A World Bank Group Flagship Report JUNE 2017 Global Economic Prospects A Fragile Recovery © 2017 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 20 19 18 17 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Table of Contents Acknowledgments ............................................................................................................................. vii Abbreviations ..................................................................................................................................... ix Chapter 1 Global Outlook: A Fragile Recovery .............................................................................1 Summary ...................................................................................................................... 3 Major economies: Recent developments and outlook ....................................................6 Global trends ..............................................................................................................10 Emerging market and developing economies: Recent developments and outlook ........14 Risks to the outlook ....................................................................................................21 Policy challenges .........................................................................................................29 References ..................................................................................................................38 Box 1.1 Low-income countries: Recent developments and outlook .............................17 Box 1.2 Regional perspectives: Recent developments and outlook ..............................22 Special Focus 1 Debt Dynamics in Emerging Market and Developing Economies: Time to Act? ........ 47 Introduction ............................................................................................................... 49 Evolution of fiscal positions ........................................................................................ 50 Fiscal positions in episodes of financial stress .............................................................. 53 Conclusion ................................................................................................................. 55 References .................................................................................................................. 56 Special Focus 2 Arm’s-Length Trade: A Source of Post-Crisis Trade Weakness ................................... 59 Introduction ............................................................................................................... 61 Characteristics of intra-firm and arm’s-length trade .................................................... 63 Evolution of intra-firm and arm’s-length trade since the crisis..................................... 64 Factors contributing to the sharp post-crisis slowdown in arm’s-length trade .............. 65 Conclusion ................................................................................................................. 67 References .................................................................................................................. 68   iii Chapter 2 Regional Outlooks ................................................................................................... 71 East Asia and Pacific ................................................................................................ 73 Recent developments........................................................................................... 73 Outlook .............................................................................................................. 75 Risks ................................................................................................................... 76 Europe and Central Asia .......................................................................................... 79 Recent developments .......................................................................................... 79 Outlook .............................................................................................................. 79 Box 2.2.1 Reversal in 2016 of diverging growth paths ........................................ 80 Risks ................................................................................................................... 81 Latin America and the Caribbean............................................................................. 85 Recent developments .......................................................................................... 85 Outlook .............................................................................................................. 86 Box 2.3.1 Continued growth divergence within Latin America and the Caribbean ....................................................................................................... 86 Risks ................................................................................................................... 88 Middle East and North Africa .................................................................................. 91 Recent developments........................................................................................... 91 Outlook .............................................................................................................. 92 Risks ................................................................................................................... 94 South Asia................................................................................................................ 99 Recent developments .......................................................................................... 99 Outlook ............................................................................................................ 100 Risks ................................................................................................................. 101 Sub-Saharan Africa................................................................................................ 105 Recent developments ........................................................................................ 105 Outlook ............................................................................................................ 106 Box 2.6.1 Deteriorating public finances in Sub-Saharan Africa ........................ 107 Risks ................................................................................................................. 108 References ................................................................................................................ 111 Statistical Appendix ........................................................................................................................ 115 Selected Topics ............................................................................................................................... 121   iv Figures 1.1 Global prospects ...............................................................................................5 1.2 Global risks and policy challenges .....................................................................6 1.3 Advanced economies .........................................................................................7 1.4 United States ....................................................................................................7 1.5 Euro Area .........................................................................................................8 1.6 Japan ...............................................................................................................9 1.7 China.............................................................................................................. 10 1.8 Global trade .................................................................................................... 11 1.9 Financial markets ............................................................................................ 12 1.10 Commodity markets ....................................................................................... 13 1.11 EMDE activity................................................................................................ 15 1.12 EMDE growth outlook ................................................................................... 21 1.13 Role of the largest EMDEs in the global outlook ............................................ 24 1.14 Global risks ..................................................................................................... 25 1.15 Risks of protectionism..................................................................................... 26 1.16 Financial market risks ..................................................................................... 27 1.17 Risks linked to weak productivity and investment growth ............................... 29 1.18 Monetary policy challenges in advanced economies......................................... 30 1.19 Fiscal policy challenges in advanced economies ............................................... 31   1.20 Structural policy challenges in advanced economies ........................................ 31 1.21 EMDE monetary policy .................................................................................. 32 1.22 EMDE fiscal policy .........................................................................................33 1.23 EMDE structural domestic policy challenges ..................................................34 1.24 EMDE structural trade policy challenges ........................................................35 1.25 Poverty and trade ............................................................................................ 36 SF1.1 Evolution of fiscal space in EMDEs ................................................................ 49 SF1.2 Debt relief under the HIPC and MDRI initiatives .......................................... 50 SF1.3 Evolution of sustainability gaps ....................................................................... 51 SF1.4 Evolution of fiscal space in EMDE regions ..................................................... 52 SF1.5 Debt dynamics around financial stress events and in 2016 .............................. 53 SF1.6 Debt dynamics in EMDE oil exporters around oil price plunges ..................... 54 SF1.7 Vulnerabilities and buffers in EMDEs............................................................. 55 SF2.1 Trade growth .................................................................................................. 61 v SF2.2 Role of the United States in trade and foreign direct investment .................... 62 SF2.3 Characteristics of U.S. intra-firm and arm’s-length trade ............................... 63 SF2.4 Regional decomposition of U.S. intra-firm and arm’s-length trade ................. 64 SF2.5 Sectoral decomposition of U.S. intra-firm and arm’s-length trade .................. 65 SF2.6 Pre- and post-crisis growth in U.S. trade ........................................................ 66 2.1.1 EAP: Recent developments............................................................................. 74 2.1.2 China ............................................................................................................. 75 2.1.3 EAP: Outlook and risks.................................................................................. 76 2.2.1 ECA: Recent developments ............................................................................ 81 2.2.2 ECA: Outlook and risks ................................................................................. 82 2.3.1 LAC: Recent developments ............................................................................ 87 2.3.2 LAC: Outlook and risks ................................................................................. 88 2.4.1 MENA: Recent developments ........................................................................ 92 2.4.2 MENA: Outlook and risks ............................................................................. 93 2.5.1 SAR: Recent developments........................................................................... 100 2.5.2 SAR: Outlook and risks............................................................................... 101 2.6.1 SSA: Recent developments ........................................................................... 106 2.6.2 SSA: Outlook and risks ................................................................................ 108 Tables 1.1 Real GDP ........................................................................................................ 4 1.2 List of emerging market and developing economies ....................................... 37 2.1.1 East Asia and Pacific forecast summary ........................................................... 77 2.1.2 East Asia and Pacific country forecasts ............................................................ 78 2.2.1 Europe and Central Asia forecast summary .................................................... 83 2.2.2 Europe and Central Asia country forecasts ..................................................... 84 2.3.1 Latin America and the Caribbean forecast summary ....................................... 89 2.3.2 Latin America and the Caribbean country forecasts ........................................ 90 2.4.1 Middle East and North Africa forecast summary ............................................ 96 2.4.2 Middle East and North Africa economy forecasts ........................................... 97 2.5.1 South Asia forecast summary ........................................................................ 102 2.5.2 South Asia country forecasts ......................................................................... 103 2.6.1 Sub-Saharan Africa forecast summary ........................................................... 109 2.6.2 Sub-Saharan Africa country forecasts ............................................................ 110 vi Acknowledgments This World Bank Group Flagship Report is a product of the Prospects Group in the Development Economics Vice Presidency. The project was managed by M. Ayhan Kose and Franziska Ohnsorge, under the general guidance of Paul Romer. Chapters 1 and 2 were led by Carlos Arteta. Chap- Modeling and data work were provided by Hidea- ter 1 (Global Outlook) was prepared by Carlos ki Matsuoka, assisted by Mai Anh Bui, Xinghao Arteta and Marc Stocker, with contributions from Gong, Cristhian Javier Vera Avellan, Liwei Liu, Csilla Lakatos and Ekaterine Vashakmadze. Addi- Trang Thi Thuy Nguyen, Shituo Sun, Collette tional inputs were provided by John Baffes, Mari Wheeler, and Peter Williams. Gerard Kambou, Eung Ju Kim, Hideaki Matsu- The online publication was produced by a team oka, Bryce Quillin, Yirbehogre Modeste Some, including Graeme Littler, Praveen Penmetsa, and and Dana Vorisek. Research assistance was provide Mikael Reventar, with technical support from by Xinghao Gong, Liwei Liu, Trang Thi Thuy Marjorie Patricia Bennington. Phillip Hay and Nguyen, Collette Wheeler, and Peter Williams. Mark Felsenthal managed media relations and dis- Box 1.1 was prepared by Gerard Kambou and Bo- semination. The print publication was produced by az Nandwa. Research assistance was provided by Maria Hazel Macadangdang, Adriana Maximiliano, Trang Thi Thy Nguyen and Xinghao Gong. Box and Rosalie Singson Dinglasan, in collaboration 1.2 was prepared by Carlos Arteta with contribu- with Aziz Gökdemir and Patricia Katayama. tions from Gerard Kambou, Lei Ye, Boaz Nandwa, Yoki Okawa, Temel Taskin, Ekaterine Many reviewers offered extensive advice and com- Vashakmadze, and Dana Vorisek. ments. These included: Kishan Abeygunawar da- na, Magda Adriani, Abebe Adugna Dadi, The first Special Focus, on debt dynamics in Kiatipong Ariyapruchya, Luca Bandiera, Rafael emerging market and developing economies, was Chelles Barroso, Davaadalai Batsuuri, Hans Beck, prepared by M. Ayhan Kose, Franziska Ohnsorge, Robert Beyer, Fabio Sola Bittar, Monika Blaszkie- and Naotaka Sugawara. The second Special Focus, wicz, Elena Bondarenko, Eduardo Borensztein, on arm’s-length trade as a source of post-crisis Cesar Calderon, Kevin Carey, Francisco G. Car- trade weakness, was prepared by Csilla Lakatos neiro, Paloma Anos Casero, Jean-Pierre Chris- and Franziska Ohnsorge. tophe Chauffour, Derek Hung Chiat Chen, Ajai Chapter 2 (Regional Outlooks) was supervised by Chopra, Ibrahim Saeed Chowdhury, Kevin James Carlos Arteta, Anna Ivanova, and Franziska Ohn- Clinton, Fabiano Silvio Colbano, Andrea Coppo- sorge. The authors were Ekaterine Vashakmadze la, Tito Cordella, Damir Cosic, Barbara Cunha, (East Asia and Pacific), Yoki Okawa (Europe and Stefano Curto, Sudyumna Dahal, Somneuk Da- Central Asia), Dana Vorisek (Latin America and vading, Simon Davies, Annette De Kleine-Feige, the Caribbean), Lei Ye with contributions from Agim Demukaj, Allen Curtis Dennis, Shantayanan Ergys Islamaj (Middle East and North Africa), Devarajan, Tatiana Didier Brandao, Viet Tuan Boaz Nandwa and Temel Taskin (South Asia), Dinh, Ndiame Diop, Quy-Toan Do, Mariam and Gerard Kambou (Sub-Saharan Africa). Re- Dolidze, Jozef Draaisma, Sebastian Eckardt, Kim search assistance was provided by Mai Anh Bui, Alan Edwards, Christian Eigen-Zucchi, Khalid El Xinghao Gong, Liwei Liu, Trang Nguyen, and Massnaoui, Olga Emelyanova, Wilfried Engelke, Shituo Sun. Marianne Fay, Norbert Matthias Fiess, Fitria   vii Fitrani, Cornelius Fleischhaker, Samuel Freije- Orton Romero, Lucy Pan, John Panzer, Catalin Rodriguez, Roberta V. Gatti, Adnan Ashraf Pauna, Keomanivone Phimmahasay, Samuel Pien- Ghumman, Frederico Gil Sander, Fernando Giuli- knagura, Rong Qian, Bryce Quillin, Habib Rab, ano, Anastasia Golovach, David M. Gould, Gun- Martin Rama, Nadir Ramazanov, Luiz Edgard jan Gulati, Poonam Gupta, Ricardo Alfredo Ramos Oliveira, Sheila Redzepi, Julio Revilla, Da- Habalian, Lea Hakim, Birgit Hansl, Marek Hanu- vid John Martin Robinson, Daniel Francisco Bar- sch, Wissam Harake, Fayavar Hayati, Santiago co Rondan, David Rosenblatt, Michele Ruta, Herrera, Jeremy Hillman, Sandra Hlivnjak, Bert Pablo Saavedra, Miguel Eduardo Sanchez Martin, Hofman, Sahar Sajjad Hussain, Zahid Hussain, Apurva Sanghi, Ilyas Sarsenov, Julie Saty Lohi, Elena Ianchovichina, Fernando Gabriel Im, Cristina Savescu, Marc Tobias Schiffbauer, Philip Yoichiro Ishihara, Sheikh Tanjeb Islam, Moham- M. Schuler, Claudia Paz Sepulveda, Smriti Seth, mad Omar Joya, Kamer Karakurum-Ozdemir, Sudhir Shetty, Altantsetseg Shiilegmaa, Emily Leszek Pawel Kasek, Vera Kehayova, Tehmina S. Sinnott, Gregory Smith, Karlis Smits, Nikola L. Khan, Mizuho Kida, Youssouf Kiendrebeogo, Da- Spatafora, Abdoulaye Sy, Congyan Tan, Fulbert vid Stephen Knight, Jakob Kopperud, Ewa Joanna Tchana Tchana, Shakira Binti Teh Sharifuddin, Korczyc, Sibel Kulaksiz, Chandana Kularatne, Hans Timmer, Emilija Timmis, Yvonne M. Tsi- Christoph Kurowski, Kwabena Gyan Kwakye, kata, Christoph Ungerer, Robert Utz, Ralph Van Jean Pierre Lacombe, Lara Alice Victoria Lambert, Doorn, Carlos Vegh, Julio Velasco, Mathew A. Emmanuel K.K. Lartey, Taehyun Lee, Tenzin Verghis, Muhammad Waheed, Jan Walliser, Pinar Lhaden, John Litwack, Gladys Lopez, Acevedo, Yasar, Ayberk Yilmaz, Hoda Youssef, Albert G. Sodeth Ly, Sanja Madzarevic-Sujster, Sandeep Zeufack, Luan Zhao, May Thet Zin, and Mahajan, Facundo S. Martin, Aaditya Mattoo, Bakhrom Ziyaev. Kirsten-Anne McLeod, Gianluca Mele, Martin Melecky, Dino Merotto, Elitza Mileva, Deepak K. Regional Projections and write-ups were produced Mishra, Florian Moelders, Shabih Ali Mohib, Lili in coordination with country teams, country Mottaghi, Rafael Munoz Moreno, Nataliya Myl- directors, and the offices of the regional chief enko, Evgenij Najdov, Nur Nasser Eddin, Claudia economists. Nassif, Antonio Nucifora, Harun Onder, Carlos viii Abbreviations AE advanced economies ASEAN Association of Southeast Asian Nations bbl barrel BEC Broad Economic Categories BIS Bank for International Settlements BRICS Brazil, Russian Federation, India, China, and South Africa CEMAC Central African Economic and Monetary Community CBO Congressional Budget Office CY calendar year DECPG Development Economics Prospects Group EAP East Asia and Pacific EBRD European Bank for Reconstruction and Development ECA Europe and Central Asia ECB European Central Bank EECF enhanced elemental chlorine–free EM emerging market economies EMBI Emerging Markets Bond Index EMDE emerging markets and developing economies ERR exchange rate regime EU European Union EPU economic policy uncertainty FDI foreign direct investment FOMC Federal Open Market Committee FSC Forest Stewardship Council FTA free trade agreement FY fiscal year GCC Gulf Cooperation Council GDP gross domestic product GEP Global Economic Prospects GNFS goods and non-factor services GNI gross national income GSP+ Generalized System of Preferences Plus GST goods and services tax HIPC Heavily Indebted Poor Countries IADB Inter-American Development Bank IMF International Monetary Fund LAC Latin America and the Caribbean LIC low-income country MDRI multilateral debt relief initiative NAICS North American Industry Classification System MENA or MNA Middle East and North Africa NAFTA North American Free Trade Agreement ix ODA official development assistance OECD Organisation for Economic Co-operation and Development OPEC Organization of the Petroleum Exporting Countries PCF processed chlorine–free PMI purchasing managers’ indexes PPP purchasing power parity QQE quantitative and qualitative monetary easing RHS right-hand side (in figures) SAR South Asia SF Special Focus SSA Sub-Saharan Africa TCF totally chlorine-free TFP total factor productivity TPP Trans-Pacific Partnership UNCTAD United Nations Conference on Trade and Development UNIDO United Nations Industrial Development Organization VIX Chicago Board Options Exchange (CBOE) Volatility Index VAT value-added tax WAEMU West African Economic and Monetary Union WEO World Economic Outlook WTO World Trade Organization x CHAPTER 1 GLOBAL OUTLOOK A Fragile Recovery GLOBAL ECONOMIC PROSPECTS | JUNE 2017 CHAPTER 1 3 Global   activity is firming broadly as expected. Manufacturing   and trade are picking up, confidence is improving, and international financing conditions remain benign. Global growth is projected to strengthen to 2.7 percent in 2017 and 2.9 percent in 2018-19, in line with January forecasts. In emerging market and developing economies (EMDEs), growth is predicted to recover to 4.1 percent in 2017 and reach an average of 4.6 percent in 2018-19, as obstacles to growth in commodity exporters diminish, while activity in commodity importers continues to be robust. Risks to the global outlook remain tilted to the downside. These include increased trade protectionism, elevated economic policy uncertainty, the possibility of financial market disruptions, and, over the longer term, weaker potential growth. A policy priority for EMDEs is to rebuild monetary and fiscal space that could be drawn on were such risks to materialize. Over the longer term, structural policies that support investment and trade are critical to boost productivity and potential growth. Summary outlook is predicated only on legislated fiscal and trade policies. Global growth is firming, contributing to an improvement in confidence. A recovery in The recovery in global trade coincides with industrial activity has coincided with a pickup in strengthening investment, which is more import- global trade, after two years of marked weakness intensive than other components of aggregate (Figure 1.1). In emerging market and developing demand. Nevertheless, structural headwinds, in- economies (EMDEs), obstacles to growth among cluding slower trade liberalization and value chain commodity exporters are gradually diminishing, integration, as well as elevated policy uncertainty, while activity in commodity importers remains continue to weigh on the outlook for trade. generally robust. As a result, and despite substantial policy uncertainty, global growth is Global financing conditions have been benign and projected to accelerate to 2.7 percent in 2017, up benefited from improving market expectations from a post-crisis low of 2.4 percent in 2016, about growth prospects. Financial market before strengthening further to 2.9 percent in volatility has been low despite elevated policy 2018-19, broadly in line with January projections. uncertainty, reflecting investor risk appetite and, perhaps, some level of market complacency. Activity in advanced economies is expected to gain Renewed risk appetite has supported EMDE momentum in 2017, supported by an upturn in financial markets and led to a narrowing of the United States, as previously anticipated. In the corporate bond spreads globally. Capital inflows to Euro Area and Japan, growth forecasts have been EMDEs were robust in the first half of 2017, upgraded, reflecting strengthening domestic partly in a rebound from late-2016 weakness. demand and exports. Investment across advanced Over time, however, a gradual tightening of economies has firmed, while private consumption international financing conditions may weigh on growth has moderated. As actual growth continues capital flows to EMDEs. Commodity prices have to exceed potential growth, increasing inflation continued to rise moderately, although prospects and narrowing output gaps have raised the for increased U.S. shale oil production are prospects of less accommodative monetary policy. weighing on the outlook for oil prices. Advanced economy growth is expected to accelerate to 1.9 percent in 2017, before Against an improving international backdrop, moderating gradually in 2018-19. As usual, the growth in EMDEs has strengthened from a post- crisis low of 3.5 percent in 2016. It is projected to reach 4.1 percent in 2017 and 4.5 percent in Note: This chapter was prepared by Carlos Arteta and Marc Stocker, with contributions from Csilla Lakatos and Ekaterine 2018. In commodity exporters, firming Vashakmadze. Additional inputs were provided by John Baffes, commodity prices, recovering industrial activity, Gerard Kambou, Eung Ju Kim, Hideaki Matsuoka, Bryce Quillin, stabilizing investment, and improving confidence Yirbehogre Modeste Some, and Dana Vorisek. Research assistance was provided by Xinghao Gong, Liwei Liu, Trang Thi Thuy Nguyen, are supporting a gradual recovery, following near- Collette Wheeler, and Peter Williams. stagnation in the past couple of years. This 4 CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 TABLE 1.1 Real   GDP1   (percent change from previous year) 2014 2015 2016 2017 2018 2019 2016 2017 2018 2019 Percentage point differences Estimates Projections from January 2017 projections World 2.8 2.7 2.4 2.7 2.9 2.9 0.1 0.0 0.0 0.0 Advanced economies 1.9 2.1 1.7 1.9 1.8 1.7 0.1 0.1 0.0 0.0 United States 2.4 2.6 1.6 2.1 2.2 1.9 0.0 -0.1 0.1 0.0 Euro Area 1.2 2.0 1.8 1.7 1.5 1.5 0.2 0.2 0.1 0.1 Japan 0.3 1.1 1.0 1.5 1.0 0.6 0.0 0.6 0.2 0.2 Emerging and developing economies 4.3 3.6 3.5 4.1 4.5 4.7 0.1 -0.1 -0.1 0.0 (EMDEs) Commodity-exporting EMDEs 2.2 0.3 0.4 1.8 2.7 3.0 0.1 -0.5 -0.3 -0.1 Other EMDEs 6.0 6.0 5.7 5.7 5.7 5.8 0.1 0.1 0.0 0.0 Other EMDEs excluding China 4.5 5.0 4.5 4.6 4.9 5.1 0.2 0.0 -0.1 0.0 East Asia and Pacific 6.8 6.5 6.3 6.2 6.1 6.1 0.0 0.0 0.0 0.0 China 7.3 6.9 6.7 6.5 6.3 6.3 0.0 0.0 0.0 0.0 Indonesia 5.0 4.9 5.0 5.2 5.3 5.4 -0.1 -0.1 -0.2 -0.1 Thailand 0.9 2.9 3.2 3.2 3.3 3.4 0.1 0.0 0.0 0.0 Europe and Central Asia 2.3 1.0 1.5 2.5 2.7 2.8 0.3 0.1 -0.1 -0.1 Russia 0.7 -2.8 -0.2 1.3 1.4 1.4 0.4 -0.2 -0.3 -0.4 Turkey 5.2 6.1 2.9 3.5 3.9 4.1 0.4 0.5 0.4 0.4 Poland 3.3 3.9 2.8 3.3 3.2 3.2 0.3 0.2 -0.1 -0.2 Latin America and the Caribbean 0.9 -0.8 -1.4 0.8 2.1 2.5 0.0 -0.4 -0.2 -0.1 Brazil 0.5 -3.8 -3.6 0.3 1.8 2.1 -0.2 -0.2 0.0 -0.1 Mexico 2.3 2.6 2.3 1.8 2.2 2.5 0.3 0.0 -0.3 -0.3 Argentina -2.5 2.6 -2.3 2.7 3.2 3.2 0.0 0.0 0.0 0.0 Middle East and North Africa 3.4 2.8 3.2 2.1 2.9 3.1 0.5 -1.0 -0.4 -0.3 Saudi Arabia 3.7 4.1 1.4 0.6 2.0 2.1 0.4 -1.0 -0.5 -0.5 Iran, Islamic Rep. 4.3 -1.8 6.4 4.0 4.1 4.2 1.8 -1.2 -0.7 -0.3 Egypt, Arab Rep.2 2.9 4.4 4.3 3.9 4.6 5.3 0.0 -0.1 -0.1 -0.1 South Asia 6.7 6.9 6.7 6.8 7.1 7.3 -0.1 -0.3 -0.2 -0.1 India3 7.2 7.9 6.8 7.2 7.5 7.7 -0.2 -0.4 -0.3 -0.1 Pakistan2 4.0 4.0 4.7 5.2 5.5 5.8 0.0 0.0 0.0 0.0 Bangladesh2 6.1 6.6 7.1 6.8 6.4 6.7 0.0 0.0 -0.1 0.0 Sub-Saharan Africa 4.6 3.1 1.3 2.6 3.2 3.5 -0.2 -0.3 -0.4 -0.2 South Africa 1.6 1.3 0.3 0.6 1.1 2.0 -0.1 -0.5 -0.7 0.2 Nigeria 6.3 2.7 -1.6 1.2 2.4 2.5 0.1 0.2 -0.1 0.0 Angola 4.8 3.0 0.0 1.2 0.9 1.5 -0.4 0.0 0.0 0.6 Memorandum items: Real GDP1 High-income countries 1.9 2.2 1.7 1.9 1.9 1.7 0.1 0.1 0.1 0.0 Developing countries 4.4 3.6 3.6 4.3 4.7 4.9 0.1 -0.1 -0.1 0.0 Low-income countries 6.3 4.7 4.4 5.4 5.8 5.8 -0.3 -0.2 -0.2 -0.3 BRICS 5.1 3.9 4.2 5.0 5.2 5.4 -0.1 -0.1 -0.2 -0.1 World (2010 PPP weights) 3.5 3.3 3.1 3.4 3.6 3.7 0.1 -0.1 -0.1 0.0 World trade volume4 4.1 2.7 2.5 4.0 3.8 3.8 0.0 0.4 -0.2 -0.1 Commodity prices Oil price5 -7.5 -47.3 -15.6 23.8 5.7 5.4 -0.5 -4.4 -2.7 0.8 Non-energy commodity price index -4.6 -15.0 -2.6 4.0 0.7 1.0 0.0 2.6 -1.5 -1.1 Source: World Bank. Notes: PPP = purchasing power parity. World Bank forecasts are frequently updated based on new information. Consequently, projections presented here may differ from those contained in other World Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time. Country classifications and lists of emerging market and developing economies (EMDEs) are presented in Table 1.2. BRICS include: Brazil, Russia, India, China, and South Africa. 1. Aggregate growth rates calculated using constant 2010 U.S. dollars GDP weights. 2. GDP growth values are on a fiscal year basis. Aggregates that include these countries are calculated using data compiled on a calendar year basis. Pakistan's growth rates are based on GDP at factor cost. The column labeled 2017 refers to FY2016/17. 3. The column labeled 2016 refers to FY2016/17. 4. World trade volume of goods and non-factor services. 5. Simple average of Dubai, Brent, and West Texas Intermediate. For additional information, please see www.worldbank.org/gep. GLOBAL ECONOMIC PROSPECTS | JUNE 2017 CHAPTER 1 5 recovery   will be broad-based, impacting nearly 70 FIGURE   1.1 Global prospects percent of commodity exporters in 2017. However, lingering fiscal and external adjustment Growth is projected to gain strength in both advanced economies and emerging market and developing economies (EMDEs). Global trade needs dampen growth prospects in a number of growth has firmed and is expected to outpace GDP growth after two years countries. As a result, growth in commodity of marked weakness. The pickup in global trade partly reflects a bottoming out of global investment, which is relatively import-intensive. Global exporters is projected to rise from 0.4 percent in financing conditions remain benign. The projected recovery in EMDEs is 2016 to 1.8 percent in 2017 and 2.7 percent in largely driven by expectations of diminishing obstacles to activity in 2018—somewhat below January forecasts, commodity exporters. reflecting longer-than-expected adjustment to low A. Global growth B. Global trade commodity prices in some countries and, to a Percent Percent Percent lesser degree, slightly lower oil price projections. 5 World Advanced economies EMDEs 15 Growth Share of GDP (RHS) 32 12 4 30 9 Growth continues to be robust among commodity 3 6 28 3 importers. Windfalls from the recent decline in 2 0 26 commodity prices is waning, but accommodative 1 -3 -6 24 22 policies are supporting domestic demand and 0 -9 -12 20 export growth is being bolstered by a recovery in 2012 2013 2014 2015 2016 2017 2018 2019 2000 2002 2004 2006 2008 2010 2012 2014 2016 2017 global trade. The forecast for growth in commodity importers remains stable, at an average C. Import intensity of demand D. Corporate bond spreads components, 2014 of 5.7 percent in 2017-19. Percent Basis points 30 600 Global In low-income countries, growth is rebounding, as 25 500 Emerging markets rising metals prices lift production in metals 20 400 exporters and infrastructure investment continues 15 300 10 in non-resource-intensive economies. However, 200 5 some low-income countries are still struggling 0 100 with declining oil production, conflict, drought, Private Consumption Export Investment 0 2012 2013 2014 2015 2016 2017 and security and political challenges. Growth in low-income countries is expected to strengthen E. Growth by country groups F. Share of EMDE commodity exporters with accelerating/ during 2017-19, as activity firms in commodity decelerating growth exporters. Percent 1990-2008 average Share of commodity exporters, percent 10 2003-08 average Accelerating Decelerating Unchanged 100 8 A number of factors weigh on longer-term EMDE 6 90 80 growth prospects, including structural headwinds 4 70 60 to global trade, worsening demographics, slowing 2 50 40 0 30 productivity growth, and governance and 20 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 10 institutional challenges. Even if the expected EMDE EMDE EMDEs 0 commodity commodity 2012 2013 2014 2015 2016 2017 2018 modest rebound in investment across EMDEs importers exporters materializes, slowing capital accumulation in Sources: Bloomberg, World Bank, World Input-Output Database. recent years may already have reduced potential A.B.E.F. Shaded areas indicate forecasts. A. Aggregate growth rates calculated using constant 2010 U.S. dollars GDP weights. growth. B. Global trade is measured as volume of goods and services. C. Import intensity for each GDP component computed from input-output tables based on Hong et al. (2016). GDP-weighted average of 25 advanced economies and 7 EMDEs. Substantial risks cloud this outlook, despite the D. Spread between yields on non-sovereign debt with at least 18 months to final maturity and U.S. Treasury yields of equivalent maturity. Individual bonds are weighted by market capitalization. Dotted possibility of fiscal stimulus in some major lines indicate the median values since 2005. Last observation is May 24, 2017. advanced economies, particularly the United E. Aggregate growth rates calculated using constant 2010 U.S. dollars GDP weights. F. Accelerating / decelerating growth are changes of at least 0.1 percentage point in growth rates States (Figure 1.2). Escalating trade restrictions from the previous year. Sample includes 86 commodity-exporting EMDEs. could derail a fragile recovery in trade and undo gains from past liberalization efforts. A further unusually low financial market volatility. Market increase in policy uncertainty from already high reassessment of advanced-economy monetary levels could dampen confidence and investment policy, or disorderly exchange rate developments, and trigger financial market stress, after a period of could contribute to swings in EMDE asset prices 6 CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 Global risks and policy challenges FIGURE 1.2   and   capital flows, potentially amplified by vulnerabilities in some countries. Over the longer Downside risks to global growth include rising protectionism, high policy term, persistent weakness in productivity and uncertainty, and the possibility of financial market disruptions. U.S. monetary policy has tightened gradually so far, but a faster pace would investment growth would erode potential growth. impact global financing conditions. Inflation has eased among EMDE commodity exporters, allowing room for cuts in policy interest rates. With deficits prevailing across EMDEs, and debt on a rising path, especially in Policymakers face the challenge in nurturing the commodity exporters, fiscal space remains constrained. recovery, confronting downside risks, and fostering longer-term growth. Central banks in A. Probability of a 1-percentage-point B. Global trade and tariffs advanced economies will gradually normalize deviation from one-year ahead global growth forecasts monetary policy as inflation increases and Percent probability Percent Percent of GDP economic slack diminishes. While the U.S. 20 25 Tariffs 40 tightening cycle is well ahead of other major 20 Trade (RHS) 15 30 advanced economies, it is proceeding at a 15 10 10 20 substantially slower pace than in the past. 5 10 Expansionary fiscal policy could help support the 5 0 1947 1948 1964 1972 1987 1999 2012 0 recovery, as long as it is consistent with medium- 0 Pre Post Pre Post Post Post -15 term fiscal sustainability. Policy priorities include 1-percentage-point 1-percentage-point Geneva Kennedy Tokyo Uru- Latest below above guay measures to support workers most affected by sectoral shifts in employment through better C. Economic policy uncertainty (EPU) and financial market volatility (VIX) D. U.S. policy interest rates around training and job search programs, and to share the tightening cycles dividends of growth and gains from globalization Index Index Percentage point change from t=0 350 Global EPU VIX (RHS) 70 3.5 1994 1999 2004 Current more widely. 300 60 3.0 2.5 250 50 200 40 2.0 Inflation rates in EMDE commodity exporters 1.5 150 30 1.0 and importers are converging. Easing inflation 100 20 0.5 among commodity exporters since mid-2016 has 50 10 0.0 0 0 -0.5 allowed a more accommodative monetary policy -12 -6 0 6 12 18 stance in some countries. Although the impact of 2000 2002 2004 2006 2008 2010 2012 2014 2016 2017 Months the earlier drop in commodity prices on the E. Consumer price inflation in EMDEs F. Fiscal sustainability gap government budgets of commodity exporters is dissipating, fiscal space remains constrained in Percent, year-on-year, 3-month moving average Percent of GDP 5 Commodity exporters 0.0 many EMDEs, suggesting the need for continued 4 Commodity importers -0.5 -1.0 fiscal adjustment. EMDEs will need to continue to 3 -1.5 pursue structural reforms to improve their longer- -2.0 2 -2.5 term growth prospects, diversify their economies, 1 -3.0 -3.5 and develop domestic as well as foreign markets. 0 2014 2015 2016 2014 2015 2016 These efforts include policies to improve the Jan-13 May-13 Jan-14 May-14 May-15 Jan-16 Jan-17 Sep-13 Sep-14 Jan-15 May-16 Sep-15 Sep-16 EMDE commodity EMDE commodity importers exporters business climate, support investment in human and physical capital, and enhance regional and Sources: Baker, Bloom, and Davis (2015); Bloomberg; Bown and Irwin (2015); Federal Reserve Board; Haver Analytics; International Monetary Fund WEO; World Bank. global trade integration of EMDEs.  A. Probabilities computed from forecast distribution of 18-month ahead oil price futures, S&P500 equity price futures, and term spread forecasts. Last observation is April 2017. B. Global trade is defined as the average of exports and imports in percent of GDP. Applied tariff rates based on weighted mean for all products. Major economies: Recent developments and outlook C. VIX is the implied volatility of option prices on the U.S. S&P 500. EPU is the Economic Policy Uncertainty index computed by Baker, Bloom, and Davis (2015). Last observation is April 2017 for EPU and May 24, 2017 for VIX. D. t=0 refers to the start of U.S. monetary policy tightening cycles (January 1994, June 1999, June 2004, and December 2015 (“current”). Dashed lines show market implied changes. Last observation is May 24, 2017. Growth in major advanced economies has strength- E. Sample includes 75 commodity-exporting and 54 commodity-importing EMDEs and shows the median in each respective group. Last observation is April 2017. ened, and their short-term outlook has improved, F. Sustainability gap is measured as the difference between the primary balance and the debt- stabilizing primary balance, assuming historical average (1990–2016) interest rates and growth rates. despite elevated policy uncertainty. A modest recovery A negative gap indicates that government debt is on a rising trajectory; a positive gap indicates government debt is on a falling trajectory. Figure shows median in each country group. Sample should continue, with output gaps narrowing and includes 44 commodity-exporting and 28 commodity-importing EMDEs. inflation gradually converging toward central bank GLOBAL ECONOMIC PROSPECTS | JUNE 2017 CHAPTER 1 7 targets.   