The global economic environment has deteriorated noticeably in the 2nd half of 2018. The main reasons for this are the geopolitical agenda of the Trump administration (e.g. the trade dispute) and the tightening of monetary policy by the Federal Reserve. In 2019 the simmering trade conflict is likely to particularly weigh on economic areas with trade surpluses (e.g. China and the Eurozone). From the perspective of emerging markets, elevated financial market volatility as well as expectations for a continued restrictive US monetary policy put additional pressure on the outlook for economic growth in 2019.
The World Bank (WB) lowered its forecast for the average oil price for the next two years to $67 per barrel, down $4 from its December forecast. In December, the World Bank expected oil price to average at $71 per barrel in 2019-2021, in June forecast it predicted $69 per barrel. Oil prices are expected to average $67/bbl in 2019 and 2020, $2/bbl lower than June projections; however, uncertainty around the forecast is high, the bank’s report says. The World Bank also said in its global economic outlook it had lowered its forecast for global economic growth by 0.1 percentage points to 2.9 percent due to a fall in trade and manufacturing, as well as due to trade wars. Global economic growth is projected to soften from a downwardly revised 3 percent in 2018 to 2.9 percent in 2019 amid rising downside risks to the outlook… International trade and manufacturing activity have softened, trade tensions remain elevated, and some large emerging markets have experienced substantial financial market pressures, the bank said.
GDP growth forecast for the next year is also revised downward by the same 0.1 percentage points to 2.8 percent. At the same time, the bank kept the 2019 growth forecast for developed economies and for the United States unchanged at 2 percent and 2.5 percent, respectively. The 2019 forecast for the euro area was lowered by 0.1 percentage points to 1.6 percent.
IEA Improves Forecast of Oil Price to $88 Per Barrel in 2025, to $112 in 2040 However, the bank slashed US GDP growth outlook for 2020 by 0.3 percentage points to 1.7 percent.
Chinese GDP growth forecast was lowered by 0.1 percentage points to 6.2 percent in 2019 and kept unchanged at the same 6.2 percent in 2020. The bank maintained its December forecast for Russia’s GDP for 2019 and 2020 at 1.5 percent and 1.8 percent, respectively.
Trade conflict between the world’s two largest economic powers already is inflicting collateral damage and threatens to do yet more harm to the global economy and the global slowdown is beginning as government and corporate debt rise, especially among the poorest countries, while mounting interest rates increase borrowing costs, the bank said in its semi-annual Global Economic Prospects report. The report was markedly more pessimistic than a year ago when the outlook was for synchronized global growth and peppered with exhortations to take urgent, imperative or critical action. Risks are rising, senior World Bank economist Ayhan Kose told French newswire. The global economy is going through a difficult period. Skies are darkening and we see the global economy slowing. Growth of the world economy is expected to slow to 2.9% this year, and 2.8% in 2020, slightly below the previous forecast, and the estimates for nearly all regions and countries were downgraded.
At the center of the turmoil, US economic growth is expected to slow this year by four tenths of a point, falling to 2.5% down from 2.9% in 2018, and to slow even further next year to 1.7%.
China’s economy also is slowing amid the trade dispute, and growth should slip to 6.2% this year and next. Kose, who heads the World Bank’s Development Prospects Group which twice a year produces the global economic forecasts said he hoped for a resolution but meanwhile urged governments to prepare for a difficult road ahead. Global growth is still robust but whether a storm will hit or it will clear highly depends on how policymakers are going to react, he said.
Though the bank still sees a low probability of recession in the United States, even a small slowdown has an outsize effect. And if the United States and China slow by a full percentage point, it will cut global growth by nearly the same amount, with dire consequences for many countries. Trade tensions are already affecting activity around the world, Kose said, and it could get worse. The report sharply downgraded the growth forecasts for key emerging market economies like Mexico, South Africa and Russia, as well as for crisis-struck countries Turkey and Argentina. So far India and Indonesia have escaped that fate. But the United States and China together account for about a third of global GDP and 20% of global trade.
How they resolve their differences is going to be very important how global economy is going to shape this year, said Kose. Trade is an engine of growth and has been “a driving force in terms of poverty reduction, he said. Our hope is that these differences are going to be resolved. But the sharp decline in global equities markets at the end of last year showed the uncertainty generated by the trade conflict undermines business confidence and slows investment, Kose said.
