Dear Colleagues. We have just released the June 2024 edition of the Global Economic Prospects report.
Global Outlook. The global economy is stabilizing, following several years of negative shocks. Global growth is projected to hold steady at 2.6 percent this year, despite flaring geopolitical tensions and high interest rates, before edging up to 2.7 percent in 2025-26 alongside modest expansions of trade and investment. Global inflation is expected to moderate at a slower clip than previously assumed, averaging 3.5 percent this year. Central banks in both advanced economies and EMDEs are likely to remain cautious in easing policy. Despite some improvement, the growth outlook remains subdued. Global growth over the forecast horizon is expected to be nearly half a percentage point below its 2010-19 average, with a slower pace of expansion in economies comprising over 80 percent of the global population. EMDE growth is projected to moderate from 4.2 percent in 2023 to 4 percent in 2024. Risks have become more balanced but remain tilted to the downside. Escalating geopolitical tensions could lead to volatile commodity prices. In a context of elevated trade policy uncertainty, further trade fragmentation risks additional disruptions to trade networks. More persistent inflation could lead to higher-for-longer interest rates. Other risks include weaker-than-anticipated activity in key economies and disasters related to climate change. Against this backdrop, policy makers face daunting challenges. Global efforts are needed to safeguard trade, support green and digital transitions, deliver debt relief, and improve food security. Still-pronounced inflation risks underscore the need for EMDE monetary policies to remain focused on price stability. High debt and elevated debt-servicing costs will require EMDE policy makers to balance sizable investment needs with fiscal sustainability. To meet development goals, policies are needed to raise productivity growth, improve the efficiency of public investment, build human capital, and close gender gaps in the labor market.
Harnessing the Benefits of Public Investment. A significant acceleration in investment is essential if EMDEs are to achieve key development goals and tackle the challenges associated with climate change. Investment—public as well as private—tends to fuel a virtuous cycle of development, boosting growth, improving productivity, and reducing poverty. In EMDEs, however, investment growth has seen a sustained slowdown since the global financial crisis and is expected to remain weak in the coming years. Policy action is necessary to reverse this trend. Public investment averages about one-quarter of total investment in the median EMDE—a modest share. Yet it can be a powerful policy lever to help ignite growth, including by helping to catalyze private investment. This chapter offers a comprehensive assessment of public investment and its macroeconomic effects in EMDEs. It finds that public investment in these economies has experienced a historic slowdown in the past decade. In EMDEs with ample fiscal space and a record of efficient government spending, on average, scaling up of public investment by one percent of GDP can increase output by up to 1.6 percent over five years. Public investment also crowds in private investment and boosts productivity, promoting long-run economic growth in these economies. To maximize the impact of public investment, EMDEs should undertake wide-ranging policy reforms to improve public investment efficiency—by, among other things, strengthening governance and fiscal administration—and create fiscal space through revenue and expenditure measures. The global community can play an important role in facilitating these reforms—particularly in lower-income developing countries—through financial support and technical assistance.
Fiscal Challenges in Small States: Weathering Storms, Rebuilding Resilience. The COVID-19 pandemic and the global shocks that followed have worsened fiscal and debt positions in small states, intensifying their already substantial fiscal challenges—especially the need to manage more frequent climate change-related natural disasters. Forty percent of the 35 EMDEs that are small states are at high risk of debt distress or already in it, roughly twice the share for other EMDEs. Larger fiscal deficits since the pandemic reflect increased spending to support households and firms, and weaker revenues. To improve their fiscal sustainability and resilience to future shocks, small states need to strike a balance between maintaining adequate fiscal buffers and increasing investments in human capital and climate change-resilient infrastructure. Comprehensive fiscal reforms are essential. First, small states’ revenues, which are highly volatile and dependent on sometimes unreliable sources, should be drawn from a more stable and secure tax base. Second, spending efficiency needs to be improved, especially on transfers to public enterprises, subsidies, and the public wage bill. Third, these changes should be complemented by reforms to fiscal frameworks, including better utilization of fiscal rules and sovereign wealth funds. Finally, to help these countries stay on sustainable fiscal paths, well-coordinated and targeted global policies are also needed. Policies supported by the global community can help improve fiscal policy management, provide technical assistance, address debt challenges, and bolster funding for small states to invest in climate change resilience and adaptation, and other priority areas.
PS: For our other periodical products, please visit: Commodity Markets Outlook and Global Monthly. For our latest work on the problems confronting lower-income developing economies, see The Great Reversal. For our comprehensive study on long-term growth outlook, see Falling Long-Term Growth Prospects. For our databases of potential growth and inflation, see Potential Growth: A Global Database and One-Stop Source: A Global Database of Inflation. For our work on debt challenges, see Global Waves of Debt: Causes and Consequences and A Cross-Country Database of Fiscal Space. For our analytical work on topical policy issues, please visit Policy Research Working Papers.
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