U.S. monetary policy normalization is expect- FIGURE   1.3 Advanced economies ed to proceed at a measured pace. China’s policy- Growth in the United States is expected to recover in 2017 and to continue guided gradual transition to slower but more at a moderate pace in 2018, as previously envisaged. The forecasts for the sustainable growth continues as expected. Euro Area and Japan have been revised upward, reflecting robust growth at the start of 2017. Inflation expectations have increased from 2016, albeit from low levels in the Euro Area and Japan. Advanced economies started the year on a solid A. GDP growth B. Long-term inflation expectations note, with investment and exports regaining 1990-2008 average momentum after subdued growth in 2016. Private Percent 2003-08 average Percent 4 United States Euro Area Japan Jan. 2017 forecast consumption decelerated somewhat in early 2017, 3 3 but has been supported by labor market 2 2 improvements. Import demand has strengthened, 1 1 further contributing to a recovery in global trade. 0 0 In 2017, growth is expected to pick up in the 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 -1 United States and Japan, and to remain broadly 2010 2011 2012 2013 2014 2015 2016 2017 United States Euro Area Japan stable in the Euro Area (Figure 1.3). Forecasts for Sources: Bloomberg, World Bank. several major economies have been upgraded. A. Shaded areas indicate forecasts. B. Long-term inflation expectations are derived from 5-year/5-year forward swap rates. Last Economic slack continues to diminish, and observation is May 24, 2017. inflation expectations are rising, albeit at different rates. FIGURE 1.4 United States United States Private consumption moderated in early 2017, despite strong consumer confidence. Private investment strengthened, whereas capital expenditures in the energy sector showed signs of bottoming out. Economic slack is Following a slowdown in 2016 that reflected diminishing, but unused capacity remains above pre-crisis levels. Over the investment and export weakness, growth is long run, net migration is expected to account for the bulk of population growth, assuming no policy change. expected to recover this year. At the start of 2017, activity was temporarily held back by a A. Consumer confidence and B. Mining investment and oil price spending changes deceleration in consumer spending, largely due to Index, 100=1985 Percent, year-on-year Percent, year-on-year one-off factors and despite high consumer 140 Consumer confidence 10 100 Mining investment Oil price (6-month lead) confidence (Figure 1.4). This was partly offset by 120 Personal consumption (RHS) 8 80 60 6 an appreciable pickup in private investment, after 100 4 40 subdued gains in 2016. Capital expenditure in the 80 2 20 0 energy sector showed signs of bottoming out, 60 0 -20 40 -2 -40 following two years of heavy retrenchment and 20 -4 -60 productivity gains in the shale oil sector. Labor 2005 2007 2009 2011 2013 2015 2017 2000 2002 2004 2006 2008 2010 2012 2014 2016 2017 market conditions have continued to improve in 2017, but wage and productivity growth remain C. Underemployment and capacity D. Contribution to total population utilization growth sluggish. Stagnant productivity partly reflects Percent Percentage points diminished firm entry rates, including a decline in Unused manufacturing capacity 1.0 Natural increase Net migration 40 Underemployment the startup rate in key innovative sectors, as well as 0.8 lower job flows (Haltiwanger 2015; Decker et al. 30 0.6 2017). Economic slack remains, as reflected in 20 0.4 underemployment and unused capacity in 10 manufacturing above levels of earlier cyclical peaks 0 0.2 (Yellen 2017). However, slack is diminishing, and 2017 2000 2002 2004 2006 2008 2010 2012 2014 2016 0.0 2015 - 2020 2020 - 2030 2030 - 2040 the unemployment rate is close to its estimated Sources: Board of Governors of the Federal Reserve System, Haver Analytics, U.S. Bureau of Labor long-run equilibrium (FOMC 2017). Following Statistics, U.S. Census Bureau, World Bank. A. Last observation is April 2017 for consumer confidence and March for real personal consumption. its March 2017 policy rate hike, the U.S. Federal B. Last observation is 2017Q1. Reserve is expected to continue to tighten C. Underemployment is the sum of unemployed, people marginally attached to the labor market, and involuntary part-time workers, in percent of the labor force. Ranges denote values of each data series monetary policy—but at a more gradual pace than at cycle peaks. Shaded areas denote U.S. recessions. Last observation is April 2017. D. Net migration includes the international migration of both native and foreign-born populations. in the past three tightening cycles, reflecting Based on the 2014 U.S. Census Bureau population projections. 8 CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 FIGURE 1.5  Euro Area significant   additional policy changes presents upside as well as downside risks to the U.S. growth Unemployment fell rapidly throughout 2016, but remains slightly above structural levels. Actual and expected inflation increased somewhat since forecast for 2018-19. Tax cuts and infrastructure the start of the year. Investment is recovering, but remains on a lower programs could lead to stronger-than-expected trajectory than in previous upturns. The United States and the United growth in the short term, but also to a more rapid Kingdom remain the single largest destination of extra-Euro Area exports. increase in policy interest rates (World Bank 2017a). In contrast, should substantial changes in A. Unemployment rate B. Euro Area inflation trade policies emerge, they might trigger Percent 13 Structural Actual Percent, year-on-year Headline inflation Core inflation retaliatory measures, damaging activity in both the 5 12 4 Inflation expectations United States and its trading partners. U.S. 11 10 3 multinationals are tightly interconnected in 9 2 regional and global supply chains and account for 1 8 a substantial share of exports, domestic sales, and 7 0 6 -1 employment in the United States (Kose et al. 2017a). The impact on trade and activity of 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2017 2000 2002 2004 2006 2008 2010 2012 2014 2016 border tax adjustments in corporate taxation would largely depend on the reaction of the C. Euro Area investment after D. Geographic distribution of Euro recessions Area exports and imports exchange rate and on associated policy Index, 100=pre-recession peak Percent uncertainties (Auerbach and Holtz-Eakin 2016). 16 130 1974 1980 1992 2008 12 Over time, more restrictive immigration rules 120 8 4 could reduce potential output growth. Net 110 0 migration contributes to both employment and Switzerland U.S. U.K. China Poland China U.S. U.K. Poland Czech Republic 100 productivity growth, and is expected to account 90 for the bulk of population growth in coming 80 0 1 2 3 4 5 6 7 8 9 10 decades (Alesina, Harnoss, and Rapoport 2013; Years after peak Exports Imports Borjas 2013; Jaumotte, Koloskova, and Saxena Sources: Bloomberg, European Commission, Eurostat, Haver Analytics, World Bank. 2016; Peri 2012).1 A. Structural unemployment is the non-accelerating wage inflation rate of unemployment (NAWRU) estimated by the European Commission. B. Long-term inflation expectations are derived from 5-year/5-year forward swap rates. Last observation is April 2017. Euro Area D. Share of extra-Euro Area exports and imports in 2016. Growth was robust in 2016 and continued at a sustained pace at the start of 2017. Manufacturing activity and goods exports have been lifted by persistent legacies from the financial crisis and strengthening global trade and investment. The lower equilibrium interest rates. Thus far, financial unemployment rate fell throughout 2016 to reach markets have been resilient despite rising U.S. 9.5 percent in the first quarter of 2017, about 2.5 policy interest rates, possibly because rate increases percentage points below its peak in 2013. were interpreted as a recognition of strengthening However, the jobless rate remains above structural U.S. growth prospects (Arteta et al. 2015). As a levels, indicating that some labor market slack result, financing conditions remain persists (Figure 1.5). Headline inflation has risen accommodative and broadly supportive of a as the energy price decline of early 2016 has continued recovery. unwound, but core inflation and inflation expectations remain below the European Central Overall, a moderate expansion in activity is Bank (ECB) target, pointing to prospects of expected to continue. Growth is projected to rise continued monetary policy accommodation. from 1.6 percent in 2016 to 2.1 percent in 2017 and 2.2 percent in 2018, before slowing to 1.9 percent in 2019 as it moves closer to potential. The remaining output gap could close by 2018 1The global implications of possible U.S. policy changes are and become positive in 2019. The possibility of discussed in greater detail in the risks and policy challenges sections. GLOBAL ECONOMIC PROSPECTS | JUNE 2017 CHAPTER 1 9 Accommodative   monetary policy is expected to FIGURE   1.6 Japan help sustain domestic demand in the near term. Unconventional measures undertaken by the ECB Exports have picked up, especially for information technology-related products and capital goods. A relative increase in domestic versus foreign since 2014 have helped stimulate credit growth, machinery orders is consistent with strengthening investment. Inflation lift inflation expectations, and foster a gradual expectations have risen, but remain below the central bank’s target. The Bank of Japan policy shift to targeting long-term interest rates around zero recovery (Arteta et al. 2016; Andrade et al. 2016). slowed its asset purchases. Fiscal policy is expected to be broadly neutral to growth in 2017 (European Commission 2017). A. Goods export volumes B. Machinery orders The recovery in private investment and export Index, 100 = 2015Q1 110 Ratio of domestic-to-foreign orders 1.7 Total exports growth is projected to continue, while private IT-related products 1.6 105 consumption decelerates on receding tailwinds Capital goods and parts 1.5 1.4 from low energy prices. On balance, growth is 100 1.3 projected to remain at 1.7 percent in 2017, better 95 1.2 than anticipated in January. In 2018-19, growth is 90 1.1 1.0 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 expected to moderate to 1.5 percent, as economic 2012 2013 2014 2015 2016 2017 slack diminishes and the ECB gradually unwinds exceptional policy measures. Nevertheless, growth C. 5-year-ahead inflation expectations D. Bank of Japan government bond should remain well above potential growth, purchases and long-term bond yields currently estimated at about 1.2 percent Percent of survey answers 45 Trillion yen, annualized rate Net government bond purchases Percent Zero percent or under 90 0.50 (European Commission 2017). Prospects remain 40 Between 0.1 and 2.0 percent 85 Long-term yields (RHS) 35 0.25 clouded by elevated policy uncertainties, including 30 80 election outcomes, the direction of Brexit 25 75 0.00 20 70 negotiations, and financial sector fragilities such as 15 65 -0.25 10 high levels of non-performing bank loans in some 5 60 -0.50 Jan-16 Jul-16 Jan-17 Apr-16 Oct-16 Apr-17 economies. Policy changes in the United States, 0 Dec-12 Mar-17 the single largest destination of Euro Area exports, also remain a source of uncertainty. Sources: Bank of Japan, Haver Analytics, Japan Cabinet Office, World Bank. A. Last observation is 2017Q1. B. Data represent a 12-month moving average. Last observation is March 2017. Japan C. Percent of surveyed households. D. Data for asset purchases are 3-month moving averages. Last observation is April 2017. The vertical line denotes the start of the Bank of Japan policy of adjusting asset purchases to stabilize Growth has picked up in 2017, supported by a 10-year government bond yields at zero. recovery in external demand. Exports have strengthened, especially for information tech- Continued accommodative monetary and fiscal nology-related products and capital goods (Figure policies should support growth, which is projected 1.6). Business investment has gained momentum, to edge up to 1.5 percent in 2017, a significant as reflected by a gradual shift from foreign to upgrade from previous forecasts. Growth is domestic machinery orders. The pickup in capital expected to moderate to 1.0 percent in 2018—a spending has been supported by elevated corporate rate that remains somewhat above estimated profits as well as preparations for the 2020 Tokyo potential growth, which has been upgraded Olympics (Osada et al. 2016; Brückner and Pappa following the release of revised capital stock and 2015). Despite some strengthening, consumption national accounts data (Kawamoto et al. 2017). continues to be on a subdued trend, and wage The Bank of Japan’s policy shift in 2016 to increases have been weak despite a tight labor targeting long-term interest rates around zero is market. While headline inflation has been positive expected to keep interest rates at low levels in 2017, inflation expectations remain low, despite throughout 2017. Supplementary public a steady increase since the introduction of spending, amounting to 1.2 percent of GDP, is quantitative easing measures in 2013 (Bank of expected to support activity throughout 2017, and Japan 2016). Administered prices, as well as some to a lesser degree in 2018. In 2019, growth is services prices, appear unresponsive to tighter forecast to slow to 0.6 percent, as a planned labor market conditions (Shintani et al. 2016). consumption tax hike is implemented. 10 CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 FIGURE 1.7  China private   sector investment growth. Despite monetary tightening, credit growth still outpaces Domestic rebalancing from investment to consumption resumed in 2017, nominal GDP growth. A housing market reflecting strengthening consumer spending and the waning effect of state- driven infrastructure spending. Import and export growth have rebounded. correction in the largest (Tier 1 and Tier 2) cities Consumer price inflation remains below target, while producer price is unfolding alongside stable growth of both sales inflation has increased sharply, reflecting higher commodity prices and reduced overcapacity in heavy industry. Reserves remain at around $3 and prices in smaller (Tier 3) cities (Chen and trillion, helped by a tightening of capital controls and measures to Wen 2017; World Bank 2017b). While consumer encourage FDI. price inflation remains below target, producer price inflation has increased sharply, reflecting A. Contribution to GDP growth B. Export and import growth higher commodity prices and reduced overcapacity Percentage points Percent, year-on-year, 12-month moving average 12 Consumption Investment Net exports 10 in heavy industry. Exchange rate pressures have Exports Imports 10 8 eased from late 2016, partly as a result of a 8 6 6 4 tightening of capital controls and measures to 4 2 encourage inward foreign direct investment (FDI), 0 2 -2 which are also helping maintain reserves at around 0 -4 US$3 trillion. 2010 2011-13 2014 2015 2016 2017Q1 -2 -6 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Growth is projected to slow to 6.5 percent in C. Inflation D. Foreign currency reserves 2017, in line with January expectations. This Percent, year-on-year US$, trillions US$, billions forecast envisages strengthening trade this year, Monthly change 10 8 Consumer price index 120 Stock (RHS) 4.0 with a moderate recovery of imports, amid robust Producer price index 6 80 3.8 domestic demand, and a gradual acceleration of 4 2 40 3.6 exports, reflecting firming external demand. 0 0 3.4 -2 -40 3.2 Intermittent fiscal support will continue to be -4 -6 -80 3.0 used to calibrate growth as monetary policy -8 -120 2.8 tightens further. Growth is expected to moderate Jun-10 Jun-13 Jun-16 Mar-11 Dec-11 Sep-12 Mar-14 Dec-14 Sep-15 Mar-17 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 to 6.3 percent on average in 2018-19, as Sources: China National Bureau of Statistics, Haver Analytics, World Bank. simulative policies are slowly withdrawn. Key A. Investment refers to gross capital formation, which includes change in inventories. downside risks to the outlook stem from financial B.-D. Last observation is April 2017. sector vulnerabilities and increased protectionist policies in advanced economies. China Global trends GDP expanded 6.7 percent in 2016, as expected. Domestic rebalancing from investment to Global trade has strengthened in 2017, as consumption slowed toward the end of 2016, as manufacturing activity firmed and investment infrastructure spending by state-owned companies growth bottomed out, especially in advanced and the public sector accelerated, more than economies. Appetite for EMDE assets has returned, offsetting a sharp slowdown in private sector reflecting market expectations of strengthening growth investment (Lardy and Huang 2017). However, and still favorable international financing rebalancing from industry to services and from conditions. Moderate increases in commodity prices exports to domestic sources of demand continued are expected to continue, although oil price (Figure 1.7). The current account surplus projections have been revised slightly down, reflecting narrowed to 1.8 percent of GDP in 2016, the prospect of increased U.S. shale oil production. reflecting stronger import demand and declining exports. Global trade Steady growth continued in early 2017. Easing Global trade growth has rebounded from a post- state-driven investment growth was offset by crisis low of 2.5 percent in 2016, despite rising strengthening export growth against the backdrop trade policy uncertainty. The recovery, which of robust consumption growth and still-weak began in the second half of 2016, has been GLOBAL ECONOMIC PROSPECTS | JUNE 2017 CHAPTER 1 11 supported   by stronger industrial activity (Figure FIGURE   1.8 Global trade 1.8). Just as a slowdown in global investment growth was an important factor behind the Global goods trade growth has rebounded since mid-2016, supported by a recovery in manufacturing activity, and remained strong in the first deceleration of global goods trade, strengthening quarter of 2017. The improvement coincided with the bottoming out of investment may support trade in 2017 (Freund global investment, which is relatively trade-intensive. Services trade continued to play a stabilizing role, outperforming goods trade during a 2016; Boz et al. 2015; Bussière et al. 2013; World period of marked weakness in the first half of 2016. The number of newly Bank 2015a). Investment growth in advanced adopted protectionist measures has generally been in line with past years. economies is firming, and the post-crisis deceleration in capital spending observed in A. Global industrial production and B. Global imports and investment goods trade volume growth EMDEs appears to be easing as the earlier terms- Percent, quarter-on-quarter annualized Percent of GDP of-trade shock for commodity exporters wanes. A 8 2012-16 average 30 Imports Investment (RHS) 25 6 recovery in goods trade is supporting an upturn in 28 24 4 China’s exports, which in turn boosts imports of 2 26 23 intermediate products across regional and global 0 24 value chains. Policy-induced infrastructure -2 22 22 spending in China has also supported demand for 16Q1 16Q2 16Q3 17Q1 16Q1 16Q2 16Q4 17Q1 16Q4 16Q3 20 21 2000 2002 2004 2006 2008 2010 2012 2014 2016 industrial commodities, benefiting countries Industrial production Trade exporting raw materials. C. Import intensity of demand D. Global services trade relative to Services trade was resilient throughout 2016, components, 2014 merchandise trade supported by robust global consumer spending, Percent 30 Percent 21.0 particularly in major advanced economies. The 25 20.8 ongoing recovery in goods trade may also boost 20 20.6 services exports embodied in traded products 15 (Lanz and Maurer 2015). Overall, trade in services 10 20.4 5 continues to play a stabilizing role, being less 20.2 0 May-16 Jan-16 Apr-16 Jun-16 Jan-17 Feb-16 Mar-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Feb-17 volatile and pro-cyclical than goods trade Private Export Investment Consumption (Borchert and Mattoo 2009; Ariu 2016; World Bank 2016a). E. Contribution to global import F. Trade restrictions growth Global trade growth is expected to rebound to Percentage points EMDE commodity exporters Flow of measures Stock of measures 300 Flow Stock (RHS) 2500 4 percent in 2017, a faster pace than previously EMDE commodity importers Advanced economies 250 2000 forecast. The recovery in trade growth in 2017 4 World 200 3 1500 is supported by stronger import demand from 2 150 1000 major advanced economies, increased trade flows 1 100 500 to and from China, and a diminished drag 0 50 -1 0 0 from weak import demand from commodity- 2010 2011 2012 2013 2014 2015 -2 2016 exporting EMDEs. Nevertheless, trade growth will 2014 2015 2016 2017 continue to be held back by structural Sources: CPB Netherlands Bureau for Economic Policy Analysis, World Bank, World Input-Output Database, World Trade Organization. impediments, such as maturing global value chains A. Last observation is 2017Q1. B. World investment, imports, and GDP calculated using constant 2010 U.S. dollars weights. and a slower pace of trade liberalization (World C. Import intensity for each GDP component computed from input-output tables based on Hong et al. Bank 2015a; ECB 2016). (2016). GDP-weighted average of 25 advanced economies and 7 EMDEs. D. 12-month moving average of global import and export values. Last observation is February 2017. E. Aggregate imports calculated using constant 2010 U.S. dollar weights. Shaded area indicates Protectionist measures do not appear to have been forecasts. F. Trade restrictions include trade remedy measures. 2016 data as of October. a significant factor behind weak trade since the global financial crisis. According to the WTO, the number of new trade restrictions in 2016 was Jokubauskaite, and Stehrer 2015). Nevertheless, broadly in line with previous years. And although an expanding stock of restrictions and growing the use of non-tariff restrictions appears to have uncertainty about the direction of trade policy in increased recently (Evenett and Fritz 2016), their some major economies could at some point have a dampening effect has been limited so far (Ghodsi, material negative impact. 12 CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 FIGURE 1.9  Financial markets Financial   markets U.S. long-term yields have stabilized since the start of 2017, following a Global financing conditions have been benign marked increase around the November 2016 elections. Long-term yields in core Euro Area countries remain low, helping to maintain favorable global since the start of 2017. Shortly after the U.S. financing conditions. Improved growth prospects and increased investor elections of November 2016, U.S. long-term risk appetite have led to a benign reaction of emerging-market assets to yields rose sharply, similar to their surge during rising U.S. yields, especially when compared with the mid-2013 Taper Tantrum. Capital inflows and bond issuance in EMDEs continue to be the mid-2013 Taper Tantrum (Figure 1.9). robust.  Unlike the Taper Tantrum, the late-2016 increase reflected market expectations of strengthening A. 10-year bond yields around 2016 B. U.S. and German 5-year bond growth and higher inflation in the United States, elections and 2013 Taper Tantrum yields and was not accompanied by a sudden and Percent Percent 3.25 3 United States sustained re-pricing of risk, including of emerging 3.00 Germany 2.75 2 market assets. Since early 2017, U.S. long-term 2.50 yields have plateaued, even as the Federal Reserve 1 2.25 Taper Tantrum has continued to raise short-term rates. 2.00 2016 elections 0 1.75 1.50 Euro Area bond yields have remained -1 exceptionally low, supported by continued mone- -60 -30 0 120 150 30 180 210 240 270 300 330 360 60 90 2010 2011 2012 2013 2014 2015 2016 2017 Days tary policy accommodation by the ECB (Mojon 2017). The decoupling of Euro Area and U.S. C. Change in EMDE bond spreads D. Commodity-exporting EMDE bond around 2016 U.S. elections and Taper spreads and exchange rates long term yields is expected to help maintain low Tantrum in 2013 global interest rates, even as the Federal Reserve Basis points 140 Taper Tantrum Basis points 500 Bond spread Index, 100=Jan. 2016 130 pursues policy normalization. In some Euro Area 120 2016 elections 100 400 Exchange rate (RHS) countries, however, upcoming political events and 80 120 60 renewed banking sector concerns have contributed 40 300 20 110 to a rise in risk premiums (De Santis 2017). 0 200 -20 -40 -60 100 100 In an environment characterized by low market volatility and robust investor risk appetite, -60 -30 0 120 150 180 210 240 270 300 330 360 30 60 90 0 90 Days 2015 2016 2017 emerging market bond spreads have narrowed and equity prices have recovered. This provides E. Portfolio flows to EMDEs F. Cumulative EMDE bond issuance another sharp contrast with the Taper Tantrum, US$, billions US$, billions which was accompanied by a substantial 25 20 Equity Bonds 400 2011-15 average 2016 2017 deterioration in financing conditions for EMDEs. 15 10 300 Bond spreads have narrowed most notably among 5 0 200 commodity exporters, while their currencies have -5 -10 generally regained ground. Overall, capital inflows -15 100 to EMDEs have been robust in the first half of -20 2017, with EMDE bond issuance activity Jan-16 Jan-17 Mar-16 May-16 Jul-16 May-17 Sep-16 Nov-16 Mar-17 0 Jan Feb Apr Jun Jul Aug Sep Oct Nov Dec Mar May increasing at a record pace. Corporate bond Sources: Bloomberg, Dealogic, Haver Analytics, J.P. Morgan, World Bank. issuance has been particularly buoyant, notably in A. Day 0 refers to May 22, 2013, and November 8, 2016. Last observation is May 24, 2017. Latin America, as companies aimed at extending B. Last observation is May 24, 2017. C. EMDE bond spreads are market-value weighted spreads between U.S. dollar-denominated EMDE maturity and lowering interest costs. Amid rising sovereign bonds and U.S. Treasury bonds. Last observation is May 24, 2017. fiscal deficits, the Middle East and North Africa D. Medians of a nine-country group of EMDE commodity exporters are shown. Exchange rates are bilateral against the U.S. dollar, with upward movement showing an appreciation. Last observation is region has accounted for about half of total May 24, 2017. E. Net flows into EMDE bond and equity funds. Last observation is May 24, 2017. EMDE sovereign bond issuances since the start of F. Data include both international sovereign and corporate issuances. Last observation is April 2017. 2017. Fewer credit downgrades and improving growth prospects have supported a recovery in capital flows to some commodity-exporting EMDEs, despite continued weak FDI in resource sectors. GLOBAL ECONOMIC PROSPECTS | JUNE 2017 CHAPTER 1 13 Capital   flows are expected to remain steady in FIGURE   1.10 Commodity markets 2017 and 2018, reflecting the offsetting effects of gradually tighter international financing Oil prices weakened in March and April, reflecting an improved production outlook in the United States. The resilience of the U.S. shale oil industry conditions and strengthening growth prospects in presents a considerable downside risk for oil prices. Metals prices, which EMDEs (Eichengreen, Gupta, and Masetti 2017). are largely influenced by fluctuations in demand from China, are projected to rise 16 percent in 2017. Agricultural prices are expected to remain stable, with global stocks of the three key grains at 15-year highs. Commodities A. U.S. oil rig count and oil prices, B. Break-even prices for U.S. shale oil After averaging $53 per barrel (bbl) during the weekly regions first quarter of 2017, oil prices dropped below US$/bbl Rig count US$/bbl U.S. oil rig count (RHS) 2013 2016 $50/bbl in early May, amid stubbornly high 150 Oil price, WTI 1,800 100 80 OECD stocks and rising Libyan production 125 1,500 60 1,200 (Figure 1.10). Global oil consumption is expected 100 900 40 to grow at a moderate 1.4 percent in 2017-18 75 600 20 despite global growth gathering momentum. Oil 50 300 0 Permian Eagle Ford Delaware Niobrara Bakken Midland Permian 25 0 production declined in early 2017 as a result of Jul-09 Jul-14 Jan-17 Jan-07 Apr-08 Oct-10 Jan-12 Apr-13 Oct-15 the implementation of cuts agreed in November 2016 by some Organization of the Petroleum C. World metal consumption growth D. Stock-to-use ratios Exporting Countries (OPEC) and non-OPEC oil producers. However, these cuts were partly offset mmt, annual change 12 Percent Maize OECD 40 by stronger-than-expected shale oil production in 8 Other non-OECD China 35 Rice Wheat the United States, following steep productivity 30 4 improvements. A rebound in drilling activity 25 0 doubled the U.S. oil rig count from its 2016 low. 20 -4 As a result, oil inventories remain high, 15 -8 10 particularly in the United States—a key factor 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2000 2002 2004 2006 2008 2010 2012 2014 2016 behind persistent weakness in oil prices. Sources: Baker Hughes, Bloomberg, Rystad Energy, U.S. Department of Agriculture, World Bank, Oil prices are expected to average $53/bbl in World Bureau of Metal Statistics. A. Last observation is May 19, 2017 for rig count and May 24, 2017 for WTI. 2017, up 24 percent from 2016, but $2/bbl less C. 2016 data are estimates. D. Stock-to-use ratios denote the ratio of ending stocks to domestic consumption and represent than January forecasts. Large stocks are expected a measure of how well supplied the market is. The data reflect the April 2017 U.S. Department of Agriculture update. to unwind during the second half of the year. This will support an increase in oil prices to $56/bbl on average in 2018, down $4/bbl from January prices rose on supply constraints, including wage projections. These forecasts reflect expectations of negotiations in large copper mines in Chile, increased U.S. shale oil production following planned shutdowns of nickel mines in the productivity gains that have reduced costs Philippines, and aluminum capacity reductions in considerably, as well as an extension of production China. Exhaustion of zinc deposits in Australia cuts by OPEC and non-OPEC producers until and Canada also played a role. Average annual March 2018. Downside risks for oil prices arise metals and mineral prices, which declined 6 mainly from the resilience of the U.S. shale oil percent in 2016, are projected to rise 16 percent in industry or weak compliance to the production 2017 and decline marginally in 2018 as some of cuts. Conversely, further disruptions among the temporary supply constraints are resolved. politically stressed producers (e.g., Iraq, Libya, Price forecasts have been lifted from January Nigeria, República Bolivariana de Venezuela), as projections due to stronger-than-expected demand well as commitments to additional production in China and some unexpected supply constraints. cuts into 2018, could temporarily lift prices. Agricultural prices are projected to remain broadly Metals prices continue to increase from their late- stable in 2017 and 2018. Improved growing 2015 lows, partly due to China’s policy-driven conditions have pushed stocks-to-use ratios of key increase in infrastructure investment. In addition, grains to 15-year highs. Fears of supply dis- 14 CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 ruptions   in the Southern Hemisphere, which from   recession (e.g., Argentina, Brazil, Nigeria, boosted soybean prices earlier in the 2016-17 crop Russia), while growth in commodity importers year, have diminished. Since agricultural continues to generally be robust. production is energy intensive, lower energy prices (compared to pre-2015 levels) continue to Industrial production and manufacturing dampen grain and oilseed prices. In addition, purchasing managers’ indexes have increased in lower energy prices reduce the incentive to divert 2017. This increase has been most pronounced land use away from food to biofuel commodities. among commodity exporters, where PMIs reached Indeed, biofuel production has changed very little their highest levels since early 2015. In in the past two years and is forecast to increase 5 commodity importers, industrial production percent in 2017, compared with an annual average remains robust, with PMIs well into expansionary rate of expansion of 15 percent during the territory. preceding 10 years (World Bank 2017c).   Domestic demand is leading the upturn in 2017, amid improving confidence and, in a number of Emerging market and commodity exporters, diminishing drag from developing economies: earlier policy tightening. This is mirrored in rising import demand, which bottomed out in late 2016. Recent developments Stronger external demand is also supporting the and outlook recent improvement in EMDE conditions, albeit unevenly. From a post-crisis low in 2016, growth is strengthening in EMDEs. A recovery in commodity Commodity-exporting EMDEs exporters is being led by some large economies where adjustment to the earlier decline in commodity prices Growth appears to be bottoming out, to varying is well advanced. However, some other economies degrees, in many of the large commodity exporters still face longer-than-expected adjustment needs, that were in recession or stagnation in 2016 (e.g., suggesting that this recovery will be somewhat softer Angola, Argentina, Brazil, Kazakhstan, Nigeria, than previously envisioned. In commodity importers, Russia). Activity remains solid in a number of growth is projected to remain solid, as stronger diversified, or non-resource-intensive, economies exports offset the impact of diminishing (e.g., Costa Rica, Ethiopia, Indonesia, Malaysia, policy support. Despite an easing of short-term Rwanda, Senegal, Sri Lanka, Tanzania). However, macroeconomic pressures in many EMDEs, the remaining adjustment needs, particularly related longer-term EMDE outlook is constrained by to fiscal sustainability, are holding back economic structural headwinds to world trade and slowing activity in some economies, especially in those that productivity growth.   