and unemployment. Finally, in the Middle East & North Africa, GDP growth has been disrupted by political and social tensions. Unemployment and slow productivity remain central policy challenges.

“Given capacity constraints, to achieve higher growth on a sustained basis, most developing countries need to once again prioritize structural reforms like easing the cost of doing business, opening up to international trade flows and foreign investment, and investing in infrastructure and human capital. These measures underpinned strong developing country growth over the past 20 years and are worth sticking with,” said Andrew Burns, Manager of Global Macroeconomics and lead author of the report.

Regional Highlights.

Growth in Latin America & the Caribbean is expected to strengthen marginally to 3.3 percent in 2013, from 3.0 percent in 2012, as lower commodity prices and subdued global activity will weigh on growth. Growth will firm somewhat in Argentina and Brazil from a very weak pace, while slowing down in most commodity exporters. In Venezuela, the reversal of highly expansionary policies will cause a sharp deceleration in GDP growth to 1.4 percent in 2013. Improvements in terms of trade will support growth in Central America, while growth in the Caribbean will be held back by financing constraints and necessary fiscal adjustments. Over the medium term, the regional economy is expected to grow just under 4 percent annually, supported by stronger capital flows (notably FDI), recovering external demand and structural reforms.

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