Dear
Colleagues (the Author of this MEMO is M. Ayhan Kose, Director Prospects Group Equitable Growth, Finance and Institutions, World Bank Group, T +1 (202) 473-8350, E akose@worldbank.org W
ayhankose):
We have just released the January 2020 edition of the
Global Economic Prospects
report—the World Bank’s semi-annual flagship publication on the state
of the world economy. In a nutshell, following a year during which weak
trade and investment dragged the world economy to its weakest
performance since the global financial crisis, economic
growth is poised for a modest rebound this year. In addition to
discussing global and regional prospects, this edition includes several
pieces on topical issues facing emerging market and developing economies
(EMDEs), including the steep post-crisis productivity
growth slowdown that was accompanied by broad-based debt accumulation,
the challenges associated with price controls, and the evolution of
inflation in low-income countries.
I briefly summarize the main messages
of the report below (to download the full report,
please use this link).
Thank you for your interest in our products. As always, comments are welcome! Best. Ayhan
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Global
Outlook: Fragile, Handle with Care.
Global growth is expected to recover to 2.5 percent in 2020—up slightly
from the post-crisis low of 2.4 percent registered last year amid
weakening trade and investment—and edge up further over the forecast
horizon. This projected recovery could be stronger
if recent policy actions—particularly those that have mitigated trade
tensions—lead to a sustained reduction in policy uncertainty.
Nevertheless, downside risks predominate, including the possibility of a
re-escalation of global trade tensions, sharp downturns
in major economies, and financial disruptions in emerging market and
developing economies (EMDEs). The materialization of these risks would
test the ability of policymakers to respond effectively to negative
events. Associated policy challenges are compounded
by high debt levels and subdued productivity growth. Many EMDEs need to
rebuild macroeconomic policy space to enhance resilience to possible
adverse developments and to pursue decisive structural reforms.
Regional
Prospects.
Growth
in almost all EMDE regions has been weaker than expected, reflecting
downgrades to almost half of EMDEs. Activity in most regions
is expected to pick up in 2020-21, but the recovery will largely depend
on a rebound in a small number of large EMDEs, some of which are
emerging from deep recessions or sharp slowdowns.
Fading
Promise: How to Rekindle Productivity Growth.
A broad-based slowdown in labor productivity growth has been underway
since the global financial crisis. In EMDEs, the slowdown has reflected
weakness in investment and moderating efficiency gains as well as
dwindling resource reallocation between sectors.
The pace of improvements in key drivers of labor productivity—including
education, urbanization, and institutions—has slowed or stagnated since
the global financial crisis and is expected to remain subdued. To
rekindle productivity growth, a comprehensive
approach is necessary: facilitating investment in physical,
intangible, and human capital; encouraging reallocation of resources
towards more productive sectors; fostering firm capabilities to
reinvigorate technology adoption and innovation; and promoting
a growth-friendly macroeconomic and institutional environment. Specific
policy priorities will depend on individual country circumstances.
The
Fourth Wave: Rapid Debt Buildup.
The
global economy has experienced four waves of debt accumulation over the
past fifty years. The first three
ended with financial crises in many EMDEs. During the current wave,
which started in 2010, the increase in debt in these economies has
already been larger, faster, and more broad-based than in any of the
previous three waves. Current low interest rates—which
markets expect to be sustained into the medium term—appear to mitigate
some of the risks associated with high debt. However, EMDEs are also
confronted by weak growth prospects, mounting vulnerabilities, and
elevated global risks. A menu of policy options is
available to reduce the likelihood of the current debt wave ending in
crises and, if crises were to take place, to alleviate their impact.
Price
Controls: Good Intentions, Bad Outcomes.
The
use of price controls is widespread across EMDEs, including for food
and key imported and exported commodities. While sometimes
used as a tool for social policy, price controls can dampen investment
and growth, worsen poverty outcomes, cause countries to incur heavy
fiscal burdens, and complicate the effective conduct of monetary policy.
Replacing price controls with expanded and better-targeted
social safety nets, coupled with reforms to encourage competition and a
sound regulatory environment, can be both pro-poor and pro-growth. Such
reforms need to be carefully communicated and sequenced to ensure
political and social acceptance. Where they exist,
price control regimes should be transparent and supported by
well-capitalized stabilization funds or national hedging strategies to
ensure fiscal sustainability.
Low
for How Much Longer? Inflation in Low-Income Countries.
Inflation
in LICs has declined sharply to a median of 3 percent in mid-2019 from a
peak of 25 percent in 1994. The drop has been supported
by the move to more flexible exchange rate regimes, greater central
bank independence, and a generally more benign external environment
since the 1990s. However, low LIC inflation cannot be taken for granted
amid mounting fiscal pressures and the risk of exchange
rate shocks. To maintain low and stable inflation, monetary and fiscal
policy frameworks need to be strengthened and supported by efforts to
replace price controls with more efficient policies.
PS:
For our other periodical products, please visit: Commodity Markets
Outlook
and
Global Monthly.
For our stock tacking of the performance of EMDEs since the global financial crisis, see
A Decade Since the Global Recession.
For details of our recent work on debt accumulation in EMDEs, see Global
Waves of Debt. For our comprehensive
database
of fiscal space indicators, see A Cross-Country
Database of Fiscal Space. For our study on the evolution and prospects of inflation,
see Inflation in Emerging and Developing Economies.
For our analytical work on topical policy issues, please visit Policy Research Working Papers.
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