have significant domestic vulnerabilities and political challenges (IMF 2017a). Recent developments In general, currencies in commodity exporters Growth in EMDEs reached a post-crisis low of 3.5 have strengthened and inflation has retreated as percent in 2016, as commodity exporters commodity prices have stabilized, allowing continued to stagnate and idiosyncratic factors monetary policy to be eased in some countries held back growth in some large commodity- (e.g., Brazil, Chile, Colombia, Ghana, Kazakhstan, importing EMDEs (e.g., India, Turkey). Activity Russia, Ukraine). Fiscal policy adjustment to low firmed toward the end of 2016 and into 2017 commodity prices is easing in countries where (Figure 1.11), reflecting a recovery in commodity such adjustment started early and is well advanced exporters, where the contraction in investment is (e.g., Honduras, Indonesia, Malaysia). Confidence easing and import growth is bottoming out. This is generally improving, although it remains fragile trend was broad-based across energy, metals, and (e.g., Argentina, Brazil, Kazakhstan, Nigeria, agricultural commodity exporters. Some large Russia, Ukraine). While private consumption commodity exporters are beginning to emerge growth appears to have bottomed out, impaired GLOBAL ECONOMIC PROSPECTS | JUNE 2017 CHAPTER 1 15 household   balance sheets continue to weigh on FIGURE   1.11 EMDE activity consumption in some countries (e.g., Brazil, Kaza- EMDE growth is strengthening, led by commodity exporters, where the khstan, Russia, Ukraine). In resource sectors, cor- contraction of investment is easing and imports are bottoming out. The porate profits have picked up and companies have recovery is broad-based among energy, metals, and agricultural made progress in repairing their balance sheets. commodity exporters. Industrial production and manufacturing PMIs are rising. EMDE domestic demand is firming, amid improved confidence. Russia is emerging from recession, with a A. GDP growth B. Investment and import growth, diminishing contraction of consumer demand commodity exporters amid increasing price and currency stability, and a Percent, year-on-year 12 EMDE commodity exporters Percent, year-on-year 10 Investment Imports positive contribution from exports (World Bank 10 China EMDE commodity importers ex. China 5 2017d). Growth in other large commodity 8 6 0 exporters is firming, supported by higher com- 4 -5 modity prices and gradual monetary policy easing 2 -10 (e.g., Indonesia, Kazakhstan), as well as improved 0 confidence (e.g., Malaysia, Ukraine). In Nigeria, -2 -15 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017 recent indicators point to a recovery in the manufacturing and non-manufacturing sectors. C. GDP growth, EMDE commodity D. Industrial production growth Brazil is expected to slowly emerge from recession exporters in 2017 (Banco Central do Brasil 2017). Activity Percent 6 Percent, year-on-year EMDE commodity importers 6 indicators have improved, including a resumption 4 5 EMDE commodity exporters of industrial output growth and a pickup in export 2 4 growth, as well as gains in confidence and 0 3 2 manufacturing. However, the country continues -2 1 2016 2017f 2016 2017f 2016 2017f 2016 2017f to struggle with rising unemployment and still 0 EMDE EMDE EMDE metal EMDE sizable fiscal adjustment needs. commodity exporters energy exporters exporters agriculture exporters -1 2014 2015 2016 2017 In general, growth in energy exporters lags that of E. Manufacturing PMI of commodity F. Contribution to GDP growth metal and agriculture exporters. Energy exporters exporters and importers face more recent, and deeper, adjustment needs. Index EMDE commodity importers EMDE commodity exporters Percentage points 8 Net exports Domestic Demand In addition, they have enacted policy measures 53 50 line 6 later than other exporters. Oil production cuts and 52 4 51 2 protracted fiscal consolidation has weighed on 0 50 growth of Gulf Cooperation Council (GCC) 49 -2 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 2017f 2017f 2017f countries and other affected energy exporters (e.g., 48 Algeria, Angola, Ecuador, Iraq, Kuwait, Qatar, 47 2014 2015 2016 2017 Commodity exporters Commodity importers EMDEs Saudi Arabia, United Arab Emirates). Real Sources: Haver Analytics, World Bank. exchange rate appreciation in economies pegged to A. B. Aggregate growth rates calculated using constant 2010 U.S. dollars weights. Last observation is the U.S. dollar has curtailed current account 2017Q1. C. Simple average of GDP growth. EMDE commodity exporter groups exclude BRICS countries. Gray improvements (Werner, Adler, and Magud 2017). line indicates interquartile ranges of growth in each group. Shaded areas indicate forecasts. D. 6-month moving average of year-on-year industrial production growth. EMDE commodity importers excludes China. Last observation is March 2017. Dotted lines indicate median values from 2012-16. In contrast to the generally improving trend across E. 6-month moving average of country sample. Index values above 50 indicate expansion. EMDE commodity importers excludes China. Sample includes 5 EMDE commodity exporters (Brazil, Russia, EMDE commodity exporters, activity was weak in Indonesia, Malaysia, South Africa) and 7 EMDE commodity importers ex. China (India, Poland, Philippines, Thailand, Vietnam, Mexico, Turkey). Last observation is April 2017. early 2017 in some countries in Sub-Saharan F. Shaded areas indicate forecasts. Commodity importers excludes China. Africa (e.g., Burundi, Chad, Equatorial Guinea), Latin America and the Caribbean (e.g., Ecuador, República Bolivariana de Venezuela), Europe and specific domestic challenges have added to the Central Asia (e.g., Azerbaijan), and East Asia and difficulties, including domestic and external Pacific (e.g., Mongolia, Papua New Guinea). This imbalances, exchange rate misalignments, social generally reflects sizable and protracted policy tensions, political challenges, security issues, and adjustment to low commodity prices. Country- droughts. Recent activity in some metals exporters 16 CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017   been held back by special factors, including has global   and domestic factors (Box 1.1). Improving production bottlenecks (e.g., Papua New Guinea), metals prices are stimulating production in metals policy uncertainty (e.g., Armenia, South Africa), exporters (e.g., Democratic Republic of Congo, and mining sector disruptions and natural Guinea). In many non-resource-intensive low- disasters (e.g., Chile, Peru). income countries, solid growth achieved in 2016 is continuing, driven by infrastructure investment. Commodity-importing EMDEs In countries hit by drought in 2016, above-average rainfalls are boosting agricultural production. Growth in commodity importers remains general- Elsewhere, reconstruction efforts following natural ly robust. In East Asia and Pacific and in South disasters (e.g., the earthquake in Nepal) are Asia, solid domestic demand, strong infrastructure picking up pace. However, some low-income spending, FDI-led investment into highly compet- countries remain under significant economic stress itive manufacturing sectors and services, and rising due to declining oil production (e.g., Chad), global demand are benefiting many countries (e.g., conflict (e.g., South Sudan), drought (e.g., South Bangladesh, Cambodia, India, the Philippines, Sudan), security threats (e.g., Afghanistan), or Vietnam; World Bank 2017b). Asian EMDE political instability (e.g., Burundi). economies are also helped by increased intra- regional trade and investment flows, which may Outlook receive a further boost from China’s “One Belt, One Road” initiative (World Bank 2016b). EMDE growth is projected to strengthen from 3.5 Robust domestic demand and stronger imports percent in 2016 to 4.1 percent in 2017 and reach from the Euro Area has favored commodity an average of 4.6 percent in 2018-19, reflecting a importers in Europe and Central Asia (e.g., recovery in commodity exporters and steady Bulgaria, Romania, Serbia). Accelerated imple- growth in commodity importers (Figure 1.12). mentation of EU-funded projects is lifting other Commodity prices are expected to rise moderately regional economies (e.g., Hungary, Poland), while from low 2016 levels, although oil prices are adverse spillovers from recession in Russia and projected to rise slightly less than forecast in Ukraine are fading, benefiting neighboring coun- January. A rebound in global trade is expected to tries (e.g., Belarus, Georgia, Moldova) (World offset the negative effects associated with a gradual Bank 2017e). Activity in commodity importers in tightening of global financing conditions. the Middle East and North Africa is improving as Growth in commodity exporters is expected to reforms are implemented, as political conditions pick up from 0.4 percent in 2016 to 1.8 percent in normalize, and as harvest conditions recover (e.g., 2017, and to reach 2.8 percent on average in 2018 Jordan, Lebanon, Tunisia). -19. The improvement is expected to be broad- Despite an overall solid performance among based, with an acceleration of activity predicted in commodity importers, special factors are weighing the majority of commodity exporters both in 2017 on growth in some large economies. In Mexico, and in 2018. Aggregate growth in commodity uncertainty about U.S. trade policy appears to be exporters will be supported by improved discouraging investment. In Turkey, lingering confidence and rising commodity prices, and will effects from the failed coup last year and high solidify as the adjustment to the earlier terms-of- inflation stemming from a substantial currency trade shock runs its course, as exports rebound and depreciation have hurt confidence. Growth in domestic demand firms. Thailand remains below its long-term trend, as policy uncertainty and competitiveness challenges Nevertheless, the expected recovery in commodity are dampening investment and exports. exporters is weaker than envisioned in January, mainly reflecting longer-than-expected adjustment Low-income countries to low commodity prices in some countries and, to a lesser degree, weaker energy price prospects. Growth in low-income countries is rebounding Special factors contributing to downward revisions after a slowdown in 2016, supported by both include slowing oil sector growth in the Islamic GLOBAL ECONOMIC PROSPECTS | JUNE 2017 CHAPTER 1 17     BOX 1.1 Low-income countries: Recent developments and outlook   Growth in low-income countries slowed to 4.4 percent in 2016 but is projected to pick up to 5.4 percent in 2017. Output in oil and metals-exporting countries will recover gradually, reflecting improvements in commodity prices and global trade, and reforms to remove constraints to growth. Average growth in non-resource-intensive countries is expected to remain solid,   supported by domestic demand and, in particular, public investment. The main downside risks to the outlook include a weaker-than-expected recovery in commodity prices, a delay in necessary fiscal adjustments, and a deterioration in security and political conditions. Growth rebound. Growth in low-income countries is account deficits high. Foreign reserves remain under rebounding in 2017 from the 2016 slowdown.1 The pressure in many countries, reflecting continued increase in metals prices is stimulating production in weakness of current account balances and lower-than- metals exporters (e.g., Democratic Republic of Congo, expected external financing. Reserve levels were less Niger). In many non-resource-intensive countries, than two months of imports of goods and services in including in the West African Economic and Monetary several countries at end-2016 (e.g., Chad, Democratic Union (WAEMU), the rebound is led by infrastructure Republic of Congo, South Sudan) (IMF 2016a). investment (IMF 2017b).2 Investor risk appetite for low-income countries’ assets has improved. In May, Stabilizing exchange rates, high inflation. The Senegal tapped the Eurobond market to finance its currencies of commodity exporters are stabilizing, investment projects. In countries that were hit by an El following sharp depreciations in 2016, although they Niño-related drought in 2016 (e.g., Malawi, continue to weaken in some cases (e.g., Democratic Mozambique), above average rainfalls are boosting Republic of Congo). Large exchange rate depreciations, agricultural production. Elsewhere, reconstruction compounded by the impact of drought on food prices, efforts following natural disasters (e.g., the earthquake contributed to a rapid increase in inflation in some in Nepal) are picking up pace. However, a number of metals exporters. Inflation in Mozambique exceeded 20 low-income countries remain under significant percent in the first quarter of 2017. In non-resource- economic stress on account of declining oil production intensive countries, inflationary pressures are (e.g., Chad), conflict (e.g., South Sudan), drought (e.g., intensifying across East Africa, where a drought has Somalia, South Sudan), security threats (e.g., reduced agricultural production, causing a spike in Afghanistan), or political instability (e.g., Burundi). food prices (e.g., Ethiopia, Rwanda). Other cases of high inflation reflect domestic supply disruptions from Elevated current account deficits. Current account natural disasters (e.g., Haiti). In Chad and WAEMU positions remain weak across low-income countries low-income countries, inflation has remained generally (Figure 1.1.1). Although current account deficits in oil low, reflecting the stable peg to the euro. In some and metals exporters are declining, they are still countries where inflation has stabilized, central banks elevated. For oil exporters, the improvement mainly have reduced policy rates (e.g., Tanzania, Uganda). reflects the recent increase in the price of oil and a decline in imports resulting from cuts in public Improving fiscal positions. Fiscal positions have investment. In metals exporters, exports are gradually improved somewhat across low-income countries, increasing as production expands from existing and reflecting fiscal consolidation efforts. Large drops in oil new mining projects. Among non-resource-intensive revenues have forced sharp spending cuts in Chad. countries (e.g., Rwanda, Uganda), rising fuel prices and Some metals exporters (e.g., Mozambique, Sierra large public investment programs are keeping current Leone) have revised their spending plans to stabilize their economies. However, in others (e.g., Liberia, Note: This box was prepared by Gerard Kambou and Boaz Nandwa. Niger), fiscal balances remain under pressure, reflecting Research assistance was provided by Trang Thi Thy Nguyen and Xinghao delayed fiscal consolidation. Fiscal deficits widened in Gong. 1For the 2017 fiscal year, low-income countries are defined as those several non-resource-intensive countries (e.g., Togo, with a gross national income (GNI) per capita, calculated using the Uganda) due to the continued expansion in public World Bank Atlas method, of $1,025 or less. infrastructure. As a result, government debt ratios in 2The WAEMU low-income countries are Benin, Burkina Faso, Guinea-Bissau, Mali, Niger, Senegal, and Togo. low-income countries have continued to rise (e.g.,   18 CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017     BOX 1.1 Low-income countries: Recent developments and outlook (continued)   FIGURE 1.1.1 Recent developments Growth slowed markedly in several low-income countries toward   the end of 2016. The impact of low commodity prices was the dominant factor, although drought and conflict also played a role. Inflationary pressures increased at the start of the year, reflecting large currency depreciations and the effect of drought on food prices in some countries. While current account and fiscal deficits remain elevated across low-income countries, they are narrowing in oil and metals exporters as commodity prices improve. A. GDP growth B. Consumer price inflation Percent, year-on-year Mozambique Percent, year-on-year 12 Uganda 30 Uganda Rwanda Chad 10 Tanzania 25 Mozambique Nepal 8 20 Haiti Low-income countries 6 15 4 10 2 5 0 0 -2 -5 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 Jan-15 Jun-15 Apr-16 Sep-16 Feb-17 Nov-15 C. Current account balance D. Fiscal balance Percent of GDP 2016e 2017f Percent of GDP 2016e 2017f 0 0 -1 -5 -2 -10 -3 -15 -4 -20 -5 -25 -6 Low-income Oil-exporting Metal-exporting Non-resource Low-income Oil-exporting Metal-exporting Non-resource countries low-income low-income intensive low- countries low-income low-income intensive low- countries countries income countries countries countries income countries Sources: Haver Analytics, International Monetary Fund, Tanzania Bureau of Statistics, World Bank. A. Last observation is 2016Q4. B. Last observation is March 2016 for Chad, September 2016 for Nepal, November 2016 for Haiti and low-income countries, and April 2017 for Mozambique and Uganda. C.D. Non-resource-intensive countries include agricultural-based economies and commodity importers. Ethiopia, Liberia, Togo), or stayed elevated (e.g., Weaker-than-expected growth outlook. Growth in Mozambique, Senegal), exceeding in most cases 50 low-income countries is projected to reach 5.4 percent percent of GDP at end-2016. The rising government in 2017 and strengthen to 5.8 percent by 2019 (Figure debt levels indicate a need for low-income countries to 1.1.2). The turnaround is predicated on a continued improve debt management capacity to manage rollover recovery of commodity prices, as well as on policy risks (World Bank 2017f). actions to reduce macroeconomic imbalances. These   GLOBAL ECONOMIC PROSPECTS | JUNE 2017 CHAPTER 1 19     BOX 1.1 Low-income countries: Recent developments and outlook (continued)   conflict (e.g., South Sudan) will dampen the growth of FIGURE 1.1.2 Outlook oil production. Among metals exporters, inflation and fiscal tightening will be a greater drag on growth than GDP growth in low-income countries is projected to recover to 5.4 percent in 2017 and to 5.8 percent in   expected. 2018-19. This reflects a moderate recovery in oil and metals exporters toward their long term average growth. In non-resource-intensive countries, growth should Growth in non-resource-intensive countries is projected to remain robust. remain robust. Large low-income countries in Sub- Saharan Africa (e.g., Ethiopia, Tanzania) will expand at A. GDP growth: Low-income country groups a rapid pace, helped by buoyant service sectors, Percent infrastructure investment, and a rebound in agriculture. 2010-2014 average 8 However, with elevated debt levels, these countries will 6 need to increase public savings, contain debt 4 accumulation, and rebuild policy buffers. Fragile states (e.g., Burundi, Haiti, Zimbabwe) will continue to 2 expand at a slower pace. 0 -2 Risks tilted to the downside. External risks include the -4 possibility of weaker-than-expected growth in advanced economies. This could reduce demand for low-income 2017f 2017f 2018f 2017f 2018f 2018f 2017f 2018f 2015 2015 2015 2016e 2015 2016e 2016e 2016e countries’ exports, depress commodity prices, and Low-income Oil-exporting Metal-exporting Non-resource countries low-income low-income intensive low- curtail foreign direct investment in mining and countries countries income countries infrastructure. Low-income countries in SSA are particularly vulnerable to this risk because of their B. GDP growth: Selected countries dependence on commodity exports. Other major risks Percent are a sharp reduction in foreign aid, particularly in view 10 8 2016 2017 of the cuts proposed by the U.S. administration; larger 6 declines in remittances due to stricter immigration 4 policies (e.g., Haiti); and border closures (e.g., 2 Afghanistan). The materialization of these risks would 0 dampen investment, consumption, and regional trade -2 in many low-income countries. -4 -6 There are also a number of domestic downside risks. -8 Failure to implement appropriate macroeconomic Senegal Ethiopia Mozambique Chad Haiti Nepal policies, especially in countries where large fiscal adjustments are needed, would further weaken macroeconomic stability. Adjustment needs are Source: World Bank. particularly large in several low-income countries in SSA, including Chad and Mozambique. In addition, rising security threats (e.g., Afghanistan), heightened forecasts are slightly weaker than those in January, with political uncertainty (e.g., Democratic Republic of a more moderate recovery among oil and metals Congo, Burundi), intensification of conflict (e.g., exporters, where growth will remain well below its South Sudan), and worsening drought conditions (e.g., 2010-2014 average. The factors underlying the modest Somalia, South Sudan) would severely affect economic recovery vary. Maturing oil fields (e.g., Chad) or conditions in fragile countries. 20 CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017       BOX 1.1 Low-income countries: Recent developments and outlook (continued) TABLE 1.1.1 Low-income country forecastsa (Real GDP growth at market prices in percent, unless indicated otherwise) 2014 2015 2016 2017 2018 2019 2016 2017 2018 2019 Percentage point differences from Estimates Projections January 2017 projections b Low Income Country, GDP 6.3 4.7 4.4 5.4 5.8 5.8 -0.3 -0.2 -0.2 -0.3 Afghanistan 1.3 1.1 2.2 2.6 3.4 3.1 1.0 0.8 0.4 -0.5 Benin 6.4 2.1 4.0 5.5 6.0 6.3 -0.6 0.3 0.7 1.0 Burkina Faso 4.0 4.0 5.4 6.1 6.3 6.3 0.2 0.6 0.3 0.3 Burundi 4.7 -3.9 -0.6 1.5 2.0 2.6 -0.1 -1.0 -1.5 -0.9 Chad 6.9 1.8 -7.0 0.2 3.2 3.1 -3.5 0.5 -1.5 -3.2 Comoros 2.1 1.0 2.2 3.3 4.0 4.0 0.2 0.8 1.0 1.0 Congo, Dem. Rep. 9.0 6.9 2.2 4.7 4.9 4.9 -0.5 0.0 -0.1 -0.1 Ethiopiac 10.3 9.6 7.5 8.3 8.0 7.9 -0.9 -0.6 -0.6 -0.7 Gambia, The 0.9 4.1 2.1 2.5 3.8 4.0 1.6 1.7 1.2 1.4 Guinea 0.4 0.1 4.6 4.4 4.6 4.6 -0.6 -0.2 0.0 0.0 Guinea-Bissau 2.5 4.8 4.9 5.1 5.1 5.1 0.0 0.0 0.0 0.0 Haitic 2.8 1.2 1.4 0.5 1.7 2.3 0.2 1.1 0.2 0.3 Liberia 0.7 0.0 -1.2 3.0 5.3 5.7 -3.7 -2.8 0.0 0.4 Madagascar 3.3 3.8 4.4 3.5 6.4 4.7 0.3 -1.0 1.6 -0.1 Malawi 5.7 2.8 2.5 4.4 4.9 5.3 0.0 0.2 0.4 0.8 Mali 7.0 6.0 5.6 5.3 5.2 5.1 0.0 0.2 0.2 0.1 Mozambique 7.4 6.6 3.3 4.8 6.1 6.7 -0.3 -0.4 -0.5 0.1 Nepalc 6.0 3.3 0.4 7.5 5.5 4.5 -0.2 2.5 0.7 -0.2 Niger 7.0 3.6 4.7 5.2 5.5 5.5 -0.3 -0.1 -0.5 -0.5 Rwanda 7.0 6.9 5.9 6.0 6.8 7.0 -0.1 0.0 -0.2 0.0 Senegal 4.3 6.5 6.6 6.7 6.9 7.0 0.0 -0.1 -0.1 0.0 Sierra Leone 4.6 -20.6 5.0 5.4 5.6 5.9 1.1 -1.5 -0.3 0.0 Tanzania 7.0 7.0 6.9 7.2 7.2 7.4 0.0 0.1 0.1 0.3 Togo 5.9 5.4 5.0 4.6 5.5 5.5 -0.4 -0.4 0.0 0.0 Ugandac 5.6 5.6 4.8 4.6 5.2 5.6 0.2 -1.0 -0.8 -0.4 Zimbabwe 3.8 0.5 0.7 2.3 1.8 1.7 0.3 -1.5 -1.6 -1.7 Source: World Bank. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. a. Central African Republic, Democratic People's Republic of Korea, and Somalia are not forecast due to data limitations. b. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. c. GDP growth based on fiscal year data. For Nepal, the year 2017 refers to FY2016/17, which runs from July 16 to July 15 of the following year. For additional information, please see www.worldbank.org/gep. Republic of Iran, the protracted effects of exporters well below the high rates achieved restricted access to international financial markets during the pre-2014 commodity boom. In this in Russia, deeper-than-expected oil production context, growth in regions with large numbers of cuts in Saudi Arabia, and a deterioration of commodity exporters will strengthen in 2017, but investor confidence in South Africa amid two at a slower-than-expected pace (Box 1.2). recent sovereign rating downgrades to sub- investment grade. More generally, the subdued Growth in commodity importers is projected to long-term outlook for commodity prices is remain broadly stable, at around 5.7 percent on expected to keep investment rates in commodity average in 2017-19. In general, stronger exports GLOBAL ECONOMIC PROSPECTS | JUNE 2017 CHAPTER 1 21   expected to offset the impact of diminishing are FIGURE   1.12 EMDE growth outlook policy support and waning windfalls from earlier EMDE growth is projected to pick up to 4.1 percent in 2017 and accelerate commodity price declines. A gradual slowdown in further in 2018-19. Amid strengthening global trade, EMDE exports and China will be partly offset by a modest pickup in imports are expected to firm. The strengthening EMDE outlook mainly the rest of the group. Excluding China, growth in reflects a recovery in commodity exporters, while growth in commodity importers is projected to remain robust. However, EMDE investment is commodity importers will accelerate from 4.6 likely to remain subdued, with investment recoveries concentrated in a few percent in 2017 to an average of 5.0 percent in large EMDEs.  2018-19, partly reflecting the diminishing role of idiosyncratic factors holding back activity in some A. GDP growth B. Import and export growth, goods and services large economies (e.g., Mexico, Turkey). Relative 1990-2008 average Percent Percent to January projections, the outlook for commodity 10 2003-2008 average 20 Exports Imports 15 importers is little changed. In particular, a 8 10 6 downgrade to India’s fast pace of expansion, 4 5 mainly reflecting a softer-than-expected recovery 2 0 -5 in private investment, is accompanied by an 0 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 -10 upward revision to Turkey, partly due to signs of EMDEs EMDE EMDE -15 2005 2007 2009 2011 2013 2015 2017 2019 less severe effects of last year’s failed coup and a commodity importers commodity exporters reassessment of potential growth. C. Share of EMDEs with accelerating D. Contribution to EMDE investment In low-income countries, growth is projected to growth growth rebound to 5.4 percent in 2017, helped by a Share of countries Commodity importers Percentage points 18 EMDE importers EMDE exporters 100 pickup in metals exporters, and strengthen to 5.8 Commodity exporters 14 Other BRICS 1990-2008 China 2003-08 80 percent in 2018-19, as activity improves in oil 60 10 exporters. This turnaround is predicated on policy 40 6 actions to tackle macroeconomic imbalances, as 20 2 well as on moderately rising commodity prices. 0 -2 These forecasts are slightly lower than in January. 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 In oil exporters, oil production will increase at a slower pace than previously projected due to Source: World Bank. A.-D. Shaded areas indicate forecasts. maturing oil fields (Chad) or conflict (South A. Aggregate growth rates calculated using constant 2010 U.S. dollars GDP weights. B. Export and import volumes include goods and non-factor services. Sudan). In metals exporters, high inflation and C. Share of countries in EMDE commodity exporters and importers whose GDP growth is at least 0.1 tight fiscal policy will be a greater drag on activity percentage point higher than the previous year. Sample includes 60 commodity importers and 86 commodity exporters. than previously thought in several countries. D. Averages for 1990-2008 and 2003-08 include all EMDEs. Growth should remain robust in non-resource- intensive countries as they continue to benefit from infrastructure investment (e.g., Ethiopia, 2017a). Even if the expected modest recovery in Senegal) and buoyant services sectors (e.g., investment materializes, the slower rate of capital Tanzania). accumulation in previous years, and the associated loss of embodied technological progress, may have While the easing of macroeconomic pressures is a already set back potential output growth. positive development in the short term for many Moreover, the overall EMDE investment recovery EMDEs, structural obstacles continue to impede is expected to be concentrated in a few large the longer-term outlook. These include structural economies. headwinds to world trade, such as slower trade liberalization and value chain integration; persistently low commodity prices; worsening Risks to the outlook demographics in most developing regions; slowing productivity growth; and governance and Despite the possibility of more expansionary fiscal institutional challenges. In addition, many policies than currently assumed in major economies, economies have experienced trend slowdowns in the balance of risks remains titled to the downside, investment growth in recent years (World Bank although slightly less so than at the start of the year. 22 CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017     BOX 1.2 Regional perspectives: Recent developments and outlook   Growth in most EMDE regions with a substantial number of commodity exporters is projected to strengthen in 2017, amid modestly rising commodity prices and growing trade. However, this acceleration is weaker than previously envisioned, mainly due to longer-than-expected adjustment to the weak commodity price outlook and, to a lesser degree, a minor downward revision to oil price forecasts. EMDE regions   with large numbers of commodity importers are expected to continue to experience solid growth. East Asia and Pacific. Regional growth is projected to inch down from 6.2 percent in 2017 to 6.1 percent on FIGURE 1.2.1 Regional growth average in 2018-19, in line with previous forecasts Growth in most EMDE regions with a substantial number (Figure 1.2.1). A gradual slowdown in China will be of commodity exporters is projected to pick up in 2017; partly offset by a modest pickup in the rest of the however, this acceleration is weaker than previously region. Domestic demand is projected to remain envisioned. EMDE regions with large numbers of commodity importers are expected to continue to robust. Firming exports are expected to offset the experience solid growth. negative impact of gradual policy tightening. Downside risks include heightened policy uncertainty, increased A. Regional growth (weighted average) protectionism in key advanced economies, and an Percent GEP Jan 2017 1990-08 average 2003-08 average abrupt tightening of financing conditions. A sharper- 10 than-expected slowdown in China could have adverse 8 consequences for the rest of the region and continues to 6 be a low-probability risk. 4 2 Europe and Central Asia. Regional activity has picked 0 up since the end of 2016, and the 2017 growth forecast -2 of 2.5 percent is in line with January projections. Both 2016 2018 2017 2017 2018 2019 2016 2017 2019 2016 2017 2018 2019 2016 2017 2018 2019 2016 2018 2019 2016 2017 2018 2019 commodity exporters and importers are recovering. East Asia Europe Latin Middle South Asia Sub- The region is benefiting from modestly rising oil prices, and Pacific and America East and Saharan Central and the North Africa benign global financing conditions, and solid growth in Asia Caribbean Africa the Euro Area. Regional growth is expected to edge up to an average of 2.8 percent in 2018-19, as activity in B. Share of countries with increasing growth Russia and other commodity exporters firms and Percent of countries growth in Turkey recovers. The main downside risks 80 70 include renewed declines in oil and other commodity 60 prices, policy uncertainty and geopolitical risks, and 50 international financial market disruptions. Domestic 40 banking system weaknesses are a vulnerability and 30 could amplify internal and external shocks. 20 10 0 Latin America and the Caribbean. Regional output 2017 2018 2016 2017 2018 2019 2016 2018 2019 2016 2017 2018 2019 2016 2017 2019 2016 2017 2018 2019 2016 2017 2018 2019 contracted 1.4 percent in 2016, pulled down by East Asia Europe Latin Middle South Asia Sub- recessions in Argentina, Brazil, and República and Pacific and America East and Saharan Central and the North Africa Bolivariana de Venezuela. Although recent data suggest Asia Caribbean Africa that the regional economy is stabilizing after two years Source: World Bank. of contraction, the recovery is expected to be subdued A.B. Average for 1990-08 is constructed depending on data availability. For in the short term. Growth is projected to reach 0.8 ECA, data for 1995-2008 are used to exclude the immediate aftermath of the collapse of the Soviet Union. A. Bars denote latest forecast; diamonds denote previous forecasts. Since the largest economies of each region account for almost 50 percent of regional GDP in some regions, weighted average predominantly reflects the Note: This box was prepared by Carlos Arteta with contributions from development in the largest economies in each region. Gerard Kambou, Lei Ye, Boaz Nandwa, Yoki Okawa, Temel Taskin, B. Share of countries that GDP growth exceeds that of the previous year out Ekaterine Vashakmadze, and Dana Vorisek. Research assistance was pro- of total countries in the region. Horizontal black line denotes 50 percent. vided by Trang Thi Thy Nguyen. GLOBAL ECONOMIC PROSPECTS | JUNE 2017 CHAPTER 1 23     BOX 1.2 Regional perspectives: Recent developments and outlook (continued)  percent in 2017, supported by strengthening private accelerating this year, largely driven by robust domestic consumption and an easing contraction in investment, demand and improved foreign direct investment, while despite a slowdown in Mexico as uncertainty about activity in Bangladesh is moderating, reflecting a U.S. economic policy dents confidence. Regional pullback in domestic demand and in industrial growth is expected to accelerate to an average of 2.3 production. Regional growth is expected to firm in percent in 2018-19, as the recoveries in Brazil and 2018-19, reaching an average of 7.2 percent, supported other commodity exporters advance. The main by robust domestic demand, an uptick in exports, and downside risks to the outlook arise from domestic strong foreign direct investment. The regional outlook political and policy uncertainty and from possible has been slightly revised down from January, reflecting policy changes in the United States. a more protracted recovery in private investment in India than previously expected. Risks to the outlook are Middle East and North Africa. Regional growth is tilted to the downside and include reforms setbacks, projected to decline from 3.2 percent in 2016 to 2.1 geopolitical tensions, and policy uncertainty. percent in 2017. The deceleration reflects slowdowns in oil-exporting economies, resulting from OPEC-led Sub-Saharan Africa. Regional growth is projected to oil production cuts agreed in November 2016. In oil recover in 2017 to 2.6 percent, reflecting a modest rise importers, growth is expected to improve this year, in commodity prices, strengthening external demand, aided by reforms and supply-side factors such as and the end of drought in several countries. The weather-induced recoveries in agricultural output. recovery is proceeding at a slightly more moderate pace Regional growth is expected to pick up to an average of than anticipated in January, reflecting in part the 3 percent in 2018-19, amid modestly rising oil prices. longer-than-expected adjustment among some large The need for additional fiscal consolidation by both oil commodity exporters to low commodity price exporters and importers remains an important prospects, as well as heightened political uncertainty in headwind over the medium term. Key risks include a South Africa. Solid growth in non-resource-intensive weaker-than-expected rise in oil prices, continued countries is continuing into 2017, as expected. geopolitical conflicts, and social tensions that may delay However, in some countries, drought continues to implementation of key structural reforms. weigh on agricultural production. Growth is projected to pick up to 3.4 percent in 2018-19. Downside risks South Asia. Regional growth is projected to remain to the outlook include insufficient adjustment to low strong, at 6.8 percent in 2017. India is recovering from commodity prices, weaker improvements in commodity the temporary adverse effects of the end-2016 prices, stronger-than-expected tightening of global withdrawal of large-denomination currency notes. financing conditions, and political uncertainty. Elsewhere in the region, growth in Pakistan is Increased protectionism, persistent policy uncertainty, moderate investment-led recovery in advanced geopolitical risks, or renewed financial market economies and diminishing headwinds among turbulence could derail an incipient recovery. commodity-exporting EMDEs. In 2018 and Financial market stress could be amplified by 2019, global growth is predicted to average 2.9 vulnerabilities in some EMDEs. Over the longer percent, as recoveries in commodity-exporting term, a protracted slowdown in productivity and EMDEs gain traction. investment growth could further deteriorate the growth potential of advanced economies and In particular, aggregate growth in the largest seven EMDEs. EMDEs (Brazil, China, India, Indonesia, Mexico, the Russian Federation, and Turkey) is expected Baseline forecasts point to strengthening to pick up throughout the forecast horizon, momentum throughout 2017, with global growth surpassing its long-term average by 2018 (Figure reaching 2.7 percent in 2017, helped by a 1.13). Over time, this group has come to play an 24 CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017   Role of the largest EMDEs in the global FIGURE 1.13 risks   continue to dominate. Policy uncertainty is outlook   likely to remain high in 2017, and there is a risk that financial market volatility could increase from Aggregate growth in the largest seven EMDEs is expected to pick up throughout the forecast horizon. Over time, this group has come to play an current low levels. This could be triggered by increasingly important role in the global economy. Recovering activity in unexpected changes in monetary, trade, or other the largest EMDEs should have notable positive effects for growth in other policies in major economies; heightened financial EMDEs as well as globally. sector concerns; electoral outcomes; or rising A. GDP growth B. Contribution to global growth geopolitical risks. Over the longer term, a more prolonged slowdown in investment could further Percent 1990-2008 average Percentage points 9 2003-08 average 4 EM7 G7 Other erode the growth potential and resilience of both 6 3 advanced economies and EMDEs. 3 2 Against this backdrop, downside risks remain 1 above historical averages. This implies a continued 0 downward skew in the distribution of possible 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018 0 EM7 G7 1990s 2000-08 2010-16 forecast errors. At present, the estimated 50- percent probability range for global growth in C. Impact of 1-percentage-point D. Impact of 1-percentage-point 2018 is 2.2-3.6 percent. The probability that increase in EM7 and G7 growth on increase in EM7 and G7 growth on growth in other EMDEs global growth global growth could be more than 1 percentage point below baseline over the next year is currently Percentage points Percentage points 4 4 estimated at 17 percent. The probability of global EM7 G7 3 EM7 G7 growth being more than 1 percentage point above 3 the baseline next year is estimated at 15 percent. 2 2 1 1 Upside risk: fiscal stimulus in advanced economies 0 0 On impact 1 year 2 years On impact 1 year 2 years While the baseline forecast assumes that fiscal Source: World Bank. A.-D. EM7 includes Brazil, China, India, Indonesia, Mexico, the Russian Federation, and Turkey. G7 policy in major advanced economies will be includes Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. A. Aggregate growth rates calculated using constant 2010 U.S. dollars GDP weights. Shaded areas broadly neutral to growth, a more expansionary denote forecasts. fiscal stance could eventually materialize over the C. Cumulative impulse responses of a 1-percentage-point increase in EM7 and G7 growth on growth in other EMDEs. Solid bars represent medians, and error bars represent 16-84 percent confidence forecast period, particularly in the United States. intervals. D. Cumulative impulse responses of a 1-percentage-point increase in EM7 and G7 growth on global Fiscal stimulus could provide a boost to U.S. growth. The impact is the GDP-weighted average of the responses of EM7, other EMDEs, and G7 countries. Solid bars represent medians, and error bars represent 16-84 percent confidence intervals. growth, depending on the nature of the measures (World Bank 2017a). Although this would have positive effects on global growth, its benefits for increasingly important role in the global economy. trading partners could be dampened by Accordingly, recovering activity in the largest countervailing forces—in particular, changes in EMDEs should have notable positive effects for U.S. trade policy. growth in other EMDEs as well as globally—even if the largest advanced economies continue to be The proposed tax cuts and measures to boost U.S. the main source of global spillovers (Huidrom, infrastructure spending are not included in Kose, and Ohnsorge 2017). baseline projections due to insufficient details and the unclear timeframe. Suggested tax reforms The benign global outlook is little changed since include a reduction in marginal tax rates for January 2017, after a sequence of forecast corporations and individuals, a simplification of downgrades in previous years (Figure 1.14). While the tax code, and measures to improve a more expansionary fiscal stance in advanced international tax competitiveness. Large cuts to economies—particularly the United States—could corporate and personal income taxes could have a lead to stronger-than-expected growth, downside positive short-term effect on growth, but could GLOBAL ECONOMIC PROSPECTS | JUNE 2017 CHAPTER 1 25   lead to a substantial increase in fiscal deficits. also 2 FIGURE   1.14 Global risks   Immediate expensing of business investments Global growth forecasts have stabilized following sequential downgrades could provide particularly strong support to in previous years. However, downside risks remain above historical capital expenditures, and help spur U.S. growth averages. The probability that global growth could be more than 1 above current projections (Auerbach et al. 2017). percentage point below the baseline next year is currently estimated at 17 percent. The probability of global growth being more than 1 percentage Infrastructure investment programs could also point above the baseline next year is 15 percent. lead to stronger-than-expected U.S. growth in the short-term, and increase potential output over the A. Global growth forecasts over time B. Downside risks to global growth medium term (Bivens 2014; Whalen and forecasts Reichling 2015). However, the U.S. economy is Percent 4 Percent 18-month ahead Median June 2015 -0.2 already close to full employment, which could January 2016 January 2017 limit the short-term lift from fiscal stimulus, and June 2017 -0.3 lead to earlier, and ultimately larger, policy 3 interest rate increases (Auerbach and -0.4 Gorodnichenko 2012; Christiano, Eichenbaum, 2 -0.5 and Rebelo 2011). 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 2018 2019 In the Euro Area, fiscal stimulus could boost C. Global growth fan chart D. Probability of 1-percentage-point growth in view of still-high unemployment and deviation from one-year ahead global low equilibrium interest rates (European growth forecasts Commission 2016). Given the high trade intensity Percent 5 5 Percent probability 20 of Euro Area activity, positive spillovers of Euro 4 4 15 Area stimulus for the rest of the world, and for 3 3 EMDEs in particular, could be substantial (World 10 2 50 percent 2 Bank 2017a). In Japan, additional stimulus 80 percent 5 measures in the short term, and further delays in 1 90 percent Baseline 1 0 planned consolidation measures over the medium 0 2015 2016 2017 2018 0 1-percentage-point 1-percentage-point below above term, could lead to a slightly higher growth trajec- tory in coming years.   Sources: Bloomberg, Consensus Economics, World Bank. A. The dates indicate the editions of Global Economic Prospects. B. Downside risks measured as the time-varying skewness of global growth forecasts, computed from Downside risk: increased protectionism and the forecast distribution of the three underlying risk factors (oil price futures, the S&P 500 equity price futures, and term spread forecasts). Each of the three risk factors’ weight is estimated using the trade retaliation variance decomposition of global growth forecasts derived from the vector autoregression model described in Ohnsorge, Stocker, and Some (2016). C.D. The fan chart and the corresponding probabilities are constructed based on the recovered Despite the recent improvement in world trade, standard deviation and skewness, assuming a two-piece normal distribution. Values for 2017 are computed from the forecast distribution of 6-month ahead oil price futures, S&P500 equity price the possibility of rising trade protectionism has futures, and term spread forecasts. Values for 2018 are based on 18-month ahead forecast distribu- tions. Last observation is April 2017. become a major source of concern (Figure 1.15). Over the medium term, additional erosion of the multilateral rules-based system that has been built A non-cooperative rise in trade restrictions could since the mid-1940s could put downward pressure result in retaliatory measures, eventually leading to on economic integration, and ultimately on substantial increases in tariffs worldwide (Ossa growth and job creation. 