Looking at the data, you definitely see that in 2018 manufacturing has slowed; (and) export orders have slowed. After rising in 2018, confidence is ebbing and “this is cause for concern.
With growing risks dominating the outlook, the World Bank urged member countries to prepare themselves, with changes in spending, investment and borrowing to establish policy buffers against coming headwinds. The sense of urgency has to be there, Kose said. Ultimately a robust policy framework is the most important insurance when you have a slowing economy and rising risks. That is especially true with rising debt levels, as interest rates are moving higher. The report highlights with concern a big jump in borrowing by the poorest nations, debt that increasingly coming from lenders that unlike the World Bank do not provide concessional terms.
Global economic growth is projected to soften from a downwardly revised 3 percent in 2018 to 2.9 percent in 2019 amid rising downside risks to the outlook, the World Bank said. International trade and manufacturing activity have softened, trade tensions remain elevated, and some large emerging markets have experienced substantial financial market pressures.
Growth among advanced economies is forecast to drop to 2 percent this year, the January 2019 Global Economic Prospects says. Slowing external demand, rising borrowing costs, and persistent policy uncertainties are expected to weigh on the outlook for emerging market and developing economies. Growth for this group is anticipated to hold steady at a weaker-than-expected 4.2 percent this year.
At the beginning of 2018 the global economy was firing on all cylinders, but it lost speed during the year and the ride could get even bumpier in the year ahead, said World Bank Chief Executive Officer Kristalina Georgieva. As economic and financial headwinds intensify for emerging and developing countries, the world’s progress in reducing extreme poverty could be jeopardized. To keep the momentum, countries need to invest in people, foster inclusive growth, and build resilient societies.” The upswing in commodity exporters has stagnated, while activity in commodity importers is decelerating. Per capita growth will be insufficient to narrow the income gap with advanced economies in about 35 percent of emerging market and developing economies in 2019, with the share increasing to 60 percent in countries affected by fragility, conflict, and violence. A number of developments could act as a further brake on activity. A sharper tightening in borrowing costs could depress capital inflows and lead to slower growth in many emerging market and developing economies.
Past increases in public and private debt could heighten vulnerability to swings in financing conditions and market sentiment. Intensifying trade tensions could result in weaker global growth and disrupt globally interconnected value chains. Robust economic growth is essential to reducing poverty and boosting shared prosperity, said World Bank Group Vice President for Equitable Growth, Finance and Institutions, Ceyla Pazarbasioglu. As the outlook for the global economy has darkened, strengthening contingency planning, facilitating trade, and improving access to finance will be crucial to navigate current uncertainties and invigorate growth.
The informal sector accounts for about 70 percent of employment and 30 percent of GDP in emerging market and developing economies. Since it is associated with lower productivity and tax revenues and greater poverty and inequality, this is symptomatic of opportunities lost. Reducing tax and regulatory burdens, improving access to finance, offering better education and public services, and strengthening public revenue frameworks could level the playing field between formal and informal sectors.
Debt vulnerabilities in low-income countries are rising. While borrowing has enabled many countries to tackle important development needs, the median debt-to-GDP ratio of low-income countries has climbed, and the composition of debt has shifted toward more expensive market-based sources of financing. These economies should focus on mobilizing domestic resources, strengthening debt and investment management practices and building more resilient macro-fiscal frameworks. Sustaining historically low and stable inflation is not guaranteed in emerging market and developing economies. Cyclical pressures that have depressed inflation over the past decade are gradually dissipating. The long-term factors that have helped reduce inflation over the past five decades – global trade and financial integration, widespread adoption of robust monetary policy frameworks – may lose momentum or reverse. Maintaining low global inflation may become as much of a challenge as achieving it.
Policies aimed at softening the blow of global food price swings can have unintended consequences if implemented by many governments in uncoordinated fashion. Government interventions can provide short-term relief, but widespread actions are likely to exacerbate food price spikes, with heaviest impact on the poor. For example, trade policies introduced during the 2010-11 food price spike may have accounted for more than one-quarter of the increase in the world price of wheat and maize. The 2010-11 food price spike tipped 8.3 million people (almost 1 percent of the world’s poor) into poverty.
