World Bank sees global growth slowing to 2.6% in 2019
06 Jun 2019
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The World Bank has forecast the global economy to grow 2.6 per cent in 2019, the slowest pace in three years, pulled down by slackening world trade and investment. Economic growth has been slower in most major economies, particularly the Euro Area, and some large emerging market and developing economies.
The World Bank expects growth to stabilise soon, although its momentum is fragile and subject to substantial risks.
Growth in the emerging and developing world is expected to pick up next year as the turbulence and uncertainty that afflicted a number of countries late last year and this year recedes, says the World Bank’s June 2019 report, `Global Economic Prospects: Heightened Tensions, Subdued Investment’.
However, the Bank says, much will depend on the momentum of trade disputes between the United States and China.
Growth may be further retarded by an escalation of trade disputes between the world’s largest economies, renewed financial turmoil in emerging and developing economies, or a more abrupt deceleration of economic growth among major economies than is currently envisioned, according to the Bank.
Of particular concern is a slowdown in global trade growth to the lowest level since the financial crisis ten years ago and a tumble in business confidence.
“Stronger economic growth is essential to reducing poverty and improving living standards,” said World Bank Group President David Malpass. “Current economic momentum remains weak, while heightened debt levels and subdued investment growth in developing economies are holding countries back from achieving their potential. It is urgent that countries make significant structural reforms that improve the business climate and attract investment. They also need to make debt management and transparency a high priority so that new debt adds to growth and investment.”
Because equitable growth is essential to alleviating poverty and increasing shared prosperity, emerging market and developing economies need to reinforce the protections they have against sudden economic downdrafts, the report cautions.
Economic policymakers in emerging and developing economies will need to rein in rising debt levels and carefully select projects for maximum benefit, better debt management and greater clarity about loans, the Bank said.
Subdued investment in emerging market and developing economies raises concern about how these economies can fulfill extensive investment needs to meet development goals.
The concentration of poverty in low-income countries raises questions about overcoming obstacles to faster growth in those economies.
The risk of renewed financial stress is a reminder of the importance of resilient central banks and monetary policy frameworks that can mitigate the pass-through effects of currency depreciations to inflation.
The World Bank produces the GEP twice a year, in January and June, as part of its in-depth analysis of key global macroeconomic developments and their impact on member countries. The GEP provides intelligence in support of achieving development goals and is a trusted resource for member countries, stakeholders, civil organizations and researchers.
Many emerging and developing economies have borrowed heavily and their hard-won reductions of public debt before the global financial crisis have eroded, says the Bank. Emerging and developing economy debt has climbed by an average of 15 percentage points to 51 per cent of GDP in 2018, according to the World Bank.
Debt accumulation can be justified because of the need for growth-enhancing projects, such as investments in infrastructure, health and education. World Bank analysis finds that low- and middle-income countries will need in the range of $640 billion to $2.7 trillion in investment a year to meet development goals by 2030. In addition, prudent government spending can help a country ride out an economic downturn.
But excessive debt carries serious risks. Even in an environment of low interest rates, debt can accumulate to unsustainable levels. A government spending large amounts to service debt is allocating less on other important activities. High debt also raises the possibility in the minds of investors and consumers that governments may eventually raise taxes to rein in deficits, chilling business and consumer spending. In extreme cases, elevated debt can lead to defaults and bailouts.
"It is urgent that countries make significant structural reforms that improve the business climate and attract investment. They also need to make debt management and transparency a high priority so that new debt adds to growth and investment," says Malpass.
Sluggish global growth and weak investment growth raises concerns about the long-term economic prospects of emerging market and developing economies. Despite a recent modest pickup, investment growth is expected to be below long-term averages in coming years, says the Bank.
“This means that the progress emerging and developing economies had made in catching up to advanced economies is slowing. Slower capital deepening also exerts a drag on the productivity of a country. This too stirs worry about filling gaping development needs over the next decade.”
The Bank recommends reallocation of resources from unproductive areas and increasing spending efficiency in order to boost public investment; improving the ease of doing business for private investment; providing greater clarity about the direction of policy and enhancing integration into global value chains, as tools to improve growth.
For commodity exporting economies, the Bank recommends greater diversification as a means of reducing vulnerability to the volatility of natural resource markets.
The rapid economic growth in some low-income countries since the turn of the century reduced poverty saw many climb to middle-income status, although many of those countries are still classified as low-income, based on having a per capita income of $995 or less in 2017.
While the number of low-income countries has declined since 2001 from 64 to 34 in 2019, the Bank says, the challenges to the remaining low-income countries are steeper than for those that have moved up.
Many of today’s low-income countries are starting from particularly weak income positions. Also, more than half of today’s low-income countries are affected by fragility, conflict and violence. And most of them are geographically disadvantaged by being isolated or landlocked, making trade integration tougher.
Also, many are heavily reliant on agriculture, putting them at greater vulnerability to extreme weather and less able to join global value chains as the prospects for commodity demand soften with slowing growth in major economies and that debt vulnerabilities climbing sharply.
To achieve stronger growth among low-income countries, policymakers, citizens, and the international community look to both external and internal drivers of growth as well as steps to mitigate risk. Domestically, developing stronger financial systems and promoting financial inclusion and strengthening governance and business climates to support the private sector can help.
As per recent IMF data, global debt is at $184 trillion, the equivalent of 225 per cent of global GDP, which means governments have to step up efforts to reduce debt, although they are also constrained.
Countries are looking to central banks to respond to the slowing economic growth with monetary policy are responses as the world economy loses the fire power to charge up growth.
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