2014; Tabakis and Zanardi 2016). This could result in large income losses for all countries While the widespread imposition of trade barriers involved (Broda, Limao, and Weinstein 2008; remains a tail risk in the short term, unilateral Perroni and Whalley 2000). restrictions may be met with retaliatory measures. An upward spiral in beggar-thy-neighbor 2Simulations suggest that a reduction in the statutory corporate protectionist measures would put into reverse the tax rate from 35 percent to 15 percent, along with a reduction in process of trade liberalization that has been a marginal personal income tax rates by an average of 2.5 percentage major contributor to deepening trade in past points, could increase GDP by about 1.2 to 1.9 percent above baseline after 2 years, but also widen fiscal deficits by 1.9 to 2.4 decades. For example, new preferential trade percent of GDP over the same period (World Bank 2017a). agreements, and a rising number of WTO 26 CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017   Risk of protectionism FIGURE 1.15 uncertainty   persists, it could weigh on confidence and derail the ongoing recovery in global growth. Protectionism has become an important source of concern. A spiral of retaliatory trade restrictions could undo gains from past trade liberalization. Increased uncertainty about policy direction can delay investment and hiring decisions (Fernández- A. Discussion of protectionism B. Global trade and tariffs Villaverde et al. 2011; Born and Pfeifer 2014; Incidence Percent Percent of GDP Kose et al. 2017b). Policy uncertainty can also 250 25 Tariffs 40 constrain the supply of credit to the economy, 20 Trade (RHS) 200 15 30 which can prolong or amplify economic 150 10 20 downturns (Bordo, Duca, and Koch 2016; 100 5 10 Karnizova and Li 2014). The threat of increased 50 0 1947 1948 1964 1972 1987 1999 2012 0 trade tariffs, even in the absence of actual changes 0 Pre Post Pre Post Post Post -15 in trade policies, could negatively impact Geneva Kennedy Tokyo Uru- Latest 2012-15 2016 2017 guay investment and trade as well (Crowley, Song, and Sources: Bown and Irwin (2015), Google Trends, World Bank. Meng 2016). Elevated policy uncertainty is A. Weekly average Google Trend search for “protectionism,” “trade restrictions,” “trade war,” and “import tariffs.” 2017 average is year-to-date. Latest observation is May 21, 2017. negatively associated with firms’ entry into foreign B. Global trade is defined as the average of exports and imports in percent of global GDP. Applied markets, and the decision to undertake costly and tariff rates based on the weighted mean for all products. irreversible investments associated with exporting. Overall, a 10-percent increase in global policy members, appear to have increased global trade uncertainty is associated with a 0.2 percentage- growth by an average of more than 1 percentage point reduction in trade growth (Constantinescu, point per year (Mattoo, Mulabdic, and Ruta Mattoo, and Ruta 2017). 2017). The unwinding of such agreements would likely put downward pressure on trade prospects The potential sources of economic policy and jeopardize the effectiveness and viability of the uncertainty are extensive. In the United States, the multilateral trading system. Past experiences with new administration has suggested major shifts in protectionist policies warn of considerable fiscal, trade, and immigration policies. These unintended damage. changes could affect investment and hiring decisions by companies, as well as capital and In turn, rising protectionism and declining trade remittance flows to EMDEs. Even without integration would harm growth. Trade— concrete changes, uncertainty about the direction particularly vertical specialization—tends to boost and scope of U.S. policies could affect prospects productivity, and hence activity (Constantinescu, for the U.S. economy and its main trading Mattoo, and Ruta 2017). In the presence of partners (Kose et al. 2017a; World Bank 2017a). complex value chain integration, tariffs and other These effects could be exacerbated by political barriers to trade are cumulative, as intermediate uncertainty. In Europe, the rising influence of goods cross borders multiple times through the populist parties could impact policies and affect stages of production. An increase in barriers to economic integration in the European Union. trade may result in cascading trade costs along the Negotiation around the exit of the United supply chain (Diakantoni et al. 2017; Rouzet and Kingdom from the European Union also Mirodout 2013). Consumers would ultimately carries risks. bear these costs, resulting in widespread welfare losses. Deteriorating trade relationships between Geopolitical risks have also steadily increased, and major economies could also increase the risk of fragile security conditions could set back activity geopolitical tensions and conflict (Copeland in a number of regions. The risk of large-scale 2014). conflict in the Middle East continues, reflecting persistent unrest in Iraq, the Syrian Arab Downside risk: policy uncertainty and Republic, and the Republic of Yemen, as well as geopolitical risks sectarian divisions in the region. A flare-up of geopolitical risks in the Middle East could lead to Global economic policy uncertainty has been disruptions in global oil supplies and a resurgence particularly elevated since mid-2016. If this of refugee flows, posing additional challenges for GLOBAL ECONOMIC PROSPECTS | JUNE 2017 CHAPTER 1 27   countries (Adhikari 2013). Water scarcity and host FIGURE   1.16 Financial market risks food insecurity could also contribute to instability A sudden reassessment of policy-related risks could trigger financial in the Middle East and Sub-Saharan Africa. market volatility and set back global activity. An uptick in the U.S. term Droughts and conflict have already led to premium from current low levels could raise long-term yields, and worsen intensifying risks of famine in Nigeria, Somalia, financing conditions for EMDEs. Given elevated private sector debt, some countries remain vulnerable to a sharp increase in borrowing costs. Some South Sudan, and the Republic of Yemen and countries also remain vulnerable to risks associated with further U.S. dollar contributed to further unrest in Syria. Finally, the appreciation, but foreign reserves are ample and external debt is threat of conflict in the Korean peninsula manageable in most cases. represents a significant source of regional and A. Economic policy uncertainty (EPU) B. Impact of global EPU and VIX global risk. and financial market volatility (VIX) shocks on global industrial production Downside risk: financial market stress Index Index Percentage points 350 70 0.0 Global EPU VIX (RHS) 300 60 A disorderly tightening of financing conditions or 250 50 -0.2 a sharp increase in financial market volatility from 200 40 -0.4 current low levels represent significant risks. These 150 30 -0.6 100 20 could be triggered by a number of factors. 50 10 -0.8 0 0 Repricing of policy-related risks -1.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2017 EPU VIX Since the start of 2017, financial market volatility C. U.S. 10-year term premium D. EMDE private sector debt has been low, despite elevated policy uncertainty. Percent 10-year term premium Percent of GDP This divergence is unusual (Figure 1.16). A 4.0 2000-current average 250 Range Median sudden reassessment of policy-related risks could 3.0 200 lead to abrupt adjustments in asset prices and safe- 2.0 150 haven flows, with adverse consequences for higher- 1.0 100 yielding assets, including those from EMDEs. In 0.0 50 general, high policy uncertainty is associated with -1.0 0 2017 2000 2002 2004 2006 2008 2010 2012 2014 2016 higher risk premiums as investors seek to hedge 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 against negative outcomes (Brogaard and Detzel 2015; Pastor and Veronesi 2013). Economic E. EMDE foreign reserves F. EMDE external debt policy uncertainty is generally a weak predictor of Months of imports Percent of exports 500 financial market volatility. However, specific 30 Range Median Range Median 400 events, such as the U.S. debt ceiling negotiations 25 20 300 in 2011, have provoked bouts of volatility and 15 200 sudden repricing of risks on international markets 10 100 (Hamilton 2017). In turn, both volatility and 5 0 policy uncertainty shocks can lead to adverse short 0 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 -term effects on activity, with the former generally 2015 having a larger impact (Alexopoulos and Cohen Sources: Baker, Bloom, and Davis (2015); Board of Governors of the Federal Reserve System; Bloomberg; Bank for International Settlements; Federal Reserve Bank of New York; Haver Analytics; 2015; Baker, Bloom, and Davis 2015; Jurado, World Bank. Ludvigson, and Ng 2015). Countries with large A. VIX is the implied volatility of option prices on the U.S. S&P 500. EPU is the Economic Policy Uncertainty index computed by Baker, Bloom, and Davis (2015). Last observation is April 2017 for exposures to international financial markets could EPU and May 24, 2017 for VIX. B. Cumulative impulse response of global industrial production growth after 12-months to a one- be particularly susceptible to these negative effects standard-deviation shock in global Economic Policy Uncertainty (EPU) and VIX. Data are in deviation from mean and scaled by the standard deviation. Estimation based on a Bayesian vector (Adrian, Stackman, and Vogt 2016). autoregression of global EPU, VIX, and global industrial production growth rate. Blue bars denote median responses and lines denote 16th-84th percentile confidence intervals. The sample period is 2000M1-2017M2. Sudden increase in borrowing costs C. Term premium estimates from the model in Adrian, Crump, and Moench (2013). Last observation is May 24, 2017. D.-F. Range indicates minimum to maximum of country sample. Changes in monetary policy expectations, D. Country sample includes Argentina, Brazil, Chile, China, Colombia, Czech Republic, Hungary, India, Indonesia, Malaysia, Mexico, Russia, Saudi Arabia, South Africa, Thailand, and Turkey. Last including a faster-than-expected normalization in observation is 2016Q3. U.S. policy, or signals of an earlier-than- E. F. Country sample includes Brazil, Bulgaria, China, Colombia, Mexico, Peru, India, Indonesia, Malaysia, Philippines, Thailand, Romania, South Africa, and Turkey. Last observation is April 2017 for anticipated exit from exceptional easing measures foreign reserves and 2015 for external debt. 28 CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017   the Euro Area and Japan, could trigger a in However,   there are several mitigating factors. The sudden increase in borrowing costs. A build-up of bulk of EMDE credit growth over the last decade inflation fears or the perception of increased has been in domestic currency. The number of macroeconomic risks could lead to an uptick in countries with currency pegs to the U.S. dollar has term premiums from current exceptionally low declined. The ratio of external debt to exports levels. Such events could trigger an abrupt remains in most cases markedly lower than in the deterioration in financing conditions for EMDEs early 2000s, despite some recent increases, and and a slowing of capital inflows—particularly if foreign reserves are generally ample. High higher yields do not reflect improved advanced- vulnerability to currency risks is confined to those economy prospects (Arteta et al. 2015). Sizable countries that still have elevated short-term external financing needs, limited levels of foreign foreign-currency-denominated debt (Chow et al. reserves, and elevated domestic debt expose 2015; Chui, Kuruk, and Turner 2016). various EMDEs to a sudden rise in borrowing costs. Rapid deleveraging could potentially Downside risk: impact of renewed sharp intensify slowdowns—including in China, where slide in oil prices on oil exporters private indebtedness and financial sector vulnerabilities remain elevated (Bernardini and A faster-than-expected rise in unconventional oil Forni 2017; World Bank 2016a; World Bank supplies, such as U.S. shale production, or 2017b). While vulnerabilities have somewhat faltering commitment of OPEC and non-OPEC diminished in EMDEs in recent years, the producers to additional cuts in output, could keep dispersion of vulnerabilities across countries oil markets oversupplied. This could lead to an widened in 2016 as commodity exporters faced abrupt slide in oil prices. continued challenges. For many oil-exporting EMDEs, a renewed sharp Further U.S. dollar appreciation decline in oil prices, after two years of difficult adjustments to the previous plunge, could Diverging monetary policies, with the U.S. substantially weigh on growth prospects. Federal Reserve raising policy rates well ahead of Financially constrained exporters with depleted other major central banks, has already contributed fiscal buffers could be forced into additional to a significant U.S. dollar appreciation. Fiscal consolidation measures, while deteriorating stimulus measures in the United States could current account positions could increase external intensify this trend. Safe-haven flows triggered by financing pressures. This could lead to renewed increased investor risk aversion, or unexpected currency depreciation and trigger a re-pricing of changes in trade or fiscal policies in the United credit and sovereign risks (Baffes et al. 2015). States, could also push up the value of the U.S. As highlighted by the early-2016 oil price drop, currency. Broad-based U.S. dollar appreciation has which heightened concerns about default risks in been associated historically with tighter global oil and gas companies, an abrupt decline in oil financing conditions and balance sheet pressures prices could also intensify corporate balance sheet for countries with large U.S. dollar debt exposure pressures among energy companies, which are (Bruno and Shin 2015). Debt levels in foreign among the most leveraged in EMDEs currency have increased in recent years, (IMF 2016b, Bank for International Settlements particularly among EMDE corporates. A sudden 2016, World Bank 2016a). Although banking strengthening of the U.S. dollar could contribute systems in most oil-exporting EMDEs have to rollover and currency risks for companies with become more resilient to oil price changes, unhedged foreign exchange exposures. For financial strains could intensify in the face of companies in commodity-related sectors, such persistently depressed prices. pressures can be amplified by the negative correlation between the U.S. dollar and In principle, these negative effects on oil producers commodity prices (Baffes et al. 2015). would be accompanied by real income gains for oil importers, offsetting the overall impact on global GLOBAL ECONOMIC PROSPECTS | JUNE 2017 CHAPTER 1 29 growth.   This offsetting effect is most likely when FIGURE   1.17 Risks linked to weak productivity and oil price declines are due to abundant supply, as investment growth opposed to weakening demand (Cashin, A key factor behind the slower growth potential in both advanced Mohaddin, and Raissi 2014; Cerdeiro and economies and EMDEs has been a deceleration in total factor productivity. Plotnikov 2017). However, renewed weakness and Investment growth slowed considerably in EMDEs, reducing the financial stress in large oil-exporting EMDEs contribution of capital accumulation to growth. could have adverse contagion effects on other A. Total factor productivity growth B. Investment growth economies through trade, financial market, and Percent Percent remittance flows (Huidrom, Kose, and Ohnsorge 2.0 Advanced economies EMDEs 15 Advanced economies EMDEs 2017; World Bank 2016c). Moreover, oil price 10 1.5 movements could have asymmetric effects—with 5 declines having a smaller positive effect on oil 1.0 0 -5 importers than increases having a negative one— 0.5 -10 due, for instance, to frictions associated with the -15 relocation of activity across sectors (Engemann, 0.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 1990-2000 2001-08 2010-14 Kliesen, and Owyang 2011; Hamilton 2011; Jo Sources: Penn World Table, World Bank. 2014). A. TFP growth measured at constant national prices and aggregated using 2011 U.S. dollars GDP weights. Sample includes 28 advanced economies and 68 EMDEs. B. Aggregate growth rates calculated using constant 2010 U.S. dollars gross fixed investment Downside risk: slowdown in potential output weights. growth Demographic pressures in advanced economies, Potential output growth has softened appreciably and in some large EMDEs, could also contribute in both advanced economies and EMDEs in to a lower rate of return on capital (Baker, De recent years, reflecting the combined deceleration Long, and Krugman 2005; Rachel and Smith in productivity and investment growth, albeit to 2015). Over time, capital deepening, which has different degrees. While baseline projections for been an important engine of growth in EMDEs both advanced economies and EMDEs assume over the last two decades, could further decelerate, some cyclical recovery in productivity and adding downward pressure to productivity and investment, risks to long-term growth remain potential output growth. predominantly on the downside. Policy challenges The trend deceleration in total factor productivity growth largely predated the global financial crisis, Challenges in major economies and it has been particularly pronounced in EMDEs since 2010 (Figure 1.17). This pattern Advanced economies have begun to shift away from a has been broad-based and is seen in more than 60 mix of exceptionally supportive monetary policy and percent of EMDEs. Weak productivity trends restrictive fiscal policy. Central banks in major could be associated with a slower rate of advanced economies face the challenge of normalizing innovation among companies and countries monetary policy without disrupting a fragile recovery operating at the technological frontier, and a or triggering financing market disruptions. slower pace of diffusion to companies and Expansionary fiscal policy would be appropriate in a countries operating below that frontier (Buera and number of economies, provided it is complemented Oberfield 2016; Andrews, Criscuolo, and Gal with measures to bolster medium-term fiscal 2015; Gordon 2014). sustainability. Globalization and technological progress have changed the demand for jobs and skills; The anticipation of lower future growth may lead accordingly, there is a need to support the adjustment to a decrease in current investment, depressing process for workers that are adversely affected. In aggregate demand in the short term and slowing China, avoiding a sharp slowdown and a disorderly capital accumulation over the longer term unwinding of financial vulnerabilities will require a (Blanchard, L’Huillier, and Lorenzoni 2013). careful balancing of policy objectives. 30 CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017   Monetary policy challenges in advanced FIGURE 1.18   helping to maintain supportive borrowing are economies conditions. In the Euro Area, quantitative easing is expected to be gradually unwound, as economic U.S. monetary policy normalization has been significantly slower than in past tightening episodes. Large central bank balance sheets might slack narrows and inflation moves toward policy constrain monetary policy actions in the case of a renewed downturn. objectives. However, a prolonged period of low inflation has made expectations more susceptible A. U.S. policy interest rates around B. G3 central bank public debt to negative shocks, encouraging the ECB to tightening cycles holdings maintain a highly accommodative stance over a Percentage point change from t=0 Percent of debt outstanding 3.5 1994 1999 2004 Current 50 sustained period of time (Ciccarelli et al. 2017). 3.0 2.5 40 The Bank of Japan has so far been successful in 2.0 30 stabilizing long-term interest rates around zero, 1.5 1.0 20 but this policy may only deliver a slow increase in 10 0.5 inflation (Cecchetti and Schoenholtz 2016). 0 0.0 Reserve Looking forward, the exceptionally large balance Bank of European Federal Japan Central -0.5 U.S. Bank -12 -6 0 Months 6 12 18 sheets and elevated government bond holdings of major central banks might constrain their ability Sources: Bank of Japan, Bloomberg, European Commission, Federal Reserve Bank of St. Louis, Federal Reserve Board, Haver Analytics, World Bank. to undertake further unconventional policies in A. t=0 refers to the start of U.S. monetary policy tightening cycles. Percentage point change from t=0 in monthly effective federal funds rates. Previous tightening cycles refer to those beginning in Janu- case of a renewed downturn. Fiscal policy would ary 1994, June 1999, and June 2004, with the current cycle having begun in December 2015. need to stand ready to implement counter-cyclical Dashed lines show market implied changes in the given rates over the next four months. Last obser- vation is May 24, 2017. measures in the event of future growth setbacks. B. Public debt held by the European Central Bank is calculated as the ratio of the Eurosystem's holdings of general government debt to general government debt outstanding. The Federal Reserve’s debt holding is in percent of publicly held U.S. Treasury securities. Data as of December 31, 2016. Fiscal policy in advanced economies Fiscal policy in advanced economies stopped being Monetary policy in advanced economies a drag on growth in 2016, for the first time since 2010 (Figure 1.19). This shift was visible in the A gradual pickup in inflation across advanced United States, Euro Area, and Japan, and it is economies has raised the prospects of less expected to continue to a lesser degree in 2017. In accommodative monetary policy. In the United the United States, where fiscal stimulus is under States, inflation and employment are already near consideration, a priority could be infrastructure central bank objectives, justifying continued policy spending in view of large unmet needs and of the normalization (Yellen 2017). A more expansionary elevated fiscal multipliers of such spending (Bivens fiscal policy stance could accelerate the pace of 2014). Improving public sector efficiency, interest rate increases, but the materialization of regulation, and private sector participation could downside risks to growth, due to policy changes or also increase economic returns from infrastructure other factors, could have the opposite effect. investment. As the U.S. economy is already Historically low equilibrium interest rates will operating close to full capacity, growth windfalls likely result in a lower terminal point for policy from fiscal stimulus measures could be short lived rates during this tightening cycle compared with and might be offset over time by pressures previous episodes (Figure 1.18). Over the longer associated with deteriorating public finances. term, this could increase the frequency and Under unchanged policies, public debt is already duration of periods when nominal policy interest expected to significantly increase over the next rates are constrained by the zero lower bound decade (CBO 2017). Unfunded tax cuts could add (Kiley and Roberts 2017). Such constraints have to the upward trajectory (Page 2017). In contrast, led to calls for higher central bank inflation tax and spending reforms that enhance targets, which would create additional space for productivity and are consistent with medium-term interest rate cuts in the future (Ball 2014; Ball et fiscal sustainability could deliver lasting benefits. al. 2016). In the Euro Area, a more expansionary fiscal In the Euro Area and Japan, large-scale uncon- policy stance to absorb remaining slack would be ventional policies continue to be in operation and appropriate for the region as a whole (European GLOBAL ECONOMIC PROSPECTS | JUNE 2017 CHAPTER 1 31 Commission   2016). However, countries with FIGURE   1.19 Fiscal policy challenges in advanced fiscal space are generally not those in the greatest economies need of stimulus. The absence of a more Fiscal policy in advanced economies was no longer a drag on growth in centralized fiscal capacity and strong coordination 2016, a first since 2010. A more expansionary fiscal stance in the Euro makes it more difficult to implement supportive Area would be warranted, but countries with fiscal space are generally not fiscal policies in a monetary union (Eyraud, those in most need of stimulus. Gaspar, and Poghosyan 2017; European A. Change in structural fiscal balance B. Structural fiscal balance and Commission 2014; Bańkowski et al. 2017). In and growth in advanced economies unemployment across Euro Area Japan, the government is debating whether fiscal countries Percentage points of potential GDP Percent Structural fiscal balance (percent of potential GDP) consolidation should be implemented before the Change in structural balance 1 1.2 3.0 inflation target is reached, with some arguing that 0.8 Real GDP growth (RHS) 0 fiscal policy should help complement monetary 0.4 2.5 -1 policy in stabilizing inflation (Sims 2016). 0.0 2.0 -2 -0.4 -0.8 -3 1.5 Structural policy in advanced economies -1.2 -4 -1.6 1.0 0 5 10 15 20 2010 2012 2014 2016 Unemployment rate (percent of labor force) In advanced economies, rising income inequality and stagnant median wages have fueled the Sources: Eurostat, International Monetary Fund WEO, World Bank. A. Structural fiscal balance is the cyclically-adjusted primary balance in percent of potential GDP. political debate on the benefits of globalization B. Last observation is 2016. and trade liberalization, amid a trend decline in the share of manufacturing jobs. This has led to calls for unwinding past trade liberalization efforts, FIGURE 1.20 Structural policy challenges in advanced and for increased protection for domestic industry. economies The last three decades have seen a decline of The last three decades have seen a decline in the share of manufacturing employment across major advanced economies. Since 2000, this decline manufacturing employment across most advanced has accelerated, particularly in the United States. Productivity gains, economies (Wood 2017). For instance, the share nevertheless, resulted in rising manufacturing output. of manufacturing jobs in total private employment in the United States, Germany, and Japan has A. Manufacturing as a share of total B. Advanced economies employment manufacturing productivity fallen by 10 percentage points since 1985 (Figure and employment 1.20). Over that period, the United States Percent Cumulative change since 2000, percent 40 U.S. Germany Japan 60 accumulated large goods trade deficits, but Japan 30 and especially Germany registered substantial 30 trade surpluses. Since 2000, the drop in 20 0 manufacturing jobs has accelerated, particularly in 10 -30 the United States, but productivity gains have 0 Euro Japan U.S. Euro Japan U.S. area area more than offset the decline, leading to a 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 Manufacturing Manufacturing continued rise in output. These common trends productivity employment highlight complex interactions between Sources: Federal Reserve Bank of St. Louis, Haver Analytics, Organisation for Economic Co- operation and Development, U.S. Bureau of Labor Statistics. technological change and globalization. A. U.S. data measures total employment on nonfarm payrolls. Last observation is 2016. Automation, shifts in production patterns, and B. Cumulative changes from 2000 to 2015. Manufacturing productivity is the gross value added per person employed. trade policies all played a role in driving labor market outcomes (Wood 2017; De Long 2017; employment services, and effective social Felipe and Mehta 2016; Autor, Dorn, and protection systems. Hanson 2016). Challenges in China Measures to support workers directly affected by sectoral shifts in employment, and to more widely The key policy challenge for China remains to spread the benefits of technological progress and manage a gradual deceleration to a sustainable globalization, should be reinforced. This includes growth rate in the medium term. Avoiding a sharp vocational training, life-long learning, better slowdown and a disorderly unwinding of financial 32 CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017   EMDE monetary policy   FIGURE 1.21 such   as wealth management products. Exchange rate flexibility has been enhanced, with the use of Inflation rates in commodity exporters and importers are converging. a basket of currencies rather than the U.S. dollar Declining inflation has enabled some central banks in commodity-exporting EMDEs to reduce policy rates. to determine the reference rate. The relaxation of foreign institutional investor rules and the opening A. Consumer price inflation in EMDEs B. Policy rate changes in EMDEs of the bond and currency derivatives market Percent, year-on-year, 3-month moving average should help promote foreign participation (IMF Basis point change from 1 year ago 5 Commodity exporters 500 Range Mean 2016c). Commodity importers 400 4 300 3 200 Despite considerable progress, there is a need to 100 2 0 further contain financial and fiscal vulnerabilities, 1 -100 -200 including rapid credit growth and high levels of 0 -300 debt. Financial and corporate sector reforms, Jan-13 May-13 Jan-14 May-14 May-15 Jan-16 Sep-13 Jan-15 May-16 Jan-17 Sep-14 Sep-15 Sep-16 -400 Commodity importers Commodity exporters including appropriate budget constraints on state- Sources: Haver Analytics, National central banks, World Bank. owned enterprises, could improve the allocation of A. Sample includes 75 commodity-exporting and 54 commodity-importing EMDEs and shows median capital. They would also help reallocate factors of in each respective group. Last observation is April 2017. B. Commodity importers include China, Hungary, India, Mexico, Philippines, Poland, Romania, production toward more productive sectors and Thailand, and Turkey. Commodity exporters include Brazil, Chile, Colombia, Indonesia, Malaysia, Peru, Russia, and South Africa. Last observation is April 2017. away from stagnating sectors with excess capacity, which would spur productivity. vulnerabilities accumulated during years of rapid Additional structural reforms could help China credit growth will require a careful balancing of shift its growth model from manufacturing to policy objectives. services, from investment to consumption, and from exports to domestic spending. China has China has initiated a wide range of reforms in significant potential for rapid urban development recent years. Efforts have focused on excess and technological transformation. Land and capacity reduction and re-employment of affected hukou (labor market) reforms could significantly workers. Measures to improve the viability of state lift urban growth and employment. Productivity -owned enterprises include the promotion of in rural areas could be bolstered by reorienting stronger participation of the private sector, more subsidy and price support programs toward the market discipline, and competition. In the oil and development of more efficient and sustainable gas sector, these efforts are being accompanied by agricultural production systems. During the a reorganization of the industry to separate reform period, counter-cyclical fiscal measures to functions in the value chains. Considerable support consumption and private investment progress has been made in household registration could smooth the transition, as long as they are reforms. Fiscal reform initiatives have focused on consistent with medium-term fiscal sustainability. addressing imbalances in revenue and expenditure The economic and social dislocations that might responsibilities across different levels of arise from enterprise restructuring could be government, the conversion of business taxes to addressed by targeted temporary income support value-added tax (VAT), tax cuts for small and high and by robust social protection programs. -tech firms, and reform of the personal income tax system. In addition, measures to improve local- Challenges in emerging and developing government debt management have been economies implemented, such as revisions of the budget law, market-based conversion of debt to bonds, and Inflation rates in commodity exporters and importers more effective monitoring and classification of are converging. Easing inflation is allowing local government debt. Financial regulation has policymakers in some commodity exporters to adopt a been tightened to contain financial sector more accommodative policy stance. Although the vulnerabilities, including through broader impact of the drop in commodity prices on regulatory oversight of off-balance sheet items government revenues in commodity exporters is GLOBAL ECONOMIC PROSPECTS | JUNE 2017 CHAPTER 1 33 beginning   to wane, fiscal space remains generally FIGURE   1.22 EMDE fiscal policy constrained across EMDEs. Policies that improve the The impact of the sharp drop in commodity prices on government revenues business climate and support investment are critical in commodity-exporting EMDEs is beginning to fade. But with fiscal space to boost long-term growth. In addition, policies that still constrained across EMDEs, consolidation will need to continue to set promote trade integration and address structural debt on a sustainable path, particularly in commodity exporters. impediments to trade will help counteract the A. Revenue and expenditure growth: B. Fiscal balance negative effects of trade policy uncertainty and rising commodity exporters protectionism. Percent, year-on-year Percent of GDP Energy exporters Revenue: Energy 2 Metals exporters 30 Revenue: Metals & agric. Agricultural exporters Monetary and financial policies 20 Expenditure: Energy Expenditure: Metals & agric. 0 Commodity importers 10 -2 Headline inflation in commodity exporters and 0 importers is converging (Figure 1.21). Stabilizing -10 -4 or appreciating exchange rates account for much -20 -6 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017 of the decline in inflation in commodity exporters since mid-2016, and inflation is already within the target bands in some countries (e.g., Brazil, C. Change in structural fiscal balance D. Fiscal sustainability gap Indonesia, Russia). In commodity importers, the Percentage point change Percent of GDP more recent increase in inflation reflects the lagged 0.6 0.0 -0.5 impact of rising energy prices in 2016. Easing 0.4 -1.0 0.2 inflation and subdued growth have led monetary -1.5 -2.0 0.0 policymakers in several major commodity -0.2 -2.5 -3.0 exporters to cut policy rates (e.g., Brazil, -0.4 -3.5 2014 2015 2016 2014 2015 2016 Colombia, Kazakhstan), despite rising interest 2014 2015 2016 2017 2014 2015 2016 2017 EMDE commodity EMDE commodity EMDE commodity EMDE commodity rates in the United States (IMF 2017c). importers exporters importers exporters Meanwhile, some commodity importers facing Sources: International Monetary Fund, World Bank. currency pressures have tightened policy amid A. Figure shows median in each country group. Sample includes 35 energy exporters and 56 metal and agricultural product exporters. Shaded areas indicate forecasts. rising inflation (e.g., Mexico, Turkey). B. Figure shows median in each country group. Sample includes 35 energy exporters, 34 agricultural product exporters, 20 metals exporters, and 62 commodity importers. C. Structural balance is the fiscal balance adjusted for the economic cycle and for one-off effects. Market concerns about financial stability in Figure shows median in each country group. Sample includes 17 commodity exporters and 22 commodity importers. Shaded areas indicate forecasts. EMDEs have receded relative to late 2016, when a D. Sustainability gap is measured as the difference between the primary balance and the debt- stabilizing primary balance, assuming historical average (1990–2016) interest rates and growth rates. tightening of global financing conditions led to A negative gap indicates that government debt is on a rising trajectory; a positive gap indicates government debt is on a falling trajectory. Figure shows median in each country group. Sample market volatility. This highlights the need to shore includes 44 commodity-exporting and 28 commodity-importing EMDEs. up buffers of liquidity and capital to mitigate future encounters with financial stress. In the Fiscal policy event of bouts of financial market stress, depending on country-specific circumstances, Fiscal consolidation continues in commodity- appropriate policy actions could include providing exporting EMDEs. Revenue losses from the sharp liquidity support to markets or implementing drop in commodity prices since 2014 deepened macro-prudential measures (e.g., Israel in August already large deficits in some countries (e.g., 2013; the Republic of Korea in July 2014; IMF Mongolia, República Bolivariana de Venezuela) 2014a). In conjunction with other appropriate and turned large surpluses into large deficits in monetary and financial policies, there could be a others (e.g., Oman, Saudi Arabia). More generally, role in some countries for the temporary and many commodity exporters still face substantial targeted use of capital controls (e.g., Colombia’s consolidation needs to ensure fiscal sustainability unremunerated reserve requirements during 2007- in the medium term (Figure 1.22). In energy 08), if needed and transparently implemented exporters, slowing expenditure growth and (Baba and Kokenyne 2011; Baffes et al. 2015; strengthening oil revenues in the second half IMF 2014b). of 2016 have helped stabilize deficits (e.g., Algeria, 34 CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 FIGURE 1.23  EMDE structural domestic policy foreign-currency   debt could consider shifting to challenges domestic currency financing, if feasible, to reduce the risks from currency depreciation. Policies directed at improving the overall business environment are critical to boosting investment, productivity, and long-term growth of output and employment. Well-managed public investment raises aggregate investment Building credibility—for instance, by setting directly and can crowd-in private investment. achievable fiscal targets and implementing them consistently, or establishing fiscal councils—will A. Factors influencing foreign B. Cumulative impact on private continue to be a policy priority (Debrun and investors’ location choice investment of a 1 percent increase in public investment Kinda, forthcoming). Replenishing or establishing Economic stability Percent deviation from the baseline stabilization funds, and improving tax 0.6 Political stability administration, will help rebuild fiscal space and Cost of raw materials increase resilience to shocks (World Bank 2015a). 