Designing tax and social policies to level the playing field for formal and informal sectors as well as strengthening domestic revenue mobilization and debt management will be important priorities for policymakers to overcome the challenges associated with informality in developing economies,” said World Bank Prospects Group Director Ayhan Kose. As the economic outlook dims, such efforts become even more important.
East Asia and Pacific: East Asia and Pacific remains one of the world’s fastest-growing developing regions. Regional growth is expected to moderate to 6 percent in 2019, assuming broadly stable commodity prices, a moderation in global demand and trade, and a gradual tightening of global financial conditions. Growth in China is expected to slow to 6.2 percent this year as domestic and external rebalancing continue. The rest of the region is expected to grow at 5.2 percent in 2019 as resilient demand offsets the negative impact of slowing exports. Indonesia’s growth is expected to hold steady at 5.2 percent. The expansion of the Thai economy is expected to slow in 2019 to 3.8 percent.
The lingering effects of financial stress in Turkey are anticipated to weigh on regional growth this year, slowing it to 2.3 percent in 2019. Turkey is forecast to experience weak activity and slow to a 1.6 percent pace due to high inflation, high interest rates, and low confidence, dampening consumption and investment. Growth in the western part of the region, excluding Turkey, is projected to slow. Poland is anticipated to slow to 4 percent as Euro Area growth slows. Growth in the eastern part of the region is also anticipated to slow as large economies including Russia, Kazakhstan, and Ukraine decelerate.
Regional growth is projected to advance to a 1.7 percent pace this year, supported mainly by a pickup in private consumption. Brazil is forecast to expand 2.2 percent, assuming fiscal reforms are quickly put in place, and that a recovery of consumption and investment will outweigh cutbacks to government spending. In Mexico, policy uncertainty and the prospect of still subdued investment is expected to keep growth at a moderate 2 percent, despite the fall in trade-related uncertainty following the announcement of the U.S.-Mexico-Canada Agreement. Argentina is forecast to contract by 1.7 percent as deep fiscal consolidation leads to a loss of employment and reduced consumption and investment.
Regional growth is projected to rise to 1.9 percent in 2019. Despite slower global trade growth and tighter external financing conditions, domestic factors, particularly policy reforms, are anticipated to bolster growth in the region. Growth among oil exporters is expected to pick up slightly this year, as GCC countries as a group accelerate to a 2.6 percent rate from 2 percent in 2018. Iran is forecast to contract by 3.6 percent in 2019 as sanctions bite. Algeria is forecast to ease to 2.3 percent after a rise in government spending last year tapers off. Egypt is forecast to accelerate to 5.6 percent growth this fiscal year as investment is supported by reforms that strengthen the business climate and as private consumption picks up. Regional growth is expected to accelerate to 7.1 percent in 2019, underpinned by strengthening investment and robust consumption. India is forecast to accelerate to 7.3 percent in FY 2018/19 as consumption remains robust and investment growth continues, Bangladesh is expected to slow to 7 percent in FY2018/19 as activity is supported by strong private consumption and infrastructure spending. Pakistan’s growth is projected to decelerate to 3.7 percent in FY2018/19, with financial conditions tightening to help counter rising inflation and external vulnerabilities. Sri Lanka is anticipated to speed up slightly to 4 percent in 2019, supported by robust domestic demand and investment boosted by infrastructure projects. Nepal’s post-earthquake momentum is forecast to moderate, and growth should slow to 5.9 percent in FY2018/19.
Regional growth is expected to accelerate to 3.4 percent in 2019, predicated on diminished policy uncertainty and improved investment in large economies together with continued robust growth in non-resource intensive countries. Growth in Nigeria is expected to rise to 2.2 percent in 2019, assuming that oil production will recover and a slow improvement in private demand will constrain growth in the non-oil industrial sector. Angola is forecast to grow 2.9 percent in 2019 as the oil sector recovers as new oil fields come on stream and as reforms bolster the business environment. South Africa is projected to accelerate modestly to a 1.3 percent pace, amid constraints on domestic demand and limited government spending.