0.4 Local market Transparancy of regulations Structural policy Availability of skilled labor 0.2 Labor costs Despite signs of pickup in EMDE activity in the 2.5 3.0 3.5 4.0 0.0 Average rank 1 year 2 years near term, these economies continue to face Sources: UNIDO (2011), World Bank. various structural challenges to boost growth over A. Average rankings according to a business survey of 7,000 companies in 19 Sub-Saharan African the longer run. On the domestic front, potential countries conducted from 2010-2011. B. Cumulative impulse responses of private investment to a positive shock to public investment, output growth in EMDEs is likely to further based on a sample of 8 EMDEs for the period 1998Q1-2016Q2. The model includes, in this order, real public investment, real GDP, real private investment, current account balance, and real effective decline as a result of weak productivity growth and exchange rate. The shock size is such that public investment increases by 1 percent from the base- line on impact. Blue bars represent median values and red error bars 16-84 percent confidence demographic pressures (IMF 2015). As the current intervals. global context illustrates, notable structural challenges to trade growth and growing Azerbaijan, Iraq, Kazakhstan). Among com- protectionist pressures are likely to weigh on the modity-importing EMDEs, slowing revenue recovery in global trade flows. This highlights the growth in 2016 contributed to a modest importance of efforts to further promote trade worsening of fiscal balances (e.g., China, integration. Dominican Republic, Egypt, Turkey). Domestic policy challenges With average oil and metals prices expected to rise in 2017, and amid ongoing fiscal consolidation, Modest growth rates in advanced economies, deficits in most commodity exporters are expected structural impediments to trade, and increasing to narrow this year. Structural budget balances in protectionist sentiment suggest that EMDEs may this group are projected to improve only need to become less reliant on external demand. marginally. With deficits predominating across Addressing domestic bottlenecks would help boost EMDEs, and debt on a rising path, especially in growth prospects in EMDEs. Policy measures that commodity exporters, fiscal space remains improve infrastructure, encourage innovation, constrained (Special Focus 1). In such an promote labor market and education reform, and environment, careful consideration of revenue and deepen within-country integration will foster expenditure reforms needed to support both potential growth (OECD and World Bank 2017; activity and long-term fiscal sustainability is key World Bank 2017g). EMDEs can reap substantial (Cordes et al. 2015). In particular, reallocating benefits from upgrading institutions and spending toward investment would help reduce improving the overall business environment the trade-off between the need for fiscal through more efficient regulations. consolidation and the goal of boosting growth. EMDE policymakers could also take advantage of In light of the sharp investment growth slowdown still benign financing conditions to lengthen the in recent years across EMDEs, structural policies maturity and duration of public debt as a to boost fixed capital formation are crucial. precaution against a further tightening of Policies that reduce economic and political borrowing conditions. Countries with elevated uncertainty, improve the transparency of GLOBAL ECONOMIC PROSPECTS | JUNE 2017 CHAPTER 1 35 regulations   through the elimination of FIGURE   1.24 EMDE structural trade policy challenges bureaucratic obstacles, streamline regulatory Deep trade agreements—those that contain substantial provisions beyond practices, and increase the availability of skilled the mere liberalization of border measures—have become more common labor are critical to enhance a country’s in recent years, although they still lag behind in EMDEs. attractiveness for investors (Figure 1.23). Measures directed at enhancing the overall business A. Depth of trade agreements B. Depth of trade agreements by country group environment through improved access to credit, Number of agreements 20 fewer obstacles to start a business, and enhanced 18 Low depth 16 contract enforcement would encourage greater 14 Medium depth High depth 16 market entry for new firms, job creation, and 12 10 12 investment (World Bank 2017h; Dabla-Norris, 8 8 6 Ho, and Kyobe 2016). In addition, reforms that 4 2 4 help level the playing field between private and 0 state-owned enterprises and promote the 0 1991 1994 1997 2000 2003 2006 2009 2012 2015 AE-AE AE-EMDE EMDE-EMDE participation of private investors in public-private Sources: Hofman, Osnago, and Ruta (2017); World Bank. partnerships can play an important role in A. Includes provisions outside the mandate of the WTO. Low depth refers to free trade agreements (FTAs) with less than 10 provisions. Medium depth refers to FTAs with between 10 and 20 provi- fostering capital formation (G20 2015). sions. High depth refers to FTAs with more than 20 provisions. B. Depth of trade agreements measured by average number of enforceable provisions for FTAs in 1958-2015. “AE” denotes advanced economies. Under the right circumstances—including the presence of economic slack and a strong institutional and legal environment—well- Policy measures aimed at removing domestic trade managed public investment directly raises bottlenecks and improving the availability of aggregate investment and also crowds-in private credit for exporters, along with increased trade investment. This effect can be boosted by facilitation efforts, may help counteract the accommodative financial conditions, as well as negative effects on EMDEs of trade policy reforms that reduce barriers to trade and foreign uncertainty. In addition, measures to address the investment and strengthen property rights (World adverse distributional consequences of trade Bank 2017a; Bruno, Campos, and Estrin 2017). liberalization could counteract rising protectionist sentiments. Trade policy challenges The withdrawal from existing trade agreements or Trade has been a catalyst for economic growth and unilateral increases in protectionist measures by stability. It boosts aggregate demand, enhances some major economies could spiral into productivity, and fosters job creation. However, widespread trade retaliation involving many rising protectionist pressures, coupled with countries, including EMDEs. This in turn could economic and trade policy uncertainty and various result in substantial income losses (Ossa 2014; structural factors, are weighing on the outlook for Perroni and Whalley 2000), as well as reverse the trade growth (Constantinescu, Mattoo, and Ruta gains from the last seven decades of trade 2017). liberalization (Figure 1.24). Such protectionist measures would likely hurt countries that rely Economic policy uncertainty is negatively heavily on trade, including the poorest EMDEs. associated with trade growth as it impacts exporters’ entry into foreign markets and the In the current environment, a renewed decision to undertake costly investments commitment by EMDE policymakers to trade associated with exporting (Special Focus 2). liberalization through bilateral and regional trade Exporting firms in EMDEs—in particular, low- agreements, coupled with commitments under the income countries—are likely to be WTO system, could act as a first line of defense disproportionately affected, as they rely more on against a potential uptick in protectionism (IMF, imports of capital equipment and intermediate World Bank, and WTO 2017; Bown et al. 2017). goods, and their costs associated with exporting The temptation for governments to resort to account for a larger share of total costs. unilateral increases in tariffs to improve their 36 CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017   Poverty and trade FIGURE 1.25 Ruta   2015). By addressing a number of dimensions that are crucial for well-functioning Protectionist measures could hurt EMDEs in general, and low-income countries (LICs) in particular, especially if they emanate from major supply chains—such as investment policy, services, economies, which are the main destination of their exports. Countries that standards, and customs procedures—deep trade graduated from low to middle income status generally had a higher degree agreements have had a positive impact on the of trade openness. formation of global value chains. A. Destination of EMDE exports B. Trade-to-GDP ratio in low-income countries, 2000-15 Poverty and trade Percent of total Percent of GDP 60 85 80 The poorest EMDEs rely heavily on trade for 40 75 economic growth. Many are highly dependent on 70 imports of capital goods. In addition, advanced 65 20 60 economies are important export destinations for 55 poor EMDEs (Figure 1.25). Protectionist trade 0 Advanced economies EMDEs 50 Graduated LICs Current LICs policies could impact the most vulnerable (since 2000) populations in EMDEs and would curtail efforts Sources: IMF Direction of Trade Statistics; World Development Indicators, World Bank. to reduce global poverty. A. Data reflect 2012-16 averages. B. Simple averages. Graduated LICs include 31 countries. Current LICs include 29 countries. Greater trade openness has been associated with lower poverty and inequality in EMDEs—with terms of trade can be reduced by an efficient and the important proviso that appropriate supporting rule-based trading system and trade agreements policies accompany it. Trade expansion appears to that promote inclusive and sustained growth. have been an important factor in the transition of countries out of low-income status. Declines in Deep trade agreements—i.e., those that include tariffs have been estimated to lead, on average, to substantial provisions beyond the mere proportionate increases in incomes of the poor liberalization of border measures, such as the (Dollar and Kraay 2004; Sachs and Warner 1995). removal of tariffs—are becoming more common Income inequality fell in many EMDEs after the in EMDEs, although they still lag those in extensive trade liberalization of the 1990s (World advanced economies. They cover an extensive set Bank 2017i). of provisions, including those that regulate competition and investment policy, consumer Measures that promote trade openness need to be protection, worker and environmental standards, accompanied by other policies to be effective in and the protection of intellectual property rights. addressing associated adjustment costs and Recent agreements concluded by the European improving the welfare of the population Union and some EMDE trading partners (such as (Goldberg and Pavckik 2004; Winters, Georgia, Ukraine, and Central America) have a McCulloch, and McKay 2004). These include very comprehensive set of provisions—above 30, measures to encourage savings and investment in compared to the average of 20 for advanced human and physical capital, as well as reforms to economies. improve governance and alleviate intra-national frictions associated with market imperfections and Deep trade agreements are associated with more transport costs (Bartley Johns et al. 2015). trade than shallow trade accords. The Without these accompanying policies, increased harmonization or mutual recognition of standards, trade openness might have an adverse impact on improved competition policy, and streamlined poverty and inequality (World Bank 2015b; Le labor and capital market regulations can boost the Goff and Singh 2013). This suggests the need for regional and global integration of EMDEs a multi-pronged agenda to pair trade liberalization (Hofmann, Osnago, and Ruta 2017). Provisions with improved human capital development and that improve the contractibility of inputs provided institutional reforms to ensure that the gains from by suppliers are associated with increased FDI increased trade contribute effectively to poverty (Ahcar and Siroën 2014; Osnago, Rocha, and reduction and the promotion of shared prosperity. GLOBAL ECONOMIC PROSPECTS | JUNE 2017 CHAPTER 1 37 TABLE     economies 1.2 List of emerging market and developing 1 Commodity Exporters2 Commodity Importers3 Albania* Madagascar Afghanistan Philippines Algeria* Malawi Antigua and Barbuda Poland Angola* Malaysia* Bahamas, The Romania Argentina Mali Bangladesh Samoa Armenia Mauritania Barbados Serbia Azerbaijan* Mongolia Belarus Seychelles Bahrain* Morocco Bhutan Solomon Islands Belize Mozambique Bosnia and Herzegovina St. Kitts and Nevis Benin Myanmar* Bulgaria St. Lucia Bolivia* Namibia Cabo Verde St. Vincent and the Grenadines Botswana Nicaragua Cambodia Swaziland Brazil Niger China Thailand Burkina Faso Nigeria* Comoros Tunisia Burundi Oman* Croatia Turkey Cameroon* Papua New Guinea Djibouti Tuvalu Chad* Paraguay Dominica Vanuatu Chile Peru Dominican Republic Vietnam Colombia* Qatar* Egypt, Arab Rep. Congo, Dem. Rep. Russia* El Salvador Congo, Rep.* Rwanda Eritrea Costa Rica Saudi Arabia* Fiji Côte d'Ivoire Senegal Georgia Ecuador* Sierra Leone Grenada Equatorial Guinea* South Africa Haiti Ethiopia Sri Lanka Hungary Gabon* Sudan* India Gambia, The Suriname Jamaica Ghana* Tajikistan Jordan Guatemala Tanzania Kiribati Guinea Timor-Leste* Lebanon Guinea-Bissau Togo Lesotho Guyana Tonga Macedonia, FYR Honduras Trinidad and Tobago* Maldives Indonesia* Turkmenistan* Marshall Islands Iran, Islamic Rep.* Uganda Mauritius Iraq* Ukraine Mexico Kazakhstan* United Arab Emirates* Micronesia, Fed. Sts. Kenya Uruguay Moldova, Rep. Kosovo Uzbekistan Montenegro Kuwait* Venezuela, RB* Nepal Kyrgyz Republic West Bank and Gaza Pakistan Lao PDR Zambia Palau Liberia Zimbabwe Panama 1 Emerging Market and Developing Economies (EMDEs) includes all those that are not classified as advanced economies. Advanced economies include Australia; Austria; Belgium; Canada; Cyprus; the Czech Republic; Denmark; Estonia; Finland; France; Germany; Greece; Hong Kong SAR, China; Iceland; Ireland; Israel; Italy; Japan; the Republic of Korea; Latvia; Lithuania; Luxembourg; Malta; Netherlands; New Zealand; Norway; Portugal; Singapore; the Slovak Republic; Slovenia; Spain; Sweden; Switzerland; the United Kingdom; and the United States. 2 Energy exporters are denoted by an asterisk. An economy is defined as commodity exporter when, on average in 2012-14, either (i) total commodities exports accounted for 30 percent or more of total goods exports or (ii) exports of any single commodity accounted for 20 percent or more of total goods exports. Economies for which these thresholds were met as a result of re-exports were excluded. When data were not available, judgment was used. 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January 2016. and Central Bank Independence.” Paper prepared Washington, DC: World Bank. for the 2016 Economic Symposium, Jackson Hole, Wyoming. _________. 2017a. Global Economic Prospects: Weak Investment in Uncertain Times. January Tabakis, C., and M. Zanardi. 2016. 2017. Washington, DC: World Bank. “Antidumping Echoing.” Economic Inquiry 55 (2): 655-681. _________. 2017b. “East Asia Pacific Economic Update.” April. World Bank, Washington, DC. UNIDO (United Nations Industrial Development Organization). 2011. Africa Investor Report: _________. 2017c. “Commodity Markets Out- Towards Evidence-Based Investment Promotion look: Investment Weakness in Commodity Expor- Strategies. December 2011. Vienna: United Nations. ting Countries.” World Bank, Washington, DC. GLOBAL ECONOMIC PROSPECTS | JUNE 2017 CHAPTER 1 45 _________.   2017d. “Russia Monthly Economic _________.   2017h. Doing Business 2017: Equal Developments.” March issue. World Bank, Opportunity for All. Washington, DC: World Bank. Washington, DC. _________. 2017i. Better Neighbors: Toward a _________. 2017e. “Europe and Central Asia Renewal of Economic Integration in Latin America. Economic Update.” May issue. World Bank, Washington, DC: World Bank. Washington, DC. Yellen, J. 2017. “From Adding Accommodation _________. 2017f. “Africa’s Pulse.” Volume 15, to Scaling It Back.” Speech at the Executives' Club April 2017, World Bank, Washington, DC. of Chicago, Chicago, Illinois, March 3. _________. 2017g. World Development Report 2017: Governance and the Law. Washington, DC: World Bank. SPECIAL FOCUS 1 Debt Dynamics in Emerging Market and Developing Economies: Time to Act? GLOBAL ECONOMIC PROSPECTS | JUNE 2017 SPECIAL FOCUS 1 49   Debt Dynamics in Emerging   Market and Developing Economies: Time to Act? Since the global financial crisis, rising private sector debt and deteriorating government debt dynamics have made some emerging market and developing economies (EMDEs) more vulnerable to financing shocks. Specifically, at end-2016, government debt exceeded its 2007 level by more than 10 percentage points of GDP in more than half of EMDEs and the fiscal balance worsened from its 2007 level by more than 5 percentage points of GDP in one-third of EMDEs. Although many EMDEs have strengthened their monetary policy frameworks and accumulated significant reserve buffers over the past two decades, they now need to shore up their fiscal positions to prevent sudden spikes in financing cost from forcing them into fiscal tightening. Introduction FIGURE SF1.1 Evolution of fiscal space in EMDEs In many EMDEs, both government and private sector debt has risen As growth becomes more durable and inflation sharply since the global financial crisis. During periods of severe financial rates get closer to central banks’ targets, monetary stress, private sector debt can burden public balance sheets.  policy in advanced economies is expected to A. Overall fiscal balance and B. Overall fiscal balance, by EMDE normalize. While this normalization is likely to government gross debt in EMDEs  region proceed smoothly, there is a possibility that it Percent of GDP Percent of GDP Percent of GDP could stir financial market volatility with adverse 2 60 15 2000 2007 implications for EMDEs (Arteta et al. 2015). In 0 50 10 2016 many EMDEs, both public and private sector 5 -2 40 vulnerability to financing cost spikes has risen 0 since the global financial crisis. -4 30 -5 Fiscal balance Government debt (RHS) -6 20 -10 Government debt dynamics in EMDEs have 2000 2004 2008 2012 2016 EAP ECA LAC MNA SAR SSA deteriorated since the global financial crisis (Huidrom, Kose, and Ohnsorge 2016; World C. Credit to the private sector in D. Government gross debt in selected EMDEs banking crises in EMDEs Bank 2015a). On average across EMDEs, Percent of GDP Percent of GDP Percent of GDP government debt has risen by 12 percentage points 60 EMDEs excluding China 100 120 of GDP since 2007 to 47 percent of GDP by EMDEs (RHS) Before After 2016, and fiscal deficits have widened to about 5 40 80 80 percent of GDP in 2016 from a surplus of roughly 40 1 percent of GDP in 2007 (Figure SF1.1). At end- 20 60 2016, government debt exceeded its 2007 level by 0 more than 10 percentage points of GDP in more 0 2000 2004 2008 2012 2016 40 Uruguay (2002) Thailand (1997) Ukraine (2008) Hungary (2008) than half of EMDEs. In addition, the fiscal Sources: International Monetary Fund, World Bank. balance worsened from 2007 levels by more than 5 A.-C. GDP-weighted averages. percentage points of GDP in one-third of A.C. The year of global recession (2009) is shaded in gray. B. EAP, ECA, LAC, MNA, SAR, and SSA stand for, respectively, East Asia and Pacific, Europe EMDEs. and Central Asia, Latin America and the Caribbean, Middle East and North Africa, South Asia, and Sub-Saharan Africa. D. The year of the onset of banking crises is in parentheses. Bars show average general government Benign financing conditions have contributed to gross debt-to-GDP ratios in the two years before and the two years after the onset of crises. shifts in the composition of government balance sheets, but not always to strengthen its resilience for example, the share of short-term components (Kose et al., forthcoming). In the median EMDE, of debt securities held by nonresidents has been smaller since 2007. However, the share of Note: This Special Focus was prepared by M. Ayhan Kose, nonresident-held debt itself has risen and the Franziska Ohnsorge, and Naotaka Sugawara. maturity of government debt has been on a 50 SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 FIGURE SF1.2  Debt relief under the HIPC and MDRI Long-term   government debt dynamics depend on initiatives debt and deficits but also on the macroeconomic context, especially the paths of GDP growth and Debt relief from both multilateral and bilateral creditors has helped significantly reduce debt in recipient countries. interest rates. This Special Focus examines the evolution of EMDE fiscal positions since the A. Government and external debt B. Total HIPC and MDRI debt relief by global financial crisis as well as during typical in HIPC multilateral creditors as of 2015 episodes of financial stress. To do so, it combines Percent of GDP 120 Percent of GDP 60 fiscal indicators and macroeconomic factors into a 100 Government debt External debt single measure of government debt dynamics: the 40 fiscal sustainability gap, defined as the difference 80 between the actual fiscal balance and the debt- 60 20 stabilizing fiscal balance.1 Specifically, this Special 40 Focus addresses the following questions: 20 0 2000 2004 2008 2012 2016 LAC SAR SSA  How have fiscal positions in EMDEs evolved  Sources: IMF (2016a), International Monetary Fund, World Bank. Note: There are a total of 36 Heavily Indebted Poor Countries (HIPC) that have reached completion since the global financial crisis? points as of April 2017: 5 from Latin America and the Caribbean (LAC), 1 from South Asia (SAR), and 30 from Sub-Saharan Africa (SSA). A. GDP-weighted average general government gross debt and external debt in 36 HIPC. The year of  How do fiscal positions typically evolve  global recession (2009) is shaded in gray. B. Blue bars refer to median, red lines to interquartile range. Both HIPC assistance committed (under during episodes of financial stress? the assumption of full participation of creditors) and MDRI (multilateral debt relief initiative) delivered by multilateral creditors as of end-August 2015 are included. GDP data are for 2015. Evolution of fiscal positions declining path. The share of government debt in Definitions. A simple summary metric of the foreign currency has increased in the median evolution of government debt dynamics is the EMDE since the late 2000s. fiscal sustainability gap (Blanchard 1993; Buiter 1985; Cottarelli and Escolano 2014; Escolano In addition, private sector debt in EMDEs has 2010). The fiscal sustainability gap compares a risen sharply since 2007, reflecting a combination country’s actual fiscal balance with its debt- of financial deepening and credit booms. Since stabilizing balance. The debt-stabilizing balance 2007, domestic bank credit to the private sector captures the long-term, cumulative impact of has risen by 12 percentage points of GDP to 52 sustained fiscal deficits on debt stocks under percent of GDP in 2016 (excluding China) and by assumed macroeconomic and financial conditions. more than 20 percentage points of GDP in one- For example, the debt burden generated by fifth of EMDEs. Firm-level data also suggest that sustained fiscal deficits will be easier to service if the corporate sector has become more financially interest rates are lower and growth (and, hence, fragile since the global financial crisis as solvency the potential for tax revenue raising) is stronger. positions weakened (Alfaro et al. 2017). During episodes of severe financial stress, private sector Specifically, the sustainability gap (pbsusgap ) for debt may become a contingent liability for the country c in year t is defined (in Kose et al., public sector. For example, before 2008, some forthcoming) as: EMDEs suffered systemic banking crises that  ic   c  * required governments to provide substantial pbsusgap  c ,t  1   pc , t    dc , financial support. Though typically not fully  c  reflected in deficits, such outlays significantly where p is the primary balance (in percent of increased public debt above and beyond increases GDP), i is the nominal interest rate,  the attributable to an accumulation of fiscal imbalances (Laeven and Valencia 2013). As these experiences show, the fiscal space implicit in low 1The analysis in this Special Focus is based on a new database on fiscal space, which includes a wide range of indicators of fiscal space debt levels can shrink rapidly during periods of for a large number of countries over the period of 1990-2016 (Kose elevated financial stress. et al., forthcoming). GLOBAL ECONOMIC PROSPECTS | JUNE 2017 SPECIAL FOCUS 1 51 nominal   GDP growth, and d * the target debt ratio FIGURE   SF1.3 Evolution of sustainability gaps  (in percent of GDP) defined as the country- specific historical median ratio. The interest rate In EMDEs, fiscal sustainability has deteriorated materially from pre-crisis averages. The deterioration was largest among commodity-exporting and nominal GDP growth are evaluated at their EMDEs. fixed long-term averages.2 Implicitly, this assumes that future trends will not deviate materially from A. Sustainability gap B. Fiscal balance, growth, and sustainability gap in EMDEs their long-term averages and that the historical Percent of GDP Percent of GDP Percent median debt level is an appropriate reference point 3 9 9 for future sustainable debt levels. This approach 6 6 0 yields similar results to that of a common bench- 3 3 mark: the median debt ratio across all EMDEs -3 0 0 over 1990-2016 (about 45 percent of GDP). A -6 -3 -3 Advanced economies Fiscal balance positive gap indicates a primary balance that EMDEs -6 Sustainability gap -6 Real GDP growth (RHS) would, over time, diminish government debt -9 1998 2001 2004 2007 2010 2013 2016 -9 1998 2001 2004 2007 2010 2013 2016 -9 below its historical median, if sustained. Con- versely, a negative gap shows a primary balance C. Share of EMDEs with sizable D. Sustainability gap, by that would increase the stock of debt above its negative sustainability gap commodity exporter status historical median.3 These sustainability gaps are Percent of EMDEs 100 All EMDEs Percent of GDP 6 Commodity exporters calculated for 72 EMDEs for 1990-2016.4 Commodity importers 80 3 60 Evolution. Since 2000, debt sustainability in 0 EMDEs has steadily improved as debt stocks 40 -3 declined and deficits narrowed or turned into 20 Commodity exporters Commodity importers surpluses. Among low-income countries, this 0 -6 1998 2001 2004 2007 2010 2013 2016 1998 2001 2004 2007 2010 2013 2016 partly reflected major debt relief initiatives such as the Highly Indebted Poor Countries (HIPC) Sources: International Monetary Fund, World Bank. Note: A sustainability gap is defined as the difference between the actual fiscal balance initiative and the Multilateral Debt Relief and the debt-stabilizing balance. The year of global recession (2009) is shaded in gray. A.B.D. GDP-weighted averages. Initiative (MDRI). The largest beneficiaries of B. Figure shows overall fiscal balance. these initiatives were EMDEs in Sub-Saharan C. Share of EMDEs with negative sustainability gaps of 1 percent of GDP or more. Sample includes 72 EMDEs, consisting of 44 commodity-exporting economies and 28 commodity-importing Africa (SSA) and Latin America and the economies. D. Samples include 44 commodity-exporting EMDEs and 28 commodity-importing EMDEs. Caribbean (LAC) (Figure SF1.2; IMF 2016a). Between the HIPC decision and completion dates, government debt in recipient countries fell by up SF1.3). In EMDEs, debt-reducing fiscal positions to 150 percentage points of GDP. (i.e., positive sustainability gaps of, on average, almost 2 percent of GDP) in 2007 turned into Following a steady pre-crisis improvement, debt-increasing fiscal positions (i.e., negative gaps government debt dynamics have deteriorated of more than 2 percent of GDP, on average) by sharply since the global financial crisis (Figure 2016. In the two-thirds of EMDEs that are commodity-exporting, this deterioration partly 2This assumption implies that variations over time in the reflected the sharp growth slowdown that sustainability gap are only attributable to changes in debt and deficits. accompanied the steep post-crisis slide in It also implies that sharp exchange rate swings do not affect the commodity prices. In commodity-importing benchmark stock of debt, although they affect fiscal balances through higher interest cost. EMDEs, fiscal positions remain weak as a result of 3Depending on country specifics, some countries may be able to fiscal stimulus implemented during the global support debt above historical medians (i.e., run negative sustainability financial crisis, chronic primary deficits, and, in gaps) for extended periods of time, whereas financial markets may force others to reduce debt below its historical median (i.e., run some EMDEs, anemic post-crisis growth. positive sustainability gaps). 4Sustainability can also be defined as the difference between the By 2016, fiscal positions in most EMDEs set level of government debt and the debt limit, defined as the value at government debt on clearly rising trajectories. which debt becomes unsustainable (Ostry et al. 2010). The existing literature employs different analytical frameworks to examine fiscal Negative sustainability gaps exceeded 1 percent of sustainability (e.g., Bohn 1998; Kose et al., forthcoming). GDP in roughly 80 percent of commodity- 52 SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017   Evolution of fiscal space in EMDE regions  FIGURE SF1.4 Regional   dimensions. Pre-crisis improvements and post-crisis deteriorations in government debt Sustainability gaps are particularly wide in MENA, LAC, and SSA, which dynamics were most pronounced in regions host a large number of commodity-exporting EMDEs, whereas rapid growth supported sustainability in EAP and SAR.   hosting large numbers of commodity-exporting countries (LAC, Middle East and North Africa A. Government gross debt B. Sustainability gap (MENA), and SSA; Figure SF1.4). In Europe and Percent of GDP Percent of GDP Central Asia (ECA), falling commodity prices in 80 2000 2007 2016 8 2000 2007 2016 the eastern part of the region and private sector 60 4 deleveraging in the western part following the 0 global financial crisis slowed growth from pre- 40 -4 crisis rates. This aggravated the challenges of debt 20 -8 sustainability despite fiscal consolidation efforts that kept fiscal deficits the smallest among EMDE 0 -12 EAP ECA LAC MNA SAR SSA EAP ECA LAC MNA SAR SSA regions. Sustainability gaps have remained positive since the global financial crisis in East Asia and C. Share of EMDEs with sizable D. Contribution to deviation of Pacific (EAP) but narrowed to below-zero in deterioration in fiscal space during regional sustainability gap 2007-16 from median EMDE, 2016 2016. In South Asia (SAR), sizable primary Percentage points of GDP deficits contributed to persistently negative Percent of EMDEs Government debt 100 Sustainability gap 3 sustainability gaps through most of the 2000s, 80 0 although deficits and negative sustainability gaps 60 -3 have narrowed since the global financial crisis. Fiscal balance 40 -6 Debt stock Interest rate Growth In 2016, the drivers of fiscal sustainability gaps 20 -9 Overall differed across regions. In MENA, EAP, LAC and 0 -12 EAP ECA LAC MNA SAR SSA EAP ECA LAC MNA SAR SSA SSA, above-median fiscal deficits widened sustainability gaps.5 In EAP, and to a much lesser Sources: International Monetary Fund, World Bank. Note: GDP-weighted averages. EAP, ECA, LAC, MNA, SAR, and SSA stand for, respectively, East extent in MENA, this was mitigated by above- Asia and Pacific, Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa, South Asia, and Sub-Saharan Africa. median growth and below-median interest rates C. For government debt, a sizable deterioration refers to an increase, between 2007 and 2016, by at least 10 percentage points of GDP in government gross debt (about top quarter of nine-year changes (in EAP). In LAC and to a lesser extent in SSA, in in all the EMDEs since 1990). For sustainability gaps, a sizable deterioration refers to a decline by at contrast, weak growth (in LAC) and elevated least 1 percentage point of GDP over 2007-16. D. Bars show the contribution of each factor to the deviation of the region’s GDP-weighted average interest rates (in both) compounded fiscal sustain- sustainability gap from the hypothetical median sustainability gap in 2016 assuming the median primary deficit (1.9 percent of GDP), median stock of debt (45 percent of GDP), median long-term ability concerns. In SAR, strong growth was the interest rate (9 percent), and median growth (7.4 percent). For example, MNA has, on average, about 9.2 percentage points of GDP wider negative sustainability gaps than the median EMDE, even main source of above-median sustainability gaps. though growth is higher than and interest rates are the same as in the median EMDE. Of this, about 9.9 percentage points is attributed to wider-than-median fiscal deficits that are only partially offset by faster-than-median growth (by 0.9 percentage points of GDP). Deep fiscal deteriorations have taken place throughout SSA and LAC (IMF 2016b; World exporting EMDEs and in about 40 percent of Bank 2017a, 2017b). On average, fiscal commodity-importing EMDEs. In more than 70 sustainability gaps widened between 2007 and percent of EMDEs, debt dynamics had worsened 2016—by 4 percentage points of GDP (to -3 materially (i.e., sustainability gaps had deteriora- percent of GDP) in SSA and by 5 percentage ted by more than 1 percentage point of GDP) points of GDP (to -4 percent of GDP) in LAC. from 2007. In principle, temporary negative This deterioration reflects both rising debt levels, sustainability gaps that are quickly reversed would especially in SSA, and widening fiscal deficits, be of limited concern; however, sustainability gaps especially in LAC. The erosion of fiscal and fiscal deficits in EMDEs have worsened sustainability was widespread in both regions: In steadily since 2012. That said, in 27 percent of SSA, the share of EMDEs with sizable EMDEs, debt dynamics in 2016 were still more favorable than in 2000, when a period of steady 5For comparison, the median sustainability gap is defined as that implied by the median primary deficit (1.9 percent), median stock of improvement began that lasted until the global debt (45 percent of GDP), median growth (7.4 percent) and median financial crisis. long-term interest rate (9 percent). GLOBAL ECONOMIC PROSPECTS | JUNE 2017 SPECIAL FOCUS 1 53 deterioration   in sustainability gaps (i.e., worsened FIGURE   SF1.5 Debt dynamics around financial stress by 1 percentage point of GDP or more) over events and in 2016  2007-16 was 80 percent; in LAC, 85 percent of Within two years of financial stress episodes in EMDEs, government debt economies in the region experienced sizable typically returns to a stable path. deteriorations over the same period. In both regions, improvements in government debt A. Sustainability gap B. Government gross debt dynamics that occurred in the early 2000s were Financial stress Financial stress Percent of GDP Percent of GDP unwound by 2016. 4 Interquartile range 120 Interquartile range Current period (t = 2016) Current period (t = 2016) 2 100 80 Weakening government debt dynamics in those 0 60 regions were also accompanied by a rapid increase -2 40 in private sector debt, although from modest -4 20 initial levels, reflecting a combination of financial -6 0 t-3 t-2 t-1 t t+1 t+2 t+3 t-3 t-2 t-1 t t+1 t+2 t+3 deepening and credit booms (World Bank 2016). Year Year In 2016, private credit by domestic banks averaged 48 percent of GDP in LAC and 29 C. Overall fiscal balance D. Credit to the private sector percent of GDP in SSA. In one-third of EMDEs Percent of GDP Financial stress Percent of GDP in SSA and more than one-quarter of EMDEs in 2 Interquartile range Current period (t = 2016) 50 LAC, private sector credit rose by more than 10 0 40 Financial stress Interquartile range percentage points of GDP between 2007 and -2 30 Current period (t = 2016) 2016. -4 20 -6 10 Fiscal positions in episodes -8 t-3 t-2 t-1 t t+1 t+2 t+3 0 t-3 t-2 t-1 t t+1 t+2 t+3 Year Year of financial stress Sources: International Monetary Fund, World Bank. Note: Year t refers to the year of onset of financial stress episodes. The solid blue lines are simple averages for all episodes, while the dashed blue lines show the interquartile range. The red line is The deterioration in government debt dynamics shown for reference and based on all EMDEs, although it is not a stress episode. Financial stress episodes are taken from Gourinchas and Obstfeld (2012) and Laeven and Valencia (2013). When since the global financial crisis is considerably consecutive events are identified within a five-year period in a country, the one associated with the more persistent than after previous episodes of lowest real GDP growth is used. A.-C. Separately, the statistical significance of restored government debt dynamics in two and three financial stress. For EMDE commodity exporters, years after financial stress events, from deteriorations during stress events, is confirmed in a linear regression of each fiscal indicator on dummy variables for financial stress events (with up to three such episodes of financial stress can also be lags and leads), with country- and year-fixed effects. C. Samples are restricted to episodes where data on sustainability gaps are available. associated with terms-of-trade shocks. EMDEs typically emerge within two years of such episodes with restored government debt dynamics. After adverse terms-of-trade shocks, a deterioration in In the run-up to and during these stress episodes, government debt dynamics is typically rapidly debt dynamics typically deteriorated somewhat as reversed. fiscal balances and sustainability gaps weakened, government debt increased, in part because of Financial stress episodes. To analyze the support to banking systems (Tagkalakis 2013), evolution of fiscal debt sustainability around and (often) exchange rate depreciation raised the financial stress events since 1990, 117 episodes are local currency value of government debt. identified in 94 EMDEs for which data on However, within two years of financial stress government debt, fiscal balance, sustainability episodes, fiscal debt sustainability improved and gaps, and private sector credit are available debt returned to a stable path. This improvement (Gourinchas and Obstfeld 2012; Laeven and may have partly reflected debt restructuring and Valencia 2013). Figure SF1.5 presents the the loss of access to financing that forces evolution of debt sustainability around these stress governments to rein in spending or raise revenues. episodes, including banking, currency and debt crises, and compares these events against recent Oil price plunges. Some of the sharpest post-crisis developments. deteriorations in fiscal positions have been among 54 SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 FIGURE SF1.6  Debt dynamics in EMDE oil exporters collapses   in global oil prices (in 1991, 1998, 2001, around oil price plunges   2008, and 2014), as identified in World Bank (2015b).6 Oil price plunges are historically accompanied by deteriorating fiscal debt sustainability in oil exporters, reflecting shrinking oil revenues, and weaker growth, but fiscal positions recover quickly after the initial shock. Fiscal positions deteriorated sharply during past oil price plunges but subsequently rebounded as a A. Sustainability gap B. Government gross debt result of a pro-cyclical fiscal tightening. Initially Percent of GDP Past oil price plunges Percent of GDP Past oil price plunges debt-reducing fiscal positions (i.e., positive 9 Interquartile range 80 Interquartile range Latest plunge (t = 2014) sustainability gaps of 3 percent of GDP) in the Latest plunge (t = 2014) 6 60 year before the average oil price plunge turned 3 into debt-increasing fiscal positions (i.e., negative 40 0 sustainability gaps of 1 percent of GDP), on -3 20 average, in the year following the plunge as -6 0 resource revenues declined. Within two years after t-3 t-2 t-1 t t+1 t+2 t+3 t-3 t-2 t-1 t t+1 t+2 t+3 Year Year the oil price plunge, however, sustainability gaps and fiscal balances were restored close to their pre- C. Overall fiscal balance D. Credit to the private sector plunge levels. After a steep increase in the wake of Percent of GDP Past oil price plunges Percent of GDP Past oil price plunges the oil price plunge, government debt returned to 8 Interquartile range Latest plunge (t = 2014) 50 Interquartile range Latest plunge (t = 2014) a stable path. Depending on country 4 40 circumstances and the depth of the growth 0 30 slowdown triggered by the oil price plunge, private 20 credit may rise (Miyajima 2017) or decline -4 10 (Barajas et al. 2010). On average, a small increase -8 0 in private credit in the year following the oil price t-3 t-2 t-1 t t+1 t+2 t+3 t-3 t-2 t-1 t t+1 t+2 t+3 Year Year plunge is mostly reversed in the subsequent years. Sources: International Monetary Fund, World Bank. Note: Year t refers to the year of oil price plunges. Past oil price plunges include collapses in global oil Comparison of current fiscal positions with prices in 1991, 1998, 2001, and 2008 (World Bank 2015b). Simple averages of 36 EMDE oil exporters in all episodes. The red lines are for the latest plunge starting in 2014. historical experience. In 2016, despite lower C. Samples are restricted to episodes where data on sustainability gaps are available. government debt levels on average, government debt dynamics compared unfavorably with those on the eve of typical financial stress episodes and energy exporters. Energy-exporting EMDEs rely oil price plunges. At -3.5 percent of GDP, heavily on fiscal revenues from the resource sector. sustainability gaps in 2016 were weaker than those For example, in 2014, on the eve of the most prior to the average financial stress episode recent plunge in oil prices, hydrocarbon revenues (although still within the range of such episodes). accounted for more than half of fiscal revenues in This mainly reflected the rapid deterioration in Angola, Algeria, Azerbaijan, Iraq, Kuwait, fiscal balances in commodity-exporting EMDEs. Nigeria, Saudi Arabia, and the United Arab Emirates, and more than one-quarter of revenues Notwithstanding weaker fiscal positions, non- in Mexico, the Islamic Republic of Iran, fiscal buffers have strengthened in EMDEs over Kazakhstan, and the Russian Federation. The the 2000s. Monetary policy frameworks have subsequent plunge in oil prices has forced some improved. A growing share (more than one- energy-exporting economies into severe fiscal adjustment and reserve losses (Danforth, Medas, and Salins 2016). Fiscal positions have deterio- 6The most recent oil price decline resembles that of 1985-86. The 1985-86 oil price slump was also associated with changing supply rated sharply in energy-exporting EMDEs, but conditions, as OPEC reverted to its production target of 30 million less sharply than in earlier episodes of oil price barrels per day despite rising unconventional oil supply from the plunges, albeit from a weaker starting position. North Sea and Mexico (World Bank 2015b). Prices dropped 60 percent from January to July 1986, ringing in two decades of low oil Figure SF1.6 illustrates fiscal developments in prices—in contrast with other similarly sharp oil price drops that energy-exporting EMDEs during the five major were quickly reversed. GLOBAL ECONOMIC PROSPECTS | JUNE 2017 SPECIAL FOCUS 1 55 quarter)   of EMDEs with sizable negative FIGURE   SF1.7 Vulnerabilities and buffers in EMDEs sustainability gaps in 2016 anchored monetary policy in inflation-targeting regimes and allowed In several EMDEs, weak fiscal positions coincide with elevated private debt. However, improved external buffers and monetary policy frameworks greater exchange rate flexibility (Figure SF1.7). could help mitigate risks. International reserves in these economies rose from 8 percent of GDP in 2000 to 20 percent of A. Sustainability gap, by level of B. Private debt, by level of private debt, 2016 sustainability gap, 2016 GDP in 2016, on average. Before the oil price Percent of EMDEs Percent of EMDEs collapse of mid-2014, some energy exporters had 100 100 Positive Moderate accumulated sovereign wealth funds with assets 80 80 Elevated amounting to more than one-third of GDP (e.g., 60 Moderate negative 60 High Algeria, Azerbaijan, Botswana, Iraq, Kazakhstan, 40 Sizable 40 negative Kuwait, Norway, Saudi Arabia, the United Arab 20 20 Emirates; World Bank 2015a). Their use helped 0 0 High Elevated Sizable negative Moderate negative ease exchange rate and fiscal adjustments to the Private debt Sustainability gap sharp drop in oil prices since mid-2014. C. International reserves, excluding D. EMDEs with floating exchange rate gold regimes Conclusion Percent of GDP 25 Percent of EMDEs 50 40 Weak post-crisis growth and, for commodity 20 exporters, sharp commodity price declines have 15 30 eroded fiscal positions in many EMDEs. These 10 20 developments have limited their ability to 5 10 effectively employ fiscal policy to weather 0 0 financing shocks (Huidrom et al. 2016). More 2000 2004 2008 2012 2016 2003 2010 2016 than 70 percent of EMDEs—and more than four- E. Sovereign wealth fund assets F. EMDEs with inflation-targeting fifths of those in SSA and LAC—now possess under management, 2015 frameworks and central bank considerably worse government debt dynamics independence (with a deterioration in sustainability gaps of more Saudi Arabia Kazakhstan Percent of EMDEs 30 Index, 0-15 [best] 7 than 1 percentage point of GDP) than in 2007. Botswana Trinidad and Tobago 6 Algeria 20 If fiscal positions are weak on the eve of financial Chile Russian Federation 5 stress episodes or, in the case of commodity Senegal 10 Peru 4 exporters, commodity price plunges, a sharp Bolivia Inflation-targeting frameworks Central bank independence (RHS) increase in financing costs may force governments 0 30 60 90 120 Percent of GDP 0 3 2000 2004 2008 2012 2016 into a pro-cyclical fiscal tightening. This—as well as debt restructurings or rapid inflation—may Sources: Dincer and Eichengreen (2014), Hammond (2012), International Monetary Fund, Sovereign Wealth Fund Institute, World Bank. have bolstered fiscal sustainability during typical A.B. Sample includes 70 EMDEs where data on sustainability gaps and private debt are available in 2016. Sustainability gaps are considered to be “sizable negative” when negative gaps are in excess financial stress episodes in the past; however, in of 1 percent of GDP and “moderate negative” when negative gaps are below 1 percent of GDP. “High” private debt is defined as private sector credit in the top quartile of the distribution among 70 the current environment such pro-cyclical fiscal EMDEs during 2000-16 (53 percent of GDP). “Elevated” private debt is defined as private sector tightening might further retard the recovery. credit in the second highest quartile (32-53 percent of GDP). Charts show the share of EMDEs with respective levels of sustainability gaps out of those with high or elevated private debt (A), and the share of EMDEs with respective levels of private debt out of those with “sizable negative” or “moderate negative” sustainability gaps (B). Weakening government debt dynamics have been C.-F. Sample includes 46 EMDEs with “sizable negative” sustainability gaps (in excess of 1 percent of GDP) in 2016. accompanied by mounting private sector debt. C.F. The year of global recession (2009) is shaded in gray. While most post-crisis credit booms in EMDEs C. GDP-weighted average. D. Floating exchange rate regimes are those classified as floating, free floating, or independently have subsided, they have left a legacy of elevated floating. Excluding countries with no separate legal tenders, currency boards, conventional fixed pegs, stabilized arrangements, crawling pegs, crawl-like arrangements including crawling bands, debt in some EMDEs (World Bank 2016). By pegged exchange rates within horizontal bands, other managed (floating) arrangements (IMF 2016c). 2016, almost two-thirds of EMDEs with high E. For countries with multiple sovereign wealth funds, the sum of all funds’ assets is presented. Countries where the size of assets under management in their funds is less than 3 percent of GDP private sector debt also had sizable negative are not shown. F. Central bank independence is a simple average and measured as an index ranging from 0 to 15, sustainability gaps; conversely, two-thirds of showing the independence and transparency of central banks, based on multiple criteria in central bank objectives, institutions, operations, and policies. 56 SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 EMDEs   with sizable negative sustainability gaps reallocation   of expenditures away from less had above-median private debt. In these countries, efficient expenditures (often subsidies) towards bouts of financial stress could curtail both private more growth-enhancing or better-targeted ones and public sector activity, with weaknesses in both (such as public spending or means-tested income amplifying each other. support) can be considered. In low-income countries, strong revenue bases and improvements While monetary policy normalization in major in spending efficiency are essential to finance advanced economies will, in all likelihood, proceed investment needed to achieve their development smoothly, there remains a risk of episodes of goals (Baum et al. 2017). financial market volatility. These episodes could be accompanied by sharp increases in financing In addition to fiscal positions, improved policy cost for EMDEs. Against this backdrop, the frameworks and reserve buffers can mitigate the simultaneous weakening of government and impact of terms of trade shocks (Adler, Magud, private sector balance sheets underscores the need and Werner 2017). A growing number of EMDEs to shore up fiscal positions. employ inflation targeting and allow greater exchange rate flexibility to absorb shocks. On In the short term, while global financial average, reserve buffers have strengthened conditions remain benign, measures to strengthen significantly and allowed, especially, energy- the resilience of government balance sheets can be exporting EMDEs to soften the adjustment to prioritized. In particular, some EMDE prospects of lower commodity prices. governments with ample market access can take advantage of still-low borrowing costs to lengthen the maturity profile of their debt or shift its References currency composition toward domestic currency Adler, G., N. E. Magud, and A. Werner. 2017. (World Bank 2015a). Such immediate steps can “Terms-of-Trade Cycles and External be complemented with broader public debt Adjustment.” Working Paper 17/29, International management reform measures. Depending on Monetary Fund, Washington, DC. country circumstances, these range from better coordination between debt management, cash management and fiscal policy to legislation and Alfaro, L., G. 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SPECIAL FOCUS 2 Arm’s-Length Trade: A Source of Post-Crisis Trade Weakness GLOBAL ECONOMIC PROSPECTS | JUNE 2017 SPECIAL FOCUS 2 61   Arm’s-Length   Trade: A Source of Post-Crisis Trade Weakness Trade growth has slowed sharply since the global financial crisis. Based on U.S. trade data, arm’s-length trade—trade between unaffiliated firms—accounts disproportionately for the overall post-crisis trade slowdown. This is partly because arm’s-length trade depends more heavily than intra-firm trade on sectors with rapid pre-crisis growth that boosted arm’s- length trade pre-crisis but that have languished post-crisis, and on emerging market and developing economies (EMDEs), where output growth has slowed sharply from elevated pre-crisis rates. Unaffiliated firms may also have been hindered more than multinational firms by constrained access to finance during the crisis, a greater sensitivity to adverse income and exchange rate movements, heightened policy uncertainty, and their typical firm-level characteristics. Introduction FIGURE SF2.1 Trade growth Since the global financial crisis, trade growth between unaffiliated Global trade volume growth reached a post-crisis companies (“arm’s-length”) has slowed considerably more steeply, and from more elevated pre-crisis rates, than between related firms (“intra- low of 2.4 percent in 2016—significantly below firm”). The resilience of multinationals was also reflected in the robust the pre-crisis average of 7.6 percent. Cyclical value added growth of their foreign affiliates. factors, such as weak global demand, low commodity prices, and slower growth in China A. U.S. export growth B. U.S. import growth have all contributed to the trade deceleration. In Percent 2002-08 2010-14 Percent 2002-08 2010-14 addition, structural factors have lowered trade’s 14 14 12 12 responsiveness to global output expansion (World 10 10 Bank 2015a; Constantinescu, Mattoo, and Ruta 8 8 2015). 6 6 4 4 2 2 The maturing of global value chains is a key 0 0 structural factor contributing to the recent trade Arm's-length Intra-firm Arm's-length Intra-firm slowdown.1 Global value chains often involve C. Global GDP and foreign affiliates D. Top 5 multinationals, 2015 numerous cross-border operations, conducted value added either “intra-firm,” that is, between firms related Percent 2002-08 2010-14 US$, billions Foreign sales Total sales through ownership or control, or between 12 300 Thousands 250 unaffiliated firms at “arm’s-length.” A firm’s 10 200 150 100 decision between arm’s-length and intra-firm 8 50 6 0 transactions has its roots in the underlying Total SA (FRA) BP (U.K.) China Ntl Offshore Shell (U.K.) Toyota (JAP) Vale SA (BRA) GE (U.S.) Petronas (MYS) Shipping (CHN) América Móvil China Ocean 4 (MEX) motivation for vertical integration (or lack Oil (CHN) 2 thereof) and foreign direct investment. Firms 0 GDP Value added of choose to internalize transactions if the cost of foreign affiliates AEs EMDEs performing these through the market is higher Sources: U.S. Census Bureau, UNCTAD. than internal costs (Coase 1937). In particular, A.B. U.S. exports and imports of goods based on data from the U.S. Census Bureau. Global data is not available. contract enforcement imposes costs when C. Nominal terms. Value added of foreign affiliates is based on estimates from various editions of UNCTAD’s World Investment Report. contracts are incomplete (Williamson 1985; D. Ranked by foreign assets in 2015. Excludes multinational companies in the financial sector. AEs stands for advanced economies. BRA=Brazil, CHN=China, FRA=France, JAP=Japan, MEX=Mexico, MYS=Malaysia. Note: This Special Focus was prepared by Csilla Lakatos and Franziska Ohnsorge. 1The expansion of global value chains contributed significantly to Grossman and Hart 1986). When contracts are the rapid rise in trade growth during 1985-2000. However, during 2000-16, growth in value chains has stabilized (Haugh et al. 2016; incomplete and their enforcement is costly, firms Constantinescu, Mattoo, and Ruta 2015). may prefer vertical integration and internal 62 SPECIAL FOCUS 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 FIGURE SF2.2  Role of the United States in trade and   cross-border trade transactions, additional In foreign direct investment considerations come into play. Firms may favor arm’s-length transactions when they seek access to The United States plays an important role in global trade and foreign direct investment and is deeply integrated into global value chains. export markets similar to their home markets and when technology, knowledge, or resource transfers A. Global trade B. U.S. trade are not required (Dunning and Lundan 2008; Constant 2010 US$, trillions US$, trillions Lanz and Miroudot 2011). As a result, arm’s- 30 Actual 2000-07 trend 4 Actual 2000-07 trend 25 length transactions are more prevalent in low- 20 3 skilled sectors and among less productive firms 15 2 (Corcos et al. 2013). 10 1 5 In practice, multinationals employ intra-firm and 0 0 arm’s-length transactions to varying degrees. In 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2015, intra-firm transactions are estimated to have accounted for about one-third of global C. U.S. share of global trade and FDI D. Countries for which the United States is the largest export exports (UNCTAD 2016). Vertically integrated destination and import source multinational companies, such as Samsung Elec- Percent of total Percent of countries 25 25 tronics, Nokia, and Intel, trade primarily intra- Total EMDE 20 20 firm. Samsung, the world’s biggest commu- 15 15 nications equipment multinational, has 158 subsidiaries across the world, including 43 10 10 subsidiaries in Europe, 32 in China and 30 in 5 5 North and South America (Samsung 2014). 0 Merchandise trade FDI stocks 0 Exports Imports Other multinationals, such as Apple, Motorola, and Nike, rely mainly on outsourcing, and hence E. Share of U.S. multinationals in F. U.S. firms participation in global on arm’s-length trade with non-affiliated suppliers largest 100 non-financial value chains (Lanz and Miroudot 2011). multinationals Percent of total Percent of exports 35 45 Domestic VA sent to third economies Multinational companies and their affiliates Foreign VA content of exports 30 40 35 accounted for one-tenth of global GDP and their 25 20 30 24.9 sales amounted to about half of global GDP in 25 15 20 19.4 2015 (UNCTAD 2016; Figure SF2.1). The 10 15 10 world’s largest multinationals (Shell, Toyota, and 5 5 11.4 15.0 General Electric in advanced economies; China 0 0 Assets Sales Employment 1995 2011 National Offshore Oil, Vale SA, and Petronas in Sources: UNCTAD, World Bank, WTO. EMDEs) are systemically important in both their A.B. Includes merchandise and services imports. home and host economies. Post-crisis, foreign C. Total of merchandise exports and imports and total of inward and outward FDI stocks. D. The sample includes 190 countries, of which 139 EMDEs, for exports and 189 countries, of which affiliates of multinational companies have fared 139 EMDEs, for imports. better than their domestic counterparts and F. VA refers to value added. contributed more significantly to the recovery of global GDP. For example, during 2010-14, the ownership of assets (Hart and Moore 1990; value added of multinationals grew faster-than- Antras 2015).2 average, at 6.6 percent—well above global GDP growth of 4.4 percent. Unfortunately, data on global intra-firm trade are Incomplete contracts can result in underinvestment when firms 2 undertake significant relationship-specific investments. Parties to a not available. However, a unique dataset on contract may underinvest in expectation of their counterpart not bilateral U.S. exports and imports can provide an complying with the terms of a contract. As suppliers often customize indication of developments in intra-firm trade their products to fit the needs of a specific buyer and buyers undertake significant investment specific to a particular supplier, growth. The United States plays an important role such cost could be significant. in global trade (Figure SF2.2): it accounts for GLOBAL ECONOMIC PROSPECTS | JUNE 2017 SPECIAL FOCUS 2 63 about   11 percent of global goods trade and 23 FIGURE   SF2.3 Characteristics of U.S. intra-firm and percent of global foreign direct investment (FDI) arm’s-length trade stocks. It is the largest export destination for one- Just over half of total U.S. trade is conducted at arm’s-length. Arm’s-length fifth of the world’s countries and the largest transactions account for a larger share of U.S. trade with EMDEs than with import source for one-tenth. U.S. multinationals advanced countries and are more common in final goods trade. U.S. trade account for about 30 percent of the employment with EMDEs has slightly shifted towards intra-firm transactions since the global financial crisis.  and sales of the world’s largest 100 non-financial multinational companies. A. Share of intra-firm exports in total B. Share of intra-firm imports in total U.S. exports U.S. imports Most of the post-crisis slowdown in U.S. trade Percent of U.S. exports Percent of U.S. imports 60 60 growth can be attributed to the sharp slowdown in 50 50 arm’s-length rather than intra-firm trade. By 40 40 2014, intra-firm trade growth had returned to 30 30 near pre-crisis rates while arm’s-length trade 20 20 growth has lagged significantly below elevated pre- 10 10 crisis rates. 0 0 Overall AEs EMDEs Overall AEs EMDEs This Special Focus addresses the following C. Structure of U.S. exports D. Structure of U.S. imports questions: Percent of U.S. exports Intermediates Percent of U.S. imports Intermediates Capital goods Capital goods Final goods Final goods 100  What are the characteristics of intra-firm and  100 14 12 29 16 80 80 arm’s-length trade? 33 30 36 60 60 22  How have intra-firm and arm’s-length trade  40 58 40 53 49 48 evolved since the crisis? 20 20 0 0 Arm's length Related party Arm's length Related party  What accounts for the sharp post-crisis  slowdown in arm’s-length trade? E. Evolution of intra-firm exports in F. Evolution of intra-firm imports in total U.S. exports total U.S. imports Characteristics of intra-firm Percent of U.S. exports 60 2002 2005 2009 Percent of U.S. imports 60 2002 2005 2009 and arm’s-length trade 2010 2010 50 50 2014 2014 40 40 30 30 Data. There is only one publicly available dataset 20 20 on international intra-firm trade with a com- 10 10 prehensive set of partner economies. This unique 0 0 U.S. trade dataset from the U.S. Census Bureau Overall AEs EMDEs Overall AEs EMDEs uses customs declarations to distinguish arm’s- Source: U.S. Census Bureau. length trade from intra-firm transactions.3 At the Note: AE stands for advanced economies. A.B.E.F. U.S. exports and imports of goods, average for 2002-14. The residual to 100 percent is the most detailed level, the data contain exports and share of arm’s-length trade in total U.S. goods exports or imports with the world, advanced economies (AEs) or EMDEs. The shares are broadly stable over the period. imports at the 6-digit North American Industry C.D. 2014 averages. The classification into intermediates, capital, and final goods is according to the Broad Economic Categories (BEC) rev.4 classification of goods according to their use. Category 51— Classification System (NAICS) level as well as passenger motor cars—has been excluded. information on countries of origin and des- tination, covering annual bilateral trade flows with are unavailable at the global level; hence, the 234 partner economies for 2002-14. Similar data analysis here relies on this U.S. trade dataset. Definition of arm’s-length and intra-firm trade. 3The U.S. Bureau of Economic Analysis collects similar data with a Intra-firm trade consists of cross-border confidential dataset on intra-firm trade data based on firm surveys. transactions between firms linked by a degree The Organisation for Economic Co-Operation and Development (OECD) database on the Activities of Multinational Enterprises of control and ownership whereas arm’s-length covers trade between OECD countries. trade is defined as cross-border transactions 64 SPECIAL FOCUS 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 FIGURE SF2.4  Regional decomposition of U.S. intra-firm between   unrelated firms. The share of arm’s- and arm’s-length trade length trade is much lower for U.S. imports (50 percent) than exports (70 percent), for U.S. trade Canada is the largest destination of U.S. intra-firm exports and the largest source of U.S. intra-firm imports, followed by Mexico. China is more in capital goods (50 percent) than final goods (60 important as a source of U.S. arm’s-length imports. In general, intra-firm percent), and for U.S. trade with advanced trade is more prevalent with higher-income trading partners. economies (51 percent) than with EMDEs (64 A. Main destinations for U.S. exports B. Main sources for U.S. imports percent). In general, a higher per capita income of a trading partner is associated with a lower share of Percent of U.S. exports Percent of U.S. imports 80 Canada Mexico 80 Canada Mexico Japan arm’s-length trade. The share of intra-firm trade of Korea Germany China Japan Germany Netherlands China 60 U.K. total U.S. trade has remained broadly stable from 60 U.K. 2002 until the global financial crisis but 40 40 subsequently increased, especially for U.S. trade 20 20 with EMDEs (Figure SF2.3). 0 0 Arm's length Intra-firm Arm's length Intra-firm Country composition of arm’s-length and intra- firm U.S. trade. Geographical proximity and the C. Share of intra-firm trade in U.S. D. Share of intra-firm trade in U.S. North American Free Trade Agreement (NAFTA) exports imports favor intra-firm transactions with two of the Percent 50 Percent 90 United States’ largest trading partners, Mexico and 45 40 80 70 Canada. About half of all U.S. exports to, and 35 30 60 more than half of all U.S. imports from, Canada 50 25 20 40 and Mexico are intra-firm transactions. Canada is 30 15 10 20 the single largest destination of U.S. intra-firm 5 0 10 0 exports (almost one-third of total U.S. intra-firm exports) and imports, followed by Mexico (about NLD BEL MEX MYS JAP IRL CAN SGP PHL DEU IRL SVK JAP CRI SAU MLT HUN SWE DNK SGP Source: U.S. Census Bureau. one-fifth of total U.S. intra-firm exports; Figure Note: Top 10 trading partners, averages for 2002-14. SF2.4). More than half of U.S. imports from its A.B. Residual to 100 percent is the share of all other countries in total U.S. arm’s-length or intra-firm exports (A) or imports (B). main non-NAFTA trading partners (with the C.D. Residual to 100 percent is the share of arm’s-length transactions in bilateral U.S. exports (C) or imports (D) with each trading partner. BEL=Belgium, NLD=Netherlands, CAN=Canada, exception of China and Italy) are also intra-firm MEX=Mexico, MYS=Malaysia, SGP=Singapore, PHL=Philippines, DEU=Germany, JAP=Japan, transactions. In contrast, U.S. exports to its main IRL=Ireland, SVK=Slovak Republic, CRI=Costa Rica, SAU=Saudi Arabia, MLT=Malta, HUN=Hungary, SWE=Sweden, DNK=Denmark. non-NAFTA trading partners are predominantly arm’s-length—53-65 percent of U.S. exports to between unrelated firms. The U.S. Census Bureau large European Union and Asian countries records transactions between related-parties. (France, Germany, Japan, Korea, Netherlands, Related-party imports are defined as shipments and United Kingdom; Figure SF2.4) fit this between “any person directly or indirectly, description. owning, controlling or holding power to vote 6 percent of the outstanding voting stock or shares Evolution of intra-firm of any organization.” The ownership threshold for related-party exports is set at 10 percent (U.S. Cen and arm’s-length trade -sus Bureau 2014). For notational convenience, related-party and intra-firm trade are hereinafter since the crisis interchangeably referred to as intra-firm trade.4 Global trade growth has slowed sharply since the Quantitative importance of arm’s-length and global financial crisis, from an average of 7.6 intra-firm trade. Just over half (about 57 percent) percent during 2002-08 to an average of 4.3 of total U.S. trade is conducted at arm’s-length percent during 2010-14. During the 2007-09 global financial crisis, global trade volumes 4Technically, the two terms imply different ownership shares. contracted by 11 percent, as domestic demand Intra-firm trade is defined as trade between firms with control and dropped and trade finance was curtailed ownership shares of at least 50 percent. (Levchenko, Lewis, and Tesar 2010; Chor and GLOBAL ECONOMIC PROSPECTS | JUNE 2017 SPECIAL FOCUS 2 65 Manova   2012). The contribution of global value FIGURE   SF2.5 Sectoral decomposition of U.S. intra-firm chains to propagating the negative effects of the and arm’s-length trade global financial crisis remains unsettled.5 Intra-firm trade is concentrated in sectors such as transportation equipment, electronics, and chemicals, while arm’s-length transactions are The U.S. trade data highlight that arm’s-length more common in textiles, apparel and leather products, and food and trade accounted disproportionately for the overall beverages. post-crisis trade slowdown. This reflected a higher pre-crisis average and a weaker post-crisis rebound A. Share of sector in intra-firm and B. Share of sector in intra-firm and arm’s-length exports arm’s-length imports in arm’s-length trade growth compared with intra- firm trade. During the crisis itself, the U.S. data Percent 100 Oil and gas Textiles and app Food and bev Chemicals Percent Oil and gas Textiles and app Food and bev Chemicals Metal products Machinery 100 Metal products Machinery suggest a broad-based trade collapse in which intra 90 80 Electronics Transport equip 90 Electronics Transport equip 80 -firm and arm’s-length trade contracted to similar 70 70 60 degrees. 50 60 50 40 40 30 30 By 2014, intra-firm trade growth had returned 20 20 10 10 close to its pre-crisis average (4.3 percent of 0 0 Arm's length Intra-firm Arm's length Intra-firm exports and 5.0 percent for imports). In contrast, arm’s-length trade growth remained significantly below its high pre-crisis average: its growth slowed C. Share of sector in intra-firm and D. The share of intra-firm transactions arm’s-length trade in sectoral exports and imports to a post-crisis annual average of 4.7 percent Percent Oil and gas Food and bev Percent Exports Imports compared to 11.3 percent during 2002-08 (Figure 100 Textiles and app Chemicals 80 Metal products Machinery 70 SF2.1). 90 80 Electronics Transport equip 60 50 40 70 30 20 Factors contributing to the 60 50 10 0 40 Transport equip Oil and gas Metal products Machinery Food and bev Textiles and Chemicals Electronics sharp post-crisis slowdown 30 app 20 10 in arm’s-length trade 0 Arm's length Intra-firm Source: U.S. Census Bureau. On average, arm’s-length U.S. trade growth Note: U.S. exports and imports of goods, averages for 2002-14. Agricultural products, paper prod- ucts, printing, non-metallic minerals, furniture, and miscellaneous manufactures have been omitted as exceeded U.S. intra-firm trade growth by 1.6 they each account for less than 2 percent of total trade. Food and bev includes food and beverages. percentage point pre-crisis (2002-08), but fell Textiles and app include textiles and apparel. Chemicals include chemicals and plastics. Electronics includes electronics and electrical equipment. short of U.S. intra-firm trade growth by 1.7 A.-C. Residual to 100 percent is the share of all other sectors in exports (A), imports (B), and trade (C). percentage point post-crisis (2010-14). This sharp D. Residual to 100 percent is the share of arm’s-length transactions in U.S. exports and imports in each sector. slowdown in arm’s-length trade reflected in part compositional effects in response to global macro- economic trends. In addition, several other factors arm’s-length export growth, their sharp post-crisis may have disadvantaged firms trading at arm’s- growth slowdown dampened it (Figure SF2.6; length, raised the cost of arm’s-length transactions, Didier et al. 2016). Second, arm’s-length exports and hence discouraged arm’s-length trade. and imports include a greater share of sectors that Compositional effects. First, a greater share of grew rapidly pre-crisis but have struggled post- arm’s-length exports than intra-firm exports is crisis (textiles and apparel and machinery) or shipped to EMDEs, especially BRICS economies. sectors that benefited from the pre-crisis Just as the rapid pre-crisis growth in EMDEs lifted commodity price boom (mining, metals, and energy; Figure SF2.5). The collapse in metals and energy prices from their peak in the first quarter of 5Global production chains may have facilitated the transmission of output contractions across the global economy through intra-firm 2011 has weighed on trade (World Bank 2015a contagion (Bems, Johnson, and Yi 2009). Conversely, they may have and 2015b; Baffes et al. 2015). These strengthened the resilience of trade by facilitating better access to compositional differences are the main reason finance or due to the stability of long-established contractual relationships in supply chains (Altomonte and Ottaviano 2009; behind the steeper-than-average slowdown in Bernard et al. 2009). arm’s-length trade growth. Had the composition 66 SPECIAL FOCUS 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2017   Pre- and post-crisis growth in U.S. trade   FIGURE SF2.6   arm’s-length trade matched that of average of exports and imports, arm’s-length export and Pre-crisis, a higher share of fast-growing sectors and export markets supported arm’s-length export growth. Post-crisis, this effect unwound as import growth would have slowed by 1.2 and 1.8 EMDE growth and some of the fastest growing sectors slowed. Such percentage points less, respectively, between the compositional effects are the main reason for the steeper-than-average pre-crisis and post-crisis periods (Figure SF2.6).6 slowdown in arm’s-length trade growth. Other contributing factors. Other factors may A. Export growth B. Import growth have further contributed to the post-crisis Percent 2002-08 2010-14 Percent 2002-08 2010-14 weakness in arm’s-length trade.7 18 18 16 16 14 12 14 12  Reduced access to finance for unaffiliated  10 10 8 8 firms. Tightening lending conditions during 6 6 4 4 and after the global financial crisis restricted 2 2 0 0 access to trade credit and other forms of Arm's- Intra- Arm's- Intra- Arm's- Intra- Arm's- Intra- length firm length firm length firm length firm financing (Chor and Manova 2012). This AEs EMDEs AEs EMDEs may have disproportionately affected transactions between non-affiliated parties C. Contribution to average annual D. Contribution to average annual (Desai, Foley, and Hines 2004; Alvarez and export growth import growth Percentage points Görg 2012). Percentage points AEs EMDEs AEs EMDEs 14 14 12 10 12 10  Disadvantages due to size and productivity.  8 8 Vertically integrated firms tend to be larger, 6 6 4 4 more productive, and more skill- and capital- 2 2 intensive (Corcos et al. 2013). More efficient 0 0 2002-08 2010-14 2002-08 2010-14 2002-08 2010-14 2002-08 2010-14 management of stocks also helps vertically Arm's- length Intra- firm Arm's- length Intra- firm integrated firms adjust to large demand shocks, such as the global financial crisis E. Contribution to deviation from (Altomonte et al. 2011). Such factors may F. Contribution to deviation from annual average export growth, change annual average import growth, account for the smaller likelihood of exit from 2002-08 to 2010-14 change 2002-08 to 2010-14 foreign markets for firms exporting on an Percentage points 4 Country composition Percentage points intra-firm basis, especially since the global 3 Sectoral composition 3 Sectoral composition Other Other financial crisis. The number of U.S. firms 2 2 exporting intra-firm fell by 8.5 percent during 1 1 2009, whereas the number of firms exporting 0 0 at arm’s-length fell by 12.5 percent (Carballo -1 -1 2015). -2 -2 Arm's-length Intra-firm Arm's length Intra-firm  Shock amplification in complex supply chains.  Source: U.S. Census Bureau. Note: AE stands for advanced economies. The demand for complex goods, such as C.D. Average annual contribution of export (C) and import (D) transactions with EMDEs and AEs to total U.S. merchandize exports (C) or imports (D). automobiles, reacts more strongly to income E. “Country composition” measures the extent to which growth in arm’s-length or intra-firm exports shocks than the demand for basic goods exceeded that of total exports due to a higher initial share of fast-growing countries. It is defined as the difference between hypothetical arm’s-length (intra-firm) export growth, had arm’s-length (intra- (Ferrantino and Taglioni 2014). As a negative firm) exports to each country grown at the same rate as total exports to each country, and actual total export growth. “Sector composition” measures the extent to which growth in arm’s-length or intra-firm exports exceeded that of total exports because of a higher initial share of fast-growing sectors. It is defined as the difference between hypothetical arm’s-length (intra-firm) export growth, had arm’s- length (intra-firm) sectoral exports grown at the same rate as total sectoral exports, and actual total export growth. “Other” is the residual. The figure shows the change in these contributions between 6The results are robust to using manufacturing trade only. the 2002-08 average and the 2010-14 average. 7 Trade policy may have favored intra-firm trade. However, in the F. The definitions are as in E. Country composition is omitted since the destination country of all imports is the United States. post-crisis period under consideration here (2010-14) there were no major changes in U.S. trade policy. Apart from three bilateral U.S. FTAs that are slowly being phased in since 2012 (Korea, Panama, Colombia), applied tariffs imposed by the United States on its imports and faced by the United States on its exports did not change significantly. GLOBAL ECONOMIC PROSPECTS | JUNE 2017 SPECIAL FOCUS 2 67   demand shock spreads through the supply U.S.   arm’s-length trade growth has slowed steeply chain, participating firms observe greater relative to intra-firm trade in the aftermath of the swings in demand the further up they are on global financial crisis, from high pre-crisis rates. the supply chain (the “bullwhip effect”). During the 2010-14 recovery, trade between non- Although intra-firm trade in intermediate affiliated firms grew at about half the pre-crisis goods fell more significantly at the beginning rate. Intra-firm trade growth also slowed but to a of the crisis, it also benefitted from a stronger considerably lesser degree. recovery thereafter (Alessandria 2011). The sharp slowdown in arm’s-length trade growth  U.S. dollar appreciation. Trade conducted stems from a number of factors. A high share of through global value chains generally shows arm’s-length exports is conducted with EMDEs, less sensitivity to real exchange rates. That’s where growth has slowed sharply from elevated because competitiveness gains from real pre-crisis rates. In addition, firms trading at arm’s- depreciations are partly offset by rising input length are more concentrated in sectors that grew costs (Ahmed, Appendino, and Ruta 2015; particularly rapidly pre-crisis and sectors that Mattoo, Mishra, and Subramaniam 2012; benefited from the pre-crisis commodity price Amiti, Itskhoki, and Konings 2014). To the boom, which boosted pre-crisis trade but have extent that intra-firm trade is more strongly languished since the crisis. Such compositional associated with global value chains than arm’s- effects simply reflect cyclical trends in the global length trade, intra-firm U.S. exports may have economy. For the United States, these effects benefited less from the pre-crisis U.S. dollar account for a significant part of the post-crisis depreciation and been dampened to a lesser growth gap between arm’s-length and intra-firm degree by the post-crisis appreciation than trade. arm’s-length exports. In addition, firms integrated vertically may have a wider range of Other factors have also been at play. Among these, tools available to them to hedge against the characteristics that make firms engaged in exchange rate movements. arm’s-length trade less resilient to the severe demand and financing shocks of the global  Uncertainty. Uncertainty influences whether financial crisis contributed to the post-crisis firms outsource or integrate vertically (Antras weakness of arm’s-length trade. Firms engaged in and Helpman 2004). Although uncertainty outsourcing tend to be smaller, less productive, discourages cross-border vertical integration, less efficient in inventory management, and have once established, vertically integrated U.S. more restricted access to finance than firms firms tend to be less sensitive to uncertainty in integrated vertically. Such factors may have their trade decisions (Carballo 2015; Bernard accelerated the exit of firms trading at arm’s- et al. 2010). Heightened economic and trade length during the global financial crisis and its policy uncertainty during and after the global aftermath. In addition, the macroeconomic financial crisis, may therefore have encouraged environment has been less favorable to arm’s- a post-crisis preference for intra-firm length trade than to intra-firm trade in the post- transactions over arm’s-length ones. crisis period. The post-crisis U.S. dollar appreciation has weighed more heavily on U.S. Conclusion exports from non-affiliated firms. Heightened financial risks and policy uncertainty may also The United States plays an important role in have discouraged arm’s-length transactions. global trade. It accounts for about 11 percent of global goods trade and is the largest export While the post-crisis environment has favored destination for one-fifth of the world’s countries. multinationals that focus on intra-firm U.S. multinationals account for about 30 percent transactions, their activities can also raise policy of the employment and sales of the world’s largest challenges. For example, multinationals may have 100 non-financial multinational companies. an incentive to adjust their transfer pricing—the 68 SPECIAL FOCUS 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 prices   assigned to intra-firm transactions—to raise Antras,   P. 2015. Global Production: Firms, the value of goods and services produced in Contracts, and Trade Structure. Princeton: countries with low corporate income taxes and Princeton University Press. reduce the value of those produced in countries with higher taxes. Policies to promote FDI and Amiti, M., O. Itskhoki, and J. Kon- trade therefore have to be carefully calibrated to ings. 2014. "Importers, Exporters, and Exchange protect fiscal revenues. A number of global Rate Disconnect." American Economic Re- initiatives have been introduced since the global view 104 (7): 1942-78. financial crisis to make global tax practices more Baffes, J., M. A. Kose, F. Ohnsorge, and M. transparent (IMF/OECD/UN/World Bank 2011, Stocker. 2015. “The Great Plunge in Oil Prices: 2016). In addition, large and internationally active Causes, Consequences, and Policy Responses.” firms also tend to be better able to absorb the Policy Research Note 15/01, World Bank, significant fixed costs of exporting. Measures to Washington, DC. reduce asymmetries of information and help small and medium-sized companies overcome regulatory Bems, R., R. C. Johnson, and K. M. Yi. 2009. burdens can help level the playing field (World “The Collapse of Global Trade: Update On the Bank 2016). 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Global Economic Prospects: ration on Tax.” Inter-agency Task Force on Finan Spillovers Amid Weak Growth. January. -cing for Development. Concept Note. Washington, DC: World Bank. CHAPTER 2 REGIONAL OUTLOOKS EAST ASIA and PACIFIC The East Asia and Pacific region is projected to grow at 6.2 percent in 2017, and at a slightly lower 6.1 percent on average in 2018-19, in line with previous forecasts. A gradual slowdown in China is offsetting a continued modest pickup in the rest of the region, led by a rebound in commodity exporters and a gradual recovery in Thailand. Growth in commodity importers excluding China is projected to remain robust, as stronger exports will offset the negative effects of eventual policy tightening on domestic demand. Downside risks are mainly external. They include heightened policy uncertainty and increased protectionism in key advanced economies, and the risk of an abrupt tightening of global financing conditions. A sharp slowdown in China is a low- probability risk, but it would have major negative consequences for the region. Recent developments and a recovery of exports. Rebalancing from investment to consumption resumed as state- Regional growth continued to be robust, and in driven investment growth slowed and private line with expectations, in the first half of 2017. sector investment growth recovered from a mid- Solid domestic demand growth reflected 2016 dip, but remained weak (Figure 2.1.2). accommodative macroeconomic policies and tight House price growth declined in major cities and labor markets (World Bank 2017a). Export credit growth slowed (but remained above volumes firmed across the region, reflecting nominal GDP growth and credit to the household gradually strengthening global activity. Purchasing sector accelerated) on tighter regulations and less managers’ indexes and consumer sentiment accommodative monetary policy (Campanaro and indicators point to solid activity across the region Masic 2017). Consumer price inflation has in the second quarter of the year. Regional remained below target. Producer price inflation inflation is trending up, reflecting positive has moderated somewhat from its peak in inflation in Thailand and increased price pressures February, reflecting higher commodity prices and in the rest of the region, particularly in Malaysia. reduced overcapacity in heavy industry. Export Producer prices have recovered, particularly in growth accelerated on stronger external demand. China and commodity exporting economies, The pace of foreign reserve drawdowns slowed reflecting the stabilization of commodity prices following a tightening of capital controls on and a rebound in economic activity. Regional capital outflows and measures to encourage financial markets stabilized after a period of foreign direct investment. volatility in late 2016, net capital outflows Growth continues to strengthen in commodity- declined, and regional currencies and asset prices exporting economies (Table 2.1.1). Domestic firmed (Figure 2.1.1). demand and imports are firming, reflecting In China, following strong growth in 2016Q4 improved confidence, higher corporate profits, (6.8 percent y/y), GDP expanded by 6.9 percent and diminishing drag from macroeconomic y/y in 2017Q1, helped by robust consumption adjustment. In Indonesia, investment climate reforms and recovering commodity prices have supported a private investment recovery (World Note: This section was prepared by Ekaterine Vashakmadze. Bank 2017b). In Malaysia, stabilizing commodity Research assistance was provided by Liwei Liu. prices have lifted business sentiment and invest- 74 CHAPTER 2.1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017  EAP: Recent developments FIGURE 2.1.1 strong  demand from China. In Malaysia, export growth (especially in electrical and electronics Activity remained robust in the first half of 2017, on solid domestic demand goods) is being bolstered by a global pickup in and firming exports. Regional financial markets have recently stabilized and regional equity prices have generally recovered their earlier losses. manufacturing and trade and a modest recovery of Inflation across the region picked up, but remained below central banks’ oil and gas shipments. targets in China and Thailand. Real credit growth generally moderated on tighter regulations and higher inflation, but remained high in China and Vietnam, and accelerated in the Philippines. Growth in commodity-importing economies remains robust, as accommodative policies A. GDP growth B. Goods exports volume growth continue to support solid growth of domestic demand. In the Philippines, expansionary fiscal policy has boosted capital formation, while robust remittances, credit growth, and low inflation have supported private consumption. In Thailand, domestic demand is gradually recovering from several years of subdued performance, but policy uncertainty continues to weigh on growth. Overall, exports in commodity-importing C. Sovereign bond spreads D. Equity prices economies are generally benefitting from strengthening global demand, although performance remains mixed. After a period of financial market volatility in late 2016—which contributed to capital outflows from the region and put pressure on regional exchange rates and equity prices—global financing conditions have improved in 2017 (World Bank 2017a). Sovereign bond spreads have narrowed, E. Inflation F. Credit growth most notably in commodity exporters (e.g., Indonesia and Malaysia) and Vietnam. Capital inflows to EAP bond and equity mutual funds have resumed (including in Malaysia and Thailand, which had experienced substantial outflows) and have been broadly stable in 2017. Most regional currencies have strengthened against the U.S. dollar. Regional equity prices have Sources: Central Bank News, Haver Analytics, International Monetary Fund, World Bank. generally recovered their earlier losses, reflecting Note: EAP stands for East Asia and Pacific. Commodity importers ex. China include Cambodia, improved confidence and a stabilization of global Philippines, Solomon Islands, Thailand, Vietnam, and Vanuatu. Commodity exporters include Indonesia, Lao PDR, Mongolia, and Malaysia. GDP-weighted averages. bond yields. B. Last observation is March 2017. C. Measures the average spread of a country’s sovereign debt (as measured by J.P. Morgan’s Emerging Markets Bond Index) over their equivalent maturity U.S. Treasury bond. Lat observation is May 24, 2017. Authorities are gradually moving to a less D. Last observation is May 24, 2017. accommodative policy stance, with some E. Average year-on-year growth. Inflation targets for 2017 are 3 percent in China and 5 percent in Vietnam. The figure shows the mid-points of targeted ranges in Indonesia (3-5 percent), Philippines exceptions. China raised its short-term interest (2-4 percent), and Thailand (1-4 percent). For Malaysia, the mid-point of Bank Negara’s 2017 forecast of 3-4 percent is used. rates in the first quarter of 2017 and continued to F. Real private sector credit growth. Average year-on-year growth. Data for Vietnam in 2016 are through October. tighten macro-prudential regulations to address financial stability risks. Malaysia made some progress in renewing medium-term fiscal ment. In Indonesia, export volumes, which had consolidation efforts. Indonesia is not planning to contracted through mid-2016, rebounded strongly extend expenditure cuts into 2017 and has in 2016Q4, and export values continued to signaled a more accommodative stance for the accelerate in the first two months of 2017 on medium term. Policies in the Philippines remain GLOBAL ECONOMIC PROSPECTS | JUNE 2017 EAST ASIA AND PACIFIC 75 accommodative,   despite rapid credit growth, FIGURE   2.1.2 China accelerated inflation, widening fiscal deficits, and Growth in China continues to slow gradually. The rebalancing from falling current account surpluses. investment to consumption resumed in 2017Q1. Fixed asset investment by state-owned enterprises and enterprises with state participation eased as Outlook support from policy-led investment spending gradually dissipated. Private investment growth recovered, but remained weak. Tighter regulations contributed to further moderation of credit growth, especially to the non- The regional growth outlook for 2017-19 remains financial corporate sector. Credit to the household sector accelerated. House price growth in Tier 1 and 2 cities has decelerated since mid-2016 solid (World Bank 2017a). Growth is projected to on tightening regulations and less accommodative monetary policy. reach 6.2 percent in 2017—a touch below the 6.3 percent pace in 2016 (Figure 2.1.3). This reflects a A. Contribution of expenditure B. Fixed asset investment components to growth gradual slowdown in China, which offsets a Percentage points Percent, year-on-year, 6-month moving average pickup of activity in the rest of the region led by a 14 Consumption Investment Net exports 30 State Private rebound in commodity exporters (Table 2.1.2). 12 10 The outlook is predicated on a modest recovery of 8 20 commodity prices and stronger external demand. 6 4 10 A rebound in global trade is expected to offset the 2 negative effects on activity of a gradual tightening 0 0 -2 of global financing conditions. 2010 2011-13 2014-16 Q12017 2013 2014 2015 2016 2017 Growth in China is projected to slow from a C. Credit growth D. Housing prices projected 6.5 percent in 2017 to 6.3 percent on Percentage points Non-financial enterprises Percent, year-on-year average in 2018-19. Fiscal support will continue 20 Households 1st tier 2nd tier 3rd tier Nominal GDP 40 to offset monetary tightening. Policies will 30 Dash line: 2011-16 average 15 continue to support growth and contain financial 20 10 risks and encourage rebalancing (World Bank and 10 Development Research Center of China’s State 5 0 -10 Council 2014). A moderate recovery in Chinese 0 Mar-12 Nov-12 Mar-13 Nov-13 Mar-14 Nov-14 Mar-15 Nov-15 Mar-16 Nov-16 Mar-17 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 imports reflects robust domestic demand. 2010 2011-13 2014-16 Q12017 Improving global demand supports export, but Sources: Haver Analytics, World Bank. rising cost pressures will limit export growth. The B. 2017YTD is March 2017 data. baseline forecast assumes no material change in D. The National Bureau of Statistics of China surveys house prices in 70 cities and divides them into three tiers. The first tier includes Shanghai, Beijing, Guangzhou, and Shenzhen. The second tier trade or political relations between China and the includes 31 provincial capital and sub-provincial capital cities. The third tier includes 35 other cities. Last observation is March 2017. United States, notwithstanding policy efforts to reduce China’s trade surplus with the United States. 2019 (World Bank 2017b). The impact of fiscal consolidation is expected to gradually dissipate. Growth in the rest of the region is projected to Private activity will pick up, helped by modestly pick up from an estimated 5.1 percent in 2017 to rising commodity prices, improving external 5.2 percent on average in 2018-19, reflecting a demand, and increased confidence bolstered by continued recovery in commodity exporters and reform measures and recent upgrades of Thailand. Growth in commodity exporters will Indonesia’s sovereign ratings by major credit continue to accelerate, from an estimated 5.1 rating agencies. These include streamlining percent in 2017 to its long-term average of 5.3 business regulations, liberalizing the foreign direct percent in 2019. This assumes that the adjustment investment (FDI) regime, and a stable rupiah to low commodity prices runs its course over the (IMF 2017a; World Bank 2017b). In Malaysia, forecast horizon, exports rebound, and investment income support measures, higher infrastructure growth stabilizes around its long-term trend. spending, and improved exports are forecast to raise growth (World Bank 2016a). In Mongolia, In Indonesia, growth is projected to firm from an growth is projected to stagnate in 2017, partly estimated 5.2 percent in 2017 to 5.4 percent in reflecting efforts to reduce public debt to 76 CHAPTER 2.1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017   EAP: Outlook and risks FIGURE 2.1.3 percent   in 2017-19—significantly higher than the long-term average of 4.3 percent (World Bank Regional growth is projected to reach 6.2 percent in 2017, a touch below 2016 growth of 6.3 percent. This reflects a gradual slowdown in China, 2017c). Accelerated public investment spending which offsets a pickup of activity in the rest of the region led by a rebound and recovering private consumption are expected in commodity exporters and a recovery in Thailand. Risks remain tilted to to support slightly stronger growth in Thailand in the downside and are mainly external. In addition, a steeper-than-expected slowdown in China would have sizable regional spillovers. Elevated 2018-19 (IMF 2016a; World Bank 2016b). domestic debt (e.g., China, Malaysia, Thailand) and sizeable external Nevertheless, growth in Thailand will remain financing needs (e.g., Indonesia, Mongolia) would amplify the impact of below the long-term trend of 4.5 percent, as policy external shocks. uncertainty and slowing productivity growth A. Regional GDP growth B. GDP growth by groups dampen private investment. In Vietnam, growth is projected to remain solid, at slightly below 6.5 Percent 10 1990-2008 2003-08 Percent 6.0 1990-2008 2003-08 percent throughout the forecast period, helped by 8 5.6 strong exports (World Bank and Ministry of 6 5.2 Planning and Investment of Vietnam 2016). The 4.8 4 4.4 outlook for Pacific Island countries is benign, 2 4.0 reflecting favorable conditions for fisheries, 0 tourism, and migration, conditional on proper 2016 2017 2018 2019 2016 2017 2018 2019 2016 2017 2018 2019 2016 2017 2018 2019 EAP EAP ex. China Commodity importers Commodity exporters ex. China domestic policies. C. External financing requirements D. Total debt Risks Percent Percent of GDP Public debt 348.1 Household debt 100 Percent of FX reserves 280 240 Corporation debt Risks to the outlook remain tilted to the downside Percent of GDP Peak 75 200 160 and are mainly external. They include heightened 50 120 policy uncertainty in the United States and 80 25 40 Europe, increased protectionism, and the risk of 0 0 an abrupt tightening of financing conditions. In 2007 2015 2016Q3 2007 2015 2016Q3 2007 2015 2016Q3 2007 2015 2016Q3 Mongolia Philippines Lao, PDR Malaysia Indonesia Vietnam Cambodia China Thailand addition, a steeper-than-expected slowdown in China Malaysia Thailand Indonesia China would have sizable regional spillovers Sources: Bank of International Settlements, Haver Analytics, International Monetary Fund, World (World Bank 2016c). Bank, Quarterly External Debt Statistics. Note: EAP stands for East Asia and Pacific. A. B. Commodity importers ex. China include Cambodia, Philippines, Solomon Islands, Thailand, Global economic policy uncertainty has been Vietnam, and Vanuatu. Commodity exporters include Indonesia, Lao PDR, Mongolia, and Malaysia. C. Data are from 2016. For Malaysia, Vietnam, and Lao PDR, the data are from 2015. External particularly elevated since the start of 2017. financing requirements are defined as total debt obligations (sum of short-term external debt and long-term debt obligations) minus the current account balance. Sources of economic policy uncertainty are D. The highest debt-to-GDP ratio since 1995Q1. The peak is identified to have occurred in 1997Q4 extensive. In the United States, the new in Thailand, 1998Q4 in Malaysia, 2001Q4 in Indonesia, and 2016Q3 in China. administration has suggested major shifts in fiscal, trade, and immigration policies. In Europe, the sustainable levels, before staging a modest recovery rising influence of populist parties could re-orient in 2018. A solid rebound is expected starting policies and affect economic integration in the in 2019, reflecting macroeconomic stabilization, European Union. Negotiations around the exit of structural reforms, large new investments into coal the United Kingdom from the European Union and gold mines, and a rebound of production also carry risks. If the uncertainty persists, it could in the Oyu Tolgoi copper mine (World Bank weigh on investor confidence and derail the 2017a). ongoing recovery in growth (World Bank 2017a). Growth in commodity importers is projected to Rising protectionist sentiments in advanced accelerate from 5.0 percent in 2017 to 5.2 percent economies are creating uncertainty about the on average in 2018-19, slightly above the long- future of established trading relationships term average of 4.8 percent. In the Philippines, (Chapter 1). The new U.S. administration has growth, led by accelerated public and private started reassessing a number of existing trade investment, is expected to remain at just under 7 agreements. Some recent related actions, including GLOBAL ECONOMIC PROSPECTS | JUNE 2017 EAST ASIA AND PACIFIC 77   withdrawal of the United States from the the The   shock would transmit to the region through Trans-Pacific Partnership (TPP), are already in reduced capital flows, high volatility, pressure on effect. These could remove significant nominal exchange rates and asset prices, and opportunities from Vietnam, and, to a lesser increased risk premiums. This could result in extent, Malaysia (World Bank 2016c). Changing increased debt-service burdens and rollover risks, trade policies would disproportionately affect the especially for unhedged short-term, foreign- more open economies in the EAP region, currency-denominated debt (e.g., Malaysia, especially those with sizable exports to advanced Mongolia) (IMF 2016f; World Bank 2016d and economies (e.g., Cambodia, China, Malaysia, 2017a). Thailand, Vietnam). Significant disruption to China’s exports would undermine its growth, with Domestic vulnerabilities, related to elevated large spillovers on the region (IMF 2016b-e; domestic debt (e.g., China, Malaysia, Thailand) World Bank 2016c). Furthermore, trade- and large external financing needs in some restricting measures in the United States could countries (Indonesia, Malaysia, Mongolia), would trigger retaliatory measures. amplify the impact of external shocks (BIS 2017; Figure 2.1.3). Shallow policy buffers are a concern A faster-than-expected tightening of global fi- in smaller countries (e.g., Mongolia, Papua New nancing conditions could set back regional growth Guinea, especially, and to some extent in Lao and exacerbate existing financial vulnerabilities. PDR and Vietnam). TABLE 2.1.1 East Asia and Pacific forecast summary (Real GDP growth at market prices in percent, unless indicated otherwise) 2014 2015 2016 2017 2018 2019 2016 2017 2018 2019 (percentage point difference Estimates Projections from January 2017 projections) EMDE EAP, GDPa 6.8 6.5 6.3 6.2 6.1 6.1 0.0 0.0 0.0 0.0 (Average including countries with full national accounts and balance of payments data only)b EMDE EAP, GDPb 6.8 6.5 6.3 6.2 6.1 6.1 0.0 0.0 0.0 0.0 GDP per capita (U.S. dollars) 6.0 5.8 5.6 5.6 5.4 5.6 -0.1 0.1 -0.1 0.1 PPP GDP 6.6 6.4 6.3 6.2 6.0 6.1 0.0 0.1 -0.1 0.0 Private consumption 7.3 7.2 7.0 7.1 7.1 7.1 0.1 0.1 0.1 0.1 Public consumption 4.0 8.5 9.1 7.5 6.9 6.8 3.0 1.6 1.1 1.0 Fixed investment 6.5 6.7 6.5 6.4 6.0 6.1 0.1 0.2 0.3 0.4 Exports, GNFSc 7.6 0.9 2.2 3.3 3.6 4.1 -1.1 -1.0 -1.2 -0.7 Imports, GNFSc 6.8 1.3 3.8 4.9 5.0 5.2 -0.1 0.2 -0.4 -0.2 Net exports, contribution to growth 0.4 -0.1 -0.4 -0.4 -0.3 -0.2 -0.3 -0.4 -0.2 -0.1 Memo items: GDP East Asia excluding China 4.7 4.8 4.9 5.1 5.2 5.3 0.1 0.1 0.0 0.1 China 7.3 6.9 6.7 6.5 6.3 6.3 0.0 0.0 0.0 0.0 Indonesia 5.0 4.9 5.0 5.2 5.3 5.4 -0.1 -0.1 -0.2 -0.1 Thailand 0.9 2.9 3.2 3.2 3.3 3.4 0.1 0.0 0.0 0.0 Source: World Bank. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time. a. EMDE refers to emerging market and developing economy. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes American Samoa and Democratic People’s Republic of Korea. b. Sub-region aggregate excludes American Samoa, the Democratic People’s Republic of Korea, Fiji, Kiribati, the Marshall Islands, the Federated States of Micronesia, Myanmar, Palau, Papua New Guinea, Samoa, Timor-Leste, Tonga, and Tuvalu, for which data limitations prevent the forecasting of GDP components. c. Exports and imports of goods and non-factor services (GNFS). For additional information, please see www.worldbank.org/gep. 78 CHAPTER 2.1 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 TABLE 2.1.2  East Asia and Pacific country forecastsa   (Real GDP growth at market prices in percent, unless indicated otherwise) 2014 2015 2016 2017 2018 2019 2016 2017 2018 2019 (percentage point difference Estimates Projections from January 2017 projections) Cambodia 7.1 7.0 6.9 6.9 6.9 6.7 -0.1 0.0 0.0 -0.1 China 7.3 6.9 6.7 6.5 6.3 6.3 0.0 0.0 0.0 0.0 Fiji 5.6 3.6 2.0 3.7 3.5 3.3 -0.4 -0.2 -0.2 -0.2 Indonesia 5.0 4.9 5.0 5.2 5.3 5.4 -0.1 -0.1 -0.2 -0.1 Lao PDR 7.5 7.4 7.0 7.0 6.8 7.2 0.0 0.0 0.0 0.0 Malaysia 6.0 5.0 4.2 4.9 4.9 5.0 0.0 0.6 0.4 0.5 Mongolia 6.9 2.2 1.0 -0.2 1.9 8.0 0.9 -2.2 -1.6 4.3 Myanmar 8.0 7.3 6.5 6.9 7.2 7.3 0.0 0.0 0.0 0.0 Papua New Guinea 7.4 6.8 2.4 3.0 3.2 3.4 0.0 0.0 0.0 0.4 Philippines 6.1 6.1 6.9 6.9 6.9 6.8 0.1 0.0 -0.1 0.1 Solomon Islands 2.0 3.3 3.0 3.3 3.0 3.0 0.0 0.0 0.0 0.0 Thailand 0.9 2.9 3.2 3.2 3.3 3.4 0.1 0.0 0.0 0.0 Timor-Lesteb 5.9 4.3 5.1 4.0 5.0 6.0 0.1 -1.5 -1.0 0.5 Vietnam 6.0 6.7 6.2 6.3 6.4 6.4 0.2 0.0 0.1 0.2 Source: World Bank. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. a. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes American Samoa and the Democratic People’s Republic of Korea. b. Non-oil GDP. Timor-Leste’s total GDP, including the oil economy, is roughly four times the non-oil economy, and highly volatile, sensitive to changes in global oil prices and local production levels. For additional information, please see www.worldbank.org/gep. EUROPE and CENTRAL ASIA The pickup in regional growth at the end of 2016 has persisted in 2017, with both commodity exporters and importers signaling recovery. The region is benefiting from rising oil prices, benign global financing conditions, robust growth in the Euro Area, and generally supportive policies. The 2017 growth forecast of 2.5 percent remains in line with January projections. Growth in the region is expected to edge up to an average of 2.8 percent in 2018-19, as activity in the Russian Federation and other commodity exporters firms, and growth in Turkey recovers. The main downside risks include renewed declines in oil and other commodity prices, policy uncertainty, and geopolitical risks, as well as international financial market disruptions. Domestic banking system weaknesses are vulnerabilities, and could become amplifiers of the effects of internal and external shocks. Recent developments Recovery is also gaining momentum in commodity importers. Robust construction activi- ty in Central Europe (e.g., Hungary, Poland) The diverging growth paths in the region reversed points towards firming investment, supported by in 2016 (Box 2.2.1) and growth momentum EU structural funds. Early 2017 data suggest a strengthened further in early 2017 in both continued recovery in Turkey despite elevated commodity exporters and importers (Figure policy uncertainty. Turkey has remained in a state 2.2.1). Activity and trade in the Europe and of emergency even after the approval of the Central Asia (ECA) region is benefiting from government-proposed constitutional referendum rising oil prices, benign global financing that created a powerful executive presidency. The conditions, and robust growth in the Euro Area. recession in Belarus shows some signs of abating, Policies in several large ECA countries have also amid tailwinds from the Russian recovery. Growth been supportive. momentum in Croatia, Moldova, and Serbia is Commodity exporters have continued on the path steady, around potential growth. Inflation in of recovery, although with a few stumbles. commodity importers has been consistently Strengthening activity indicators for Russia undershooting lower monetary policy bounds, but suggest continued expansion in the first quarter of has started gathering speed, with both core and 2017. Modest monetary policy easing, as inflation non-core components accelerating. approached the target of 4 percent at end-March, will support Russian growth in the near term. Outlook Early 2017 data indicate some signs of recovery in Azerbaijan, including in the non-oil sector, and a A broad-based acceleration in growth to 2.5 continued recovery in Kazakhstan, assisted by percent is expected in 2017, in line with January fiscal stimulus (World Bank 2017d). In contrast, forecasts, but with some heterogeneity within the renewed conflict in Ukraine is already taking a region. A forecast upgrade for Turkey due to the toll, and is manifested in weak industrial faster-than-anticipated recovery after the failed production data. Inflation in commodity exporters coup attempt is offset by a downward revision in is slowing, reflecting easing depreciation pressures. Russia due to the extension of economic sanctions. Growth is expected to strengthen further in 2018- 19, supported by a continuing recovery in Note: The section was prepared by Yoki Okawa. Research commodity exporters in line with firming assistance was provided by Shituo Sun. commodity prices, and the unwinding of 80 CHAPTER 2.2 GLOBAL ECONOMIC PROSPECTS | JUNE 2017       BOX 2.2.1 Reversal in 2016 of diverging growth paths Following a sharp slowdown in 2014-15 in the wake of the cumulative 15.8 percent contraction in 2014-15 in the oil price collapse, regional growth started recovering in wake of geopolitical tensions with Russia. In contrast, 2016. The growth rebound in large commodity exporters growth in Azerbaijan declined precipitously from 1.1 (e.g., Kazakhstan, Russia, Ukraine) in late 2016 was partly percent in 2015 to negative 3.8 percent in 2016 amid offset by a growth deceleration in large commodity contraction in the non-oil sector. This, in part, reflected importers (e.g., Hungary, Poland, Turkey), bringing the credit constraints as currency devaluations in 2015 2016 regional average to 1.5 percent, up from 1 percent in strained the solvency of banks in Azerbaijan’s highly 2015. dollarized banking system. The Russian economy, hit hard by the oil price plunge and The pace of expansion in large commodity importers economic sanctions, emerged from recession in the last slowed. Despite strong recovery in the fourth quarter, quarter of 2016 (World Bank 2016f). Annual GDP growth in Turkey halved, to 2.9 percent—the lowest rate remained virtually flat, in a notable improvement over the since the global financial crisis. The sharp deceleration 2.8 percent contraction of 2015. The recovery was reflected deteriorating business conditions in the wake of supported by rising oil prices and facilitated by exchange the failed coup attempt and sanctions imposed by Russia. rate flexibility (World Bank 2017e). A strengthening oil In Poland and Hungary, slow disbursement of EU sector and supportive policies, including fiscal stimulus in structural funds contributed to a contraction in infrastructure and monetary policy easing, also contributed investment, which weighed on growth. In contrast, an to the recovery in Kazakhstan in the second half of 2016, incipient recovery in Russia and Ukraine reduced adverse with growth stabilizing at 1 percent. In Ukraine, gov- spillovers from these two large economies to neighboring ernment stabilization efforts, supported by international economies in the eastern part of the region (e.g., Belarus, financial institutions and a bumper agricultural crop, led Moldova), although the economy of Belarus continued to to a sharp rebound in growth to 2.3 percent, following a contract. geopolitical risks and domestic policy uncertainty modestly and to varying degrees. Output in in major economies in the region (Figure 2.2.2). Turkey is set to expand by 3.5 percent, supported by accommodative fiscal policy. Countries in Growth in commodity exporters is projected to Central Europe will benefit from EU accelerate in 2017, driven by private consumption infrastructure financing, with an acceleration of and investment amid strengthening commodity growth to 3.4 percent. Countries in the eastern prices, although economic performance is part of the region will benefit from the continued expected to vary widely. In Russia, the 1.3 percent recovery in Russia, though growth in Belarus is expansion this year, after a two-year recession, will being held back by continued fiscal tightening be driven by consumption, as easing inflation will needed to finance public debt repayment. While contribute to growth in real incomes. fiscal relaxation will contribute less to growth in Strengthening oil prices and output and an Romania, it will put pressure on public and accommodative macroeconomic policy stance will external deficits. support Kazakhstan’s growth recovery to 2.4 percent. Growth in Ukraine is projected to edge Growth in the region is expected to edge up to an down to 2 percent. In contrast, output will average of 2.8 percent in 2018-19, as activity in continue contracting in Azerbaijan, although at a Russia and other commodity exporters firms, and slower pace than in 2016 as weaknesses in the growth in Turkey recovers. Russia is expected to banking system as well as tight monetary and fiscal continue growing at a modest 1.4 percent, as low policies continue weighing on growth. oil prices, demographic pressures, and slow implementation of structural reforms weigh on Growth in commodity importers is also expected potential growth. In contrast, growth in Turkey is to gather momentum in 2017, albeit only expected to accelerate to 4 percent as policy GLOBAL ECONOMIC PROSPECTS | JUNE 2017 EUROPE AND CENTRAL ASIA 81 uncertainty   abates, tourism recovers, and FIGURE   2.2.1 ECA: Recent developments corporate balance sheets mend. Structural reforms, Growth momentum strengthened further in early 2017 for a majority of including in the banking sector, will help lift countries. Inflation in commodity exporters is slowing as depreciation growth throughout the forecast horizon in pressures have eased, while inflation in commodity importers gathered Azerbaijan, Belarus, and Kazakhstan. speed. A. Industrial production B. Manufacturing PMIs Risks Percent Commodity exporters Index 8 Commodity importers 60 Russia Turkey 6 The projected upturn is fragile. Heightened policy 4 uncertainties and geopolitical risks, within and 2 50 outside the region, could set back growth in ECA. 0 -2 Other major risks include renewed decline in -4 40 commodity prices and international financial 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 Jan-16 May-16 Jul-16 Jan-17 Mar-16 Sep-16 Nov-16 Mar-17 market disruptions. Domestic banking system weaknesses are vulnerabilities, and could become amplifiers of the effects of internal and external C. Inflation D. Export and import growth shocks. Percent 2014m4 Percent 8 2016m4 Exports 2017m4 20 7 Imports Inflation target Subdued growth and growing anti-immigration 6 5 10 sentiment have fueled populist opposition to 4 European integration. An unwinding of 3 0 2 integration in Europe would have implications for 1 -10 ECA given its close trade, financial, and 0 Jun-13 Feb-13 Oct-13 Jun-14 Jun-15 Jun-16 Feb-14 Oct-14 Feb-15 Oct-15 Feb-16 Oct-16 Feb-17 -1 Commodity Commodity remittances ties with advanced economies in the exporters importers region (Figure 2.2.2; EBRD 2015; World Bank Sources: Haver Analytics, World Bank. 2016c). Even in the absence of concrete anti- Note: ECA stands for Europe and Central Asia. A. Values are GDP weighted-average year-on-year growth. Commodity exporters include Armenia, integration steps, uncertainty about policies can Azerbaijan, Kazakhstan, Kyrgyz Republic, Russia, and Ukraine. Commodity importers include Belarus; Bosnia and Herzegovina; Bulgaria; Croatia; Hungary; Macedonia, FYR; Moldova; weigh on growth by discouraging investment, Montenegro; Poland; Romania; Serbia; and Turkey. Last observation is 2017Q1. employment, foreign firm entry, and FDI B. Purchasing managers’ indexes for manufacturing. Values above 50 indicate expansion. Last observation is April 2017. (Crowley, Song, and Meng 2016; Kose et al. C. Inflation is median in each sub-grouping. Commodity exporters include Albania, Armenia, Azerbaijan, Kazakhstan, Kyrgyz Republic, Russia, and Ukraine. Commodity importers include 2017a). Belarus; Bosnia and Herzegovina; Bulgaria; Croatia; Georgia; Hungary; Kosovo; Macedonia, FYR; Moldova; Poland; Romania; Serbia; and Turkey. Last observation is March 2017. D. GDP weighted-average volume of exports and imports for Armenia, Hungary, Kazakhstan, Poland, Geopolitical tensions may also suppress growth. A Russia, Turkey, and Ukraine. Last observation is February 2017. re-escalation of violence in Syria could undermine investor and consumer confidence, thereby putting a strain on growth. Within the region, A renewed decline in commodity prices could geopolitical risks have been highlighted by the first negatively affect investment and consumption major terrorist attack in Russia since 2012, a cargo among ECA commodity exporters. The resulting blockade on eastern region in Ukraine in March, a slower growth could have spillovers to neighboring renewed territorial dispute between Armenia and countries (World Bank 2016c). In addition, a Azerbaijan since early 2016, reemerging political disorderly tightening of global financing tension among Western Balkan countries, and conditions may put pressure on currencies, raise domestic policy uncertainties in Belarus, Russia, borrowing costs, and lead to an outflow of capital and Turkey. In contrast, strengthening relations from ECA region. between Central Asian countries, including a provisional agreement on the demarcation Domestic vulnerabilities may exacerbate the between the Kyrgyz Republic and Uzbekistan, and impact of external and internal shocks. Banking restoration of direct flights between Tajikistan and and corporate sector balance sheets with high Uzbekistan, could help boosting regional degrees of dollarization (e.g., Azerbaijan, Armenia, integration. Belarus, Georgia, Kazakhstan, Kyrgyz Republic, 82 CHAPTER 2.2 GLOBAL ECONOMIC PROSPECTS | JUNE 2017   ECA: Outlook and risks FIGURE 2.2.2 Tajikistan),   low asset quality (e.g., Azerbaijan, Bosnia and Herzegovina, Croatia, Russia, A broad-based acceleration in activity, supported by consumption and investment, is expected in 2017-19. However, growth outcomes are Kazakhstan, Tajikistan, Serbia), and reliance on projected to vary widely, especially in commodity exporters. Growth is external funding (e.g., Belarus, Croatia, Georgia, expected to edge up further in 2018-19. Heightened policy uncertainties Tajikistan, Turkey) are weak spots. While reforms and geopolitical risks in Europe could inflict damage on growth in the ECA region. Domestic banking system weaknesses are vulnerabilities, and aimed at strengthening financial systems are could become amplifiers of the effects of internal and external shocks. ongoing in many countries, including Azerbaijan, Belarus, Kazakhstan, Turkey, and Russia, the A. Distribution of growth B. Country decomposition of growth process of restoring banking sector health may be Percent Range Median Percent Other Other commodity Commodity importers commodity Commodity importers exporters exporters protracted (Reinhart and Rogoff 2014). Fiscal 10 4 Turkey Turkey Russia Russia deficits in several ECA countries (e.g., Kyrgyz 5 Regional Regional growth growth 3 Republic, Tajikistan, Turkey, Romania) widened 0 2 in 2016. Further deterioration in fiscal positions 1 -5 could exacerbate vulnerabilities. 2016 2017 2018-2019 2016 2017 2018-2019 0 -1 -2 Commodity exporters Commodity importers 2013 2014 2015 2016 2017 2018 2019 C. GDP decomposition of commodity D. GDP decomposition of commodity exporters importers Percent Private cons. Government cons. Percent Private cons. Government cons. Investment Exports Investment Exports 8 Imports GDP 8 Imports GDP 4 4 0 0 -4 -4 -8 -8 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 E. Trade and financial exposure F. Non-performing loans Percent Percent Percent 40 Other ECA EU15 2 10 8 30 6 4 20 1 2 0 Sub-Saharan Central Asia South Asia Middle East & East Asia & Latin America 10 North Africa Europe & Caribbean Pacific Africa & the 0 0 Inward Foreign Exports Portfolio Remittance FDI claims liabilities inflows (RHS) Sources: BIS, Bloomberg, Haver Analytics, World Bank. Note: ECA stands for Europe and Central Asia. A. Median and range among each sub-grouping. Commodity exporters include Albania, Armenia, Azerbaijan, Kazakhstan, Kosovo, Kyrgyz Republic, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. Commodity importers include Belarus; Bulgaria; Bosnia and Herzegovina; Croatia; Georgia; Hungary; Macedonia, FYR; Moldova; Montenegro; Poland; Romania; Serbia; and Turkey. B. GDP-weighted growth. Commodity exporters include Albania, Armenia, Azerbaijan, Kazakhstan, Kyrgyz Republic, Ukraine, and Uzbekistan. Commodity importers include Belarus; Bulgaria; Croatia; Georgia; Hungary; Macedonia, FYR; Moldova; Poland; Romania and Uzbekistan. C. Commodity exporters include Albania, Armenia, Azerbaijan, Kazakhstan, Kyrgyz Republic, Russia, Ukraine, and Uzbekistan. Cons. = consumption. D. Commodity importers include Belarus; Bulgaria; Croatia; Georgia; Hungary; Macedonia, FYR; Moldova; Poland; Romania; and Turkey. Cons. = consumption. E. Foreign claims refer to stock of total claims of BIS-reporting banks on foreign banks and non- banks. Trade refers to goods exports and imports. Data are average of 2010-15. Exports to the United States/Euro Area, remittances from the United States/Euro Area, and FDI from the United States/Euro Area (all in percent of GDP). FDI is stock of total FDI. ECA refers to EMDE ECA countries. EU15 includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and United Kingdom. F. Share of non-performing loans to gross loans. Simple average of each sub-grouping of countries. GLOBAL ECONOMIC PROSPECTS | JUNE 2017 EUROPE AND CENTRAL ASIA 83 TABLE   2.2.1 Europe and Central Asia forecast summary   (Real GDP growth at market prices in percent, unless indicated otherwise)   2014 2015  2016  2017  2018  2019    2016  2017  2018  2019  (percentage point difference     Estimates Projections   from January 2017 projections) EMDE ECA, GDP a   2.3 1.0 1.5 2.5 2.7 2.8 0.3 0.1 -0.1 -0.1 EMDE ECA, GDP excl. Russia  3.4 3.6 2.7 3.3 3.5 3.7 0.3 0.3 0.1 0.1 (Average including countries with full national accounts and balance of payments data only)b EMDE ECA, GDPb  2.3 0.9 1.5 2.5 2.7 2.8 0.3 0.1 0.0 -0.1 GDP per capita (U.S. dollars)  1.9 0.5 1.2 2.3 2.5 2.6 0.3 0.2 -0.1 -0.1 PPP GDP  2.2 0.7 1.5 2.5 2.7 2.8 0.4 0.1 -0.1 -0.1 Private consumption  2.0 -2.5 -0.1 3.4 3.9 4.0 -2.1 0.8 0.9 1.0 Public consumption  0.9 0.0 2.4 2.3 1.9 2.1 1.7 1.1 0.5 0.7 Fixed investment  2.3 0.4 0.4 3.8 4.2 4.3 0.1 -0.9 -2.6 -1.1 Exports, GNFSc  3.3 3.7 3.2 3.7 3.9 3.8 0.9 0.6 0.5 0.2 Imports, GNFS   c -0.5 -5.8 3.1 5.4 5.9 6.0 -0.2 0.7 -0.3 1.0 Net exports, contribution to 1.3 3.1 0.2 -0.3 -0.4 -0.5 0.4 0.0 0.3 -0.2 growth  Memo items: GDP    d Commodity exporters 0.8 -2.4 0.2 1.7 1.9 2.0 0.3 -0.1 -0.3 -0.3 Commodity importerse 4.0 4.6 2.8 3.4 3.5 3.6 0.2 0.4 0.2 0.2 f Central Europe 3.0 3.7 3.1 3.5 3.3 3.2 0.2 0.3 0.0 0.0 Western Balkansg 0.4 2.2 2.9 3.2 3.5 3.7 0.2 0.0 -0.1 0.0 Eastern Europeh -3.8 -7.7 0.8 1.4 2.6 3.2 0.9 0.1 0.1 0.6 i South Caucasus 2.7 1.7 -2.1 0.1 1.6 2.2 -0.9 -2.0 -1.4 -0.7 Central Asiaj 5.4 3.1 3.0 3.9 4.1 4.5 0.2 0.1 -0.7 -0.6 Russia 0.7 -2.8 -0.2 1.3 1.4 1.4 0.4 -0.2 -0.3 -0.4 Turkey 5.2 6.1 2.9 3.5 3.9 4.1 0.4 0.5 0.4 0.4 Poland 3.3 3.9 2.8 3.3 3.2 3.2 0.3 0.2 -0.1 -0.2 Source: World Bank. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time. a. EMDE refers to emerging market and developing economy. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. b. Sub-region aggregate excludes Bosnia and Herzegovina, Kosovo, Montenegro, Serbia, Tajikistan, and Turkmenistan, for which data limitations prevent the forecasting of GDP components. c. Exports and imports of goods and non-factor services (GNFS). d. Includes Albania, Armenia, Azerbaijan, Kazakhstan, Kyrgyz Republic, Kosovo, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. e. Includes Belarus; Bosnia and Herzegovina; Bulgaria; Croatia; Georgia; Hungary; Macedonia, FYR; Moldova; Montenegro; Poland; Romania; Serbia; and Turkey. f. Includes Bulgaria, Croatia, Hungary, Poland, and Romania. g. Includes Albania; Bosnia and Herzegovina; Kosovo; Macedonia, FYR; Montenegro; and Serbia. h. Includes Belarus, Moldova, and Ukraine. i. Includes Armenia, Azerbaijan, and Georgia. j. Includes Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. For additional information, please see www.worldbank.org/gep. 84 CHAPTER 2.2 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 TABLE 2.2.2  Europe and Central Asia country forecasts a   (Real GDP growth at market prices in percent, unless indicated otherwise)   2014 2015  2016  2017  2018  2019  2016  2017  2018  2019    (percentage point difference     Estimates Projections from January 2017 projections) Albania 1.8 2.6 3.2 3.5 3.5 3.8 0.0 0.0 0.0 0.1 Armenia 3.6 3.0 0.2 2.7 3.1 3.4 -2.2 0.0 0.1 0.2 Azerbaijan 2.0 1.1 -3.8 -1.4 0.6 1.3 -0.8 -2.6 -1.7 -1.0 Belarus 1.7 -3.9 -2.6 -0.4 0.5 1.2 -0.1 0.1 -0.8 -0.2 Bosnia and Herzegovina 1.1 3.0 2.8 3.2 3.7 4.0 0.0 0.0 0.0 0.1 Bulgaria 1.3 3.6 3.4 3.0 3.2 3.3 -0.1 -0.2 0.1 0.2 Croatia -0.4 1.6 2.9 2.9 2.5 2.6 0.2 0.4 0.0 0.0 Georgia 4.6 2.9 2.7 3.5 4.0 4.5 -0.7 -1.7 -1.3 -0.5 Hungary 4.0 3.1 2.0 3.7 3.7 3.0 -0.1 0.6 0.3 0.0 Kazakhstan 4.2 1.2 1.0 2.4 2.6 2.9 0.1 0.2 -1.1 -1.1 Kosovo 1.2 4.1 3.6 3.9 4.2 4.4 0.0 0.0 0.5 0.8 Kyrgyz Republic 4.0 3.9 3.8 3.4 4.0 4.8 1.6 0.4 0.3 -0.1 Macedonia, FYR 3.6 3.8 2.4 2.8 3.3 3.8 0.4 -0.5 -0.4 -0.2 Moldova 4.8 -0.5 4.1 4.0 3.7 3.5 1.9 1.2 0.4 -0.2 Montenegro 1.8 3.4 2.5 3.3 3.0 2.0 -0.7 -0.3 0.0 -1.0 Poland 3.3 3.9 2.8 3.3 3.2 3.2 0.3 0.2 -0.1 -0.2 Romania 3.1 3.9 4.8 4.4 3.7 3.5 0.1 0.7 0.3 0.3 Russia 0.7 -2.8 -0.2 1.3 1.4 1.4 0.4 -0.2 -0.3 -0.4 Serbia -1.8 0.8 2.8 3.0 3.5 3.5 0.3 0.2 0.0 0.0 Tajikistan 6.7 6.0 6.9 5.5 5.9 6.1 0.9 1.0 0.7 1.6 Turkey 5.2 6.1 2.9 3.5 3.9 4.1 0.4 0.5 0.4 0.4 Turkmenistan 10.3 6.5 6.2 6.3 6.5 6.5 0.0 -0.2 -0.3 -0.5 Ukraine -6.6 -9.8 2.3 2.0 3.5 4.0 1.3 0.0 0.5 1.0 Uzbekistan 8.1 8.0 7.8 7.6 7.7 7.8 0.5 0.2 0.3 0.4 Source: World Bank. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. a. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. For additional information, please see www.worldbank.org/gep. LATIN AMERICA AND THE CARIBBEAN The regional economy appears to be stabilizing in 2017, but the recovery is uneven. Growth is expected to be 0.8 percent in 2017 as private consumption strengthens and the contraction in investment eases. Growth is projected to increase to 2.1 percent in 2018 as the recovery in Brazil and other commodity exporters gains traction. Risks to the outlook remain tilted to the downside and stem from domestic political and policy uncertainty, uncertainty about policy changes in the United States, and potential financial market disruptions that could hinder external financing. Recent developments International bond issuance in Latin America accelerated in the first quarter of 2017 amid low market volatility and robust investor appetite for Recent data for the largest economies in Latin emerging market assets. Private sector debt American and the Caribbean are lackluster, yet issuance rose notably as energy firms sought to broadly improving. Real activity data (for extend debt maturities or lower interest costs. example, industrial production and PMI) have improved somewhat from the lows of 2016, while Early 2017 was marked by fiscal reforms in several confidence has stabilized after falling in the three countries. Mexico took steps to liberalize fuel years to early 2016 (Figure 2.3.1, Box 2.3.1). The prices in January. Colombia enacted a structural recent recovery in global trade is also evident in tax reform that includes adjustments to the VAT, Latin America, where export volumes have picked simplification of the corporate and personal tax up since mid-2016. regimes, the imposition of some excise and subnational taxes, and measures to reduce tax The recovery is uneven, however. While Argentina evasion. Argentina initiated a quarterly path for and Brazil appear to be pulling out of recessions, fiscal targets. In Brazil, the pension reform plan growth in Colombia slowed in 2017Q1, in part being negotiated in the National Congress is due to a value-added tax (VAT) hike. First quarter expected to be finalized later this year, following activity in Chile and Peru was held back by the adoption in late 2016 of a constitutional natural disasters and mining sector strikes. amendment introducing a ceiling on federal primary expenditures for the next 20 years. Disinflation is underway in most large economies in the region, underpinned by exchange rate ap- Nearly all countries in the region have fiscal preciation, monetary policy actions over the past deficits, and more than one-quarter have deficits year, and, especially in Brazil, falling food prices of greater than 5 percent of GDP, in part (Figure 2.3.2). Mexico is an exception, where reflecting the lingering effects of low commodity inflation is increasing due to a still weak peso prices on government revenues. There was some (reflecting the uncertain policy path in the United correction in 2016, however, with nearly half of States) and rising fuel prices. Hyperinflation the countries in the region managing to improve continues in República Bolivariana de Venezuela. their budget positions. The largest improvements occurred in small economies, including Grenada Note: This section was prepared by Dana Vorisek. Research (stronger adherence to fiscal rules and improved assistance was provided by Shituo Sun. tax administration and compliance), Belize (rising 86 CHAPTER 2.3 GLOBAL ECONOMIC PROSPECTS | JUNE 2017       BOX 2.3.1 Continued growth divergence within Latin America and the Caribbean Latin America and the Caribbean experienced a second South America (Brazil and Argentina) improved somewhat year of contraction in 2016—the continent’s first multi- in the second half of the year, however. Argentina saw the year recession since the 1980s—with output contracting start of a recovery in the third quarter of 2016. Although 1.4 percent. Performance in the subregions varied substan- Brazil experienced its eighth quarterly contraction in Q4, tially, however. While growth eased to a moderate 2.5 the decline moderated on a year-on-year basis. percent in Mexico and Central America, and in the Carib- bean, the contraction in South America deepened, to 2.9 The slight growth deceleration in Mexico and Central percent. Growth for the region as a whole was nevertheless America in 2016 mainly reflects easing growth in Mexico, in line with expectations in January 2017. where investment and net exports were less supportive of growth in the context of subdued capital inflows and glob- Within South America, output contracted in four coun- al trade. Growth in Central America also eased, mainly tries in 2016—Argentina, Brazil, Ecuador, and República reflecting slowing growth in Guatemala on heightened Bolivariana de Venezuela—while the majority of other political uncertainty and contracting public spending. South American countries saw a slowdown in growth. Guatemala and other Central American countries did, Adjustment to subdued commodity prices continued to however, experience robust growth in remittances in 2016 dampen activity in South America. In Brazil, rising unem- as the U.S. labor market recovered, and in anticipation of ployment, tightening financial conditions, and continued changes in U.S. immigration policy (World Bank 2017f). political tensions extended deep declines in private con- sumption and investment. In Argentina, the short-term In the Caribbean, the deceleration in 2016 reflected a rise in inflation that resulted from the removal of public modest slowdown in the Dominican Republic, the largest service subsidies contributed to a contraction in private economy in the region, on the completion of construction consumption and investment. Peru was a notable excep- projects and weakening manufacturing growth. Contrac- tion to the trend in South America, as growth was lifted by tion in several commodity-exporting countries (Belize, booming copper production as a large new mine began Suriname, Trinidad and Tobago) also contributed to the operating. Conditions in the two largest economies of deceleration. revenue, including from fuel tax hikes), and After dropping sharply in response to falling Suriname (reduced procurement spending). The commodity prices and domestic political median deficit in commodity-exporting countries uncertainty, investment appears set to return to is on track to recede in 2017 as recovering positive growth in 2017 in some countries (e.g., commodity prices bolster government revenues Argentina, Colombia). In Argentina, investment and budget reform programs progress. will be supported by an improved business cli- mate following reforms by the Macri admin- Outlook istration and a strong increase in public investment, albeit projected within the planned Growth in Latin America and the Caribbean is fiscal consolidation path. In Colombia, a rebound projected to strengthen to 0.8 percent in 2017, as in infrastructure investment will be supported by a Argentina and Brazil emerge from recessions large national road project. Nonetheless, for the (Figure 2.3.3, Table 2.3.1). A growth recovery in region as whole, the investment contribution to commodity exporters in the region will be offset to growth will continue to be slightly negative in some extent by easing growth in Mexico. The pace 2017. Private consumption and net exports are of the regional recovery is projected to be slower expected to provide a boost to growth as activity than forecasted in the January Global Economic in commodity exporters recovers. Prospects as a result of a more protracted adjustment to previous commodity price declines and A rising forecast for metals prices should favor continued policy uncertainty. metals and minerals producers. However, the GLOBAL ECONOMIC PROSPECTS | JUNE 2017 LATIN AMERICA AND THE CARIBBEAN 87 metal-exporting   economies in the region face FIGURE   2.3.1 LAC: Recent developments diverging growth paths, due to idiosyncratic Early 2017 data for the largest economies in the region are lackluster, yet factors. Copper production in Chile, which was broadly improving. Exports from the region have picked up since mid- deeply disrupted early in the year by a strike at the 2016. Disinflation is underway in most large Latin American economies, largest mine, should recover sufficiently for growth reflecting strengthening currencies. In Mexico, however, currency depreciation has pushed inflation above the central bank target range. to accelerate modestly, to 1.8 percent. Growth in Despite bouts of market volatility in late 2016, external financing conditions Peru is projected to decelerate in 2017, reflecting remain accommodative. the adverse impacts of major floods early in the year and softening copper production and exports. A. Industrial production and B. Goods exports and imports, consumer confidence volume Growth in energy exporters is projected to be Percent, year-on-year Index, 2010=100 Index, 2010=100, 3-month moving average 10 Industrial production 130 140 mixed this year. In Colombia, stable growth Consumer confidence (RHS) 120 130 Exports Imports 5 reflects rebounding investment and exports and an 110 120 uptick in imports, while the higher VAT is 0 100 110 90 expected to keep private consumption growth flat. -5 100 80 90 Growth in Ecuador is projected to continue -10 70 80 contracting, though less deeply than in 2016, Jan-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jan-17 Jul-13 Jul-16 Jan-10 Jul-10 Jan-11 Jul-11 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jan-12 Jul-12 Jan-13 reflecting slowing momentum in fiscal consolidation. C. Consumer price inflation D. Exchange rates Growth in Mexico is projected to slow to 1.8 Percent, year-on-year 10 Apr-16 Oct-16 LCU/USD, percent change during period Apr 2016 - Oct 2016 Apr-17 10 Nov 2016 - Apr 2017 percent, from 2.3 percent in 2016, mainly on an 9 8 Target 5 7 expected contraction of investment, in turn 6 0 5 reflecting uncertainty about U.S. economic policy. 4 -5 3 In the remainder of Central America, growth is 2 -10 1 -15 expected to be stable. Strengthening tourism Argentina Colombia Chile Peru Mexico Brazil Colombia Chile Peru Brazil Mexico demand underlies an expected acceleration in growth to 3.3 percent in the Caribbean. E. Bond issuance F. Sovereign bond spreads The regional recovery is expected to gather pace in US$, billions Basis points 2018 and 2019 as growth picks up in the largest Argentina Brazil Mexico Others 700 Argentina Brazil Chile 25 Colombia Mexico Peru economy, Brazil, and in energy exporters. In 20 600 Argentina and Brazil, reforms implemented over 15 500 10 400 the past two years to stabilize government finances 5 300 are expected to begin to yield dividends, as will 0 200 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 efforts in Argentina to improve the business 100 Jan-16 Jul-16 Jan-17 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Mar-16 May-16 Sep-16 Nov-16 Mar-17 May-17 climate. The medium-term outlook for Brazil is Public Private constrained, however, by the need for private and public sector deleveraging, following a rapid Sources: CPB Netherlands Bureau for Economic Policy Analysis, Dealogic, Haver Analytics, World Bank. increase in debt prior to the 2015–16 recession, Note: LAC stands for Latin America and the Caribbean. A. GDP-weighted averages using seasonally-adjusted data for Brazil and Mexico. Last observation and the medium-term forecast for Argentina is is March 2017 for industrial production and April 2017 for consumer confidence. subject to significant uncertainty. For Mexico, the B. Lines show aggregate volumes for Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, Guatemala, Mexico, Paraguay, Peru, and Uruguay. Last observation negative impacts from potential U.S. policy is March 2017. C. Blue boxes show central inflation targets; vertical lines show target bands. changes will weigh on investment and growth D. LCU is local currency unit. prospects. More generally, long-term growth in F. Measures the average spread of a country’s sovereign debt (as measured by J.P. Morgan’s Emerging Markets Bond Index) over the equivalent maturity U.S. Treasury bond. Last observation the region is constrained by infrastructure bottle- is May 24, 2017. necks, highlighting the trade-off with short-term fiscal consolidation needs, and by expected sub- dued long-term commodity price growth follow- ing the end of the latest commodity supercycle. 88 CHAPTER 2.3 GLOBAL ECONOMIC PROSPECTS | JUNE 2017   LAC: Outlook and risks FIGURE 2.3.2 Risks   The two-year contraction in growth in Latin America and the Caribbean is expected to end in 2017. Net exports are projected to support growth in Risks to the growth outlook for Latin America and 2017–19, in part due to firming commodity prices. But the recovery will be the Caribbean remain tilted to the downside. largely driven by accelerating private consumption and investment. Strong trade and financial linkages with the United States mean that U.S. policy They stem most prominently from domestic changes could impact regional activity. Fiscal imbalances, particularly in political and policy uncertainty, possible policy South America, make the region vulnerable to global financing shocks. The changes in major advanced economies (in rising impact of natural disasters in the region stands to derail growth in some countries. particular, the United States), a sharp or disorderly tightening of global financing conditions, lower- A. Contribution to GDP growth B. Commodity prices than-expected commodity prices, and the Percentage point contribution to growth Percent change, year-on-year increasingly severe impact of natural disasters. Private consump. Government consump. Crude oil Soybeans Wheat Investment Exports 30 Copper Iron ore Imports Real GDP growth 4 20 10 In a number of countries in the region, persistent 2 0 domestic political uncertainty could hinder -10 -20 growth in the short and medium term by reducing 0 -30 -40 confidence. In addition, the region faces an -2 -50 elevated level of policy uncertainty related to 2013 2014 2015 2017f 2018f 2019f 2016e 2014 2015 2016 2017f 2018f 2019f election cycles. Four major countries in the region (Brazil, Chile, Colombia, Mexico) are scheduled C. Exports to the United States and China, 2015–16 D. Remittance inflows, 2015 to hold legislative and presidential elections between November 2017 and October 2018. Percent Share of domestic GDP Percent Percent of GDP 30 Share of total exports (RHS) 90 25 United States 25 75 20 Rest of world Although expansionary U.S. fiscal policy stands to 20 60 15 15 45 10 have positive spillovers for exports from the 10 30 5 15 5 0 region, a more protectionist trade policy stance in 0 0 the United States would be detrimental to Mexico Haiti Honduras El Salvador Jamaica Guatemala Nicaragua Belize Mexico Guyana Dominican Rep. Guyana Brazil Mexico Nicaragua Haiti El Salvador Chile Honduras Peru Uruguay and Tobago Trinidad and many Central American and Caribbean United States China economies (IADB 2017). For Mexico, a renegotiation of the North American Free Trade E. Fiscal balances F. Natural disasters Agreement (NAFTA) could have repercussions Percent of GDP LAC Number of people affected, millions not only for exports, but also for investment, South America 2 Mexico & Central America 9 8 1997-2006 2007-16 which was boosted by the agreement. NAFTA has 1 The Caribbean 0 7 also been found to have boosted total factor 6 -1 5 productivity in Mexico (Shiff and Wang 2002) -2 4 3 and accelerated economic convergence in North -3 2 America (Easterly, Fiess, and Lederman 2003). -4 1 -5 0 Central America would suffer from rising U.S. 2007 2012 2016 Drought Flood All disasters trade protectionism through its strong trade Sources: Centre for Research on the Epidemiology of Disasters, Haver Analytics, International linkages to both the United States and Mexico. Monetary Fund, national sources, World Bank. For commodity producers in South America, a Note: LAC stands for Latin America and the Caribbean. A. GDP-weighted averages. Countries covered are Antigua and Barbuda, Argentina, The Bahamas, shift in the composition of GDP in China toward Barbados, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, services could also hinder growth through a Paraguay, Peru, St. Lucia, St. Vincent and the Grenadines, Trinidad and Tobago, Uruguay, and República Bolivariana de Venezuela. e = estimate. f = forecast. reduction in exports. B. Percent change of average annual prices. f = forecast. C. 2015–16 average for share of GDP and share of goods exports. More restrictive U.S. immigration policy may E. Median for each country group. F. Annual average for year spans indicated. “All disasters” include droughts, floods, storms, reduce remittance flows to the region, with a landslides, and wildfires. Countries covered are Antigua and Barbuda, Argentina, The Bahamas, Barbados, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominica, the Dominican follow-on drop in private consumption and Republic, Ecuador, El Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, investment. Central America and some Caribbean Suriname, Trinidad and Tobago, Uruguay, and República Bolivariana de Venezuela. The population of these countries averaged 533 million in 1997-2006 and 605 million in 2007-16. countries, where remittances are an important source of household income are particularly vul- nerable. In the medium term, the adverse effects GLOBAL ECONOMIC PROSPECTS | JUNE 2017 LATIN AMERICA AND THE CARIBBEAN 89   growth of tighter U.S. immigration policy may on The   path of commodity prices also stands to be mitigated, at least to some degree, by impact growth in the region. In particular, a less- expanding labor forces as returning migrants begin robust-than-expected recovery of global oil and to be reabsorbed by the domestic labor markets. natural gas prices in 2017 would undermine the expected pace of growth in Bolivia, Colombia, Faster-than-expected U.S. interest rate hikes or Ecuador, and Trinidad and Tobago, all of which U.S. dollar appreciation could make it more are heavily reliant on energy exports. difficult and costlier to secure financing in some countries in the region—in particular, those with Finally, changing environmental patterns pose elevated dollar-denominated debt or high gov- growing risks (World Bank 2014). The average ernment financing needs (Argentina, Chile, some number of people per year in the region affected Caribbean economies). Despite the recent pursuit by natural disasters, especially droughts and of countercyclical fiscal policies in some countries, floods, doubled in 2007–16 compared to the the lack of fiscal buffers remains a vulnerability in previous decade. Drought impacted approximately the region (World Bank 2017g; IMF 2017b). 4.3 million people in the region in 2016. TABLE 2.3.1 Latin America and the Caribbean forecast summary (Real GDP growth at market prices in percent, unless indicated otherwise)       2014 2015 2016 2017 2018 2019 2016 2017 2018 2019 (percentage point difference Estimates Projections from January 2017 projections) EMDE LAC, GDPa 0.9 -0.8 -1.4 0.8 2.1 2.5 0.0 -0.4 -0.2 -0.1 (Average including countries with full national accounts and balance of payments data only)b EMDE LAC, GDPb 0.9 -0.8 -1.4 0.8 2.1 2.5 0.0 -0.4 -0.2 -0.1 GDP per capita (U.S. dollars) -0.2 -1.9 -2.5 -0.2 1.1 1.5 0.0 -0.3 -0.1 -0.1 PPP GDP 1.1 -0.2 -0.9 1.1 2.2 2.6 0.0 -0.3 -0.2 0.0 Private consumption 1.5 -0.8 -1.2 0.8 2.1 2.7 0.3 -0.1 -0.1 0.3 Public consumption 1.9 0.6 -0.3 0.5 0.9 0.9 0.9 1.7 0.4 0.0 Fixed investment -2.0 -5.8 -6.4 -0.6 2.3 3.3 -1.5 -1.0 0.0 -0.1 c Exports, GNFS 1.5 4.5 1.2 4.2 3.2 3.2 -0.3 0.9 -0.1 -0.3 Imports, GNFSc -0.2 -1.2 -2.7 2.9 2.6 3.4 -0.3 2.7 0.5 0.6 Net exports, contribution to growth 0.3 1.2 0.9 0.3 0.2 0.0 0.1 -0.4 -0.1 -0.2 Memo items: GDP South Americad 0.3 -2.1 -2.9 0.3 1.9 2.3 -0.1 -0.5 -0.2 -0.1 Mexico and Central Americae 2.5 2.9 2.5 2.1 2.4 2.7 0.2 0.0 -0.3 -0.2 f Caribbean 3.9 3.4 2.5 3.3 3.8 3.7 -0.7 0.2 0.4 0.4 Brazil 0.5 -3.8 -3.6 0.3 1.8 2.1 -0.2 -0.2 0.0 -0.1 Mexico 2.3 2.6 2.3 1.8 2.2 2.5 0.3 0.0 -0.3 -0.3 Argentina -2.5 2.6 -2.3 2.7 3.2 3.2 0.0 0.0 0.0 0.0 Source: World Bank. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time. a. EMDE refers to emerging market and developing economy. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Cuba. b. Aggregate includes all countries in notes d, e, and f except Grenada, St. Kitts and Nevis, and Suriname, for which data limitations prevent the forecasting of GDP components. c. Exports and imports of goods and non-factor services (GNFS). d. Includes Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay, and República Bolivariana de Venezuela. e. Includes Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, and Panama. f. Includes Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, the Dominican Republic, Grenada, Guyana, Haiti, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago. For additional information, please see www.worldbank.org/gep. 90 CHAPTER 2.3 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 TABLE 2.3.2  Latin America and the Caribbean country forecasts   a (Real GDP growth at market prices in percent, unless indicated otherwise)      2014 2015 2016 2017 2018 2019 2016 2017 2018 2019 (percentage point difference       Estimates Projections from January 2017 projections) Argentina -2.5 2.6 -2.3 2.7 3.2 3.2 0.0 0.0 0.0 0.0 Belize 4.1 1.0 -1.5 2.1 2.0 2.0 -0.5 0.6 0.0 -0.5 Bolivia 5.5 4.9 4.3 3.7 3.7 3.4 0.6 0.2 0.3 0.0 Brazil 0.5 -3.8 -3.6 0.3 1.8 2.1 -0.2 -0.2 0.0 -0.1 Chile 1.9 2.3 1.6 1.8 2.0 2.3 0.0 -0.2 -0.3 -0.2 Colombia 4.4 3.1 2.0 2.0 3.1 3.4 0.3 -0.5 0.1 0.1 Costa Rica 3.7 4.7 4.3 3.8 3.6 3.5 0.0 -0.1 -0.1 -0.2 Dominica 3.9 2.2 0.6 3.0 2.1 2.1 -0.7 0.2 -0.6 -0.6 Dominican Republic 7.6 7.0 6.6 5.3 5.0 4.8 -0.2 0.8 0.8 0.8 Ecuador 4.0 0.2 -1.5 -1.3 -0.4 0.3 0.8 1.6 0.2 -0.7 El Salvador 1.4 2.3 2.4 2.0 1.8 1.7 0.2 0.1 -0.2 -0.3 Guatemala 4.2 4.1 3.1 3.5 3.5 3.6 0.2 0.3 0.1 0.2 Guyana 3.8 3.1 3.3 3.5 3.6 3.7 0.7 -0.3 -0.3 -0.4 b Haiti 2.8 1.2 1.4 0.5 1.7 2.3 0.2 1.1 0.2 0.3 Honduras 3.1 3.6 3.6 3.4 3.3 3.3 -0.1 -0.1 -0.1 0.1 Jamaica 0.7 1.0 1.4 2.0 2.1 2.3 -0.2 0.0 -0.2 -0.2 Mexico 2.3 2.6 2.3 1.8 2.2 2.5 0.3 0.0 -0.3 -0.3 Nicaragua 4.8 4.9 4.7 4.3 4.2 4.2 0.2 0.3 0.3 0.4 Panama 6.1 5.8 4.9 5.2 5.4 5.8 -0.5 -0.2 -0.1 0.3 Paraguay 4.7 3.0 4.1 3.6 3.8 3.8 0.3 0.0 0.5 0.5 Peru 2.4 3.3 3.9 2.8 3.8 3.6 -0.1 -1.4 0.0 0.0 St. Lucia 0.5 1.6 0.8 0.5 0.7 0.7 -0.2 -1.3 -1.5 -1.8 St. Vincent and the Grenadines -0.5 2.1 1.8 2.5 2.8 2.9 -0.2 0.3 0.4 0.5 Suriname 0.4 -2.7 -10.4 0.9 2.2 1.2 -3.4 0.4 1.1 -0.1 Trinidad and Tobago -0.6 -0.6 -5.1 0.3 3.4 3.3 -2.3 -2.0 -0.2 0.1 Uruguay 3.2 0.4 1.5 1.6 2.4 3.4 0.8 0.0 -0.1 -0.3 Venezuela, RB -3.9 -8.2 -12.0 -7.7 -1.2 0.7 -0.4 -3.4 -1.7 -0.3 Source: World Bank. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. a. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. b. GDP is based on fiscal year, which runs from October to September of next year. For additional information, please see www.worldbank.org/gep. MIDDLE EAST AND NORTH AFRICA Growth in the Middle East and North Africa region is projected to fall from 3.2 percent in 2016 to 2.1 percent in 2017. The adverse impact of OPEC-led oil production cuts in oil exporters is expected to more than offset the modestly improving growth in oil importers. Regional growth is forecast to pick up gradually, reaching 3.1 percent by 2019, despite continued fiscal consolidation in both oil exporters and importers. The key risks to the outlook include continued geopolitical tensions and conflicts, a lower-than-expected rise in oil prices for oil exporters, and challenges that may delay implementation of key structural reforms. Recent developments consolidation, and regional conflicts. Production in the oil sector has declined in the first four Growth in the Middle East and North Africa months of 2017 as a result of the November 2016 (MENA) region remained subdued at 3.2 percent OPEC production cut agreement.2 Among the top in 2016, due in part to the impact of low oil prices five oil producers in the region (Iraq, Islamic on the region’s key oil exporters (Figure 2.4.1).1 Republic of Iran, Kuwait, Saudi Arabia, and the Growth in Gulf Cooperation Council (GCC) United Arab Emirates), oil production cuts in the economies was held back by low oil prices and first quarter of 2017 amounted to more than one fiscal consolidation. Lower transfers from oil funds million barrels a day relative to October 2016 to general budgets were accompanied by tightened levels. The largest cuts were implemented by Saudi liquidity in the banking sector, which is reliant on Arabia, but compliance with OPEC mandates has public sector deposits, and has weighed on non-oil been higher than expected across most oil activity. Offsetting the slower growth in GCC oil exporters. exporters was stronger-than-expected growth in Oil importers have been gradually gaining non-GCC oil exporters, due to rising oil momentum since 2016, during which poor production in the Islamic Republic of Iran fol- harvests (e.g., severe drought in Morocco) as well lowing the lifting of sanctions, as well as improved as geopolitical conflicts (e.g., terrorist attacks in security in Iraq. the Arab Republic of Egypt and Jordan, In 2017, growth in the MENA region continues repercussions from closure of export routes from to be held back by oil production cuts, fiscal Jordan to the Syrian Arab Republic) constrained growth. Egypt, the largest oil importer, has been adjusting to a flexible exchange rate regime since Note: This section was prepared by Lei Sandy Ye, with November 2016, contributing to improving contributions from Ergys Islamaj. Research assistance was provided by Liwei Liu. exports and industrial production in the beginning 1The World Bank’s Middle East and North Africa aggregate of 2017. Egypt and other large importers are also includes 16 economies, and is grouped into three subregions. Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab beginning to undertake reforms to their business Emirates comprise the Gulf Cooperation Council (GCC); all are oil environments, such as the launch of Morocco’s exporters. Other oil exporters in the region are Algeria, the Islamic Republic of Iran, and Iraq. Oil importers in the region are Djibouti, the Arab Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, and 2The OPEC production cut agreement attempts to contain the West Bank and Gaza. The Syrian Arab Republic, the Republic of increase in global oil stocks and rebalance global oil markets. These Yemen, and Libya are excluded from regional growth aggregates due cuts were initially scheduled to last until June 2017 and have to data limitations. subsequently been extended to March 2018. 92 CHAPTER 2.4 GLOBAL ECONOMIC PROSPECTS | JUNE 2017   MENA: Recent developments FIGURE 2.4.1 rates   largely pegged to the U.S. dollar and subdued oil prices helped keep inflation below 3 Growth in MENA is softening in 2017. The adverse impact of OPEC-led percent among GCC economies. The peg to the production cuts in oil exporters more than offsets stronger growth in other regional economies. Inflation has picked up sharply in several countries. U.S. dollar has, however, implied appreciations of The peg to the dollar has contained inflation, but has led to real exchange the real effective exchange rate in Saudi Arabia rate appreciations in Saudi Arabia and the United Arab Emirates. and the United Arab Emirates, which may hinder their adjustment to low oil prices. A. GDP growth B. Oil production Percent MENA Millions of barrels per day 10 GCC 26 Fiscal consolidation programs continue against Non-GCC oil exporters 8 Oil importers the backdrop of sizable current account and fiscal 6 24 4 deficits in the region. These programs feature 2 22 expenditure cuts, new or increased value-added 0 and excise taxes, and energy subsidy reforms. In -2 -4 20 several economies (e.g., GCC), some of these Mar-16 Jun-16 Jul-16 Oct-16 Nov-16 Dec-16 Jan-17 Mar-17 Jan-16 Feb-16 Apr-16 May-16 Aug-16 Sep-16 Feb-17 Apr-17 programs are part of longer-term policies to 2010 2011 2012 2013 2014 2015 2016 2017 promote diversification beyond the energy sector. C. Inflation D. Real effective exchange rate These include Saudi Arabia’s National Percent Percent Index, 2010=100 Algeria Saudi Arabia Transformation Plan and Vision 2030; and a 12 GCC 35 130 10 Iran, Islamic Rep.; Algeria Egypt, Arab Rep. (RHS) United Arab Emirates GCC-wide value-added tax of 5 percent, effective 25 120 8 Other oil importers in 2018. While consolidation programs have 110 6 15 100 already contributed to estimated fiscal im- 4 2 5 90 provements by the start of 2017 in a few 0 -5 80 economies (e.g., Morocco, Jordan), most others registered weaker external and fiscal accounts Apr-14 Jul-14 Jan-15 Apr-15 Jul-15 Jan-16 Apr-16 Jul-16 Jan-17 Apr-17 Oct-14 Oct-15 Oct-16 Jul-14 Jul-15 Jan-16 Jul-16 Jan-17 Apr-14 Oct-14 Jan-15 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 from 2015 to 2016. Sources: Bank for International Settlements, Haver Analytics, International Energy Agency, World Bank. Note: MENA stands for Middle East and North Africa. Supported by benign global financing conditions, A. Weighted average growth of real GDP. B. Sum of daily crude oil productions of Iraq, Islamic Republic of Iran, Kuwait, Saudi Arabia, and the renewed investor risk appetite since the start of United Arab Emirates. Red columns denote period since November 2016 OPEC production cut agreement. Last observation is April 2017. 2017, and driven by the need to finance fiscal C. Unweighted averages. GCC includes Bahrain, Kuwait, Oman, Saudi Arabia, Qatar, and the United deficits, international bond issuances in the region Arab Emirates. Other oil importers include Morocco, Tunisia, Lebanon, and Jordan. Year-on-year growth rates. Last observation is April 2017. have been resilient, amounting to more than $45 D. Broad indexes of weights comprising 61 economies. Last observation is April 2017. billion in early 2017. GCC economies have also embarked on efforts to promote equity investor confidence, including in the context of the Islamic banking services in January, to relieve impending initial public offering of Saudi structural bottlenecks and improve private sector Aramco, the state oil company, under what is activity. expected to be the largest valuation on record. In Saudi Arabia and the United Arab Emirates, Inflation has picked up in several large economies. higher composite purchasing managers’ indexes Egypt’s core and overall inflation rate exceeded 30 (PMIs) over the past five months suggest that percent (y/y) in March 2017 due to currency business confidence is improving. depreciation and rising food prices. As a result of higher oil prices, inflation in most oil importers Outlook outside of Egypt has also begun to edge up this year. Food price pressures have further Regional growth is projected to fall from 3.2 contributed to rising inflation in Algeria and the percent in 2016 to 2.1 percent in 2017. The Islamic Republic of Iran, climbing back to double adverse impact of OPEC-led oil production cuts digits (y/y) in March 2017 in the latter (although in oil exporters more than offsets the modestly still on a declining trend from an annual rate of improving growth in oil importers. Growth is about 35 percent in 2013). In contrast, exchange expected to recover to an average of 3.0 percent GLOBAL ECONOMIC PROSPECTS | JUNE 2017 MIDDLE EAST AND NORTH AFRICA 93   2018-19. While the deceleration in 2017 is in FIGURE   2.4.2 MENA: Outlook and risks driven by oil exporters, the modest recovery in the In GCC oil exporters, gradually improving PMIs suggest recovery in the longer-term outlook is broad-based. This forecast non-oil sectors. A weak governance environment for investors and assumes a moderation of geopolitical tensions, as corporations in MENA may limit potential benefits from more supportive well as an increase in oil prices, which are expected conditions. Current account and fiscal balances are expected to improve over the medium term amid ongoing fiscal consolidation, as reflected in to average $53 per barrel (bbl) in 2017 and declining fiscal break-even prices, and depreciated exchange rates in $56 per bbl in 2018—a slight downgrade from economies not pegged to the U.S. dollar. Heightened geopolitical tensions January projections. Given the considerable may deter tourism and incur particularly high business costs outside of the GCC. A lower-than-expected rise in oil prices, potentially from higher uncertainty associated with oil prices in 2017, production outside of the region, may constrain fiscal space. fiscal consolidation is expected to continue, as the fiscal break-even prices for most oil exporters in A. Purchasing managers’ indexes B. Doing Business environment: MENA the region remain above projected oil prices Index Distance to Frontier Score (Figure 2.4.2). Oil importers are expected to see 65 Saudi Arabia United Arab Emirates 100 80 higher growth starting in 2017, aided by improved 60 60 competitiveness, reforms, and a recovery in 40 20 agricultural conditions. 55 0 Getting Starting a Paying electricity insolvency Registering across borders Minority investors Resolving business construction permits taxes credit Getting property Trading protection Dealing with 50 The forecast assumes that OPEC-mandated Aug-15 Jan-16 Jun-16 Mar-15 Nov-16 Apr-17 production cuts constrain GCC growth in 2017. Growth in Saudi Arabia, the largest economy in the region, and Iraq will slow as a result of C. Fiscal break-even oil prices: oil D. Current account balance exporters continued production cuts. In the Islamic GCC Republic of Iran, the second-largest economy in US$/bbl 120 GCC Non-GCC Percent of GDP 25 Non-GCC oil exporters Oil importers the region, limited spare capacity in oil production 110 20 100 15 and difficulty in accessing finance are weighing on 90 10 the country’s growth. Offsetting factors include 80 5 0 solid current account and fiscal positions, which 70 -5 60 are expected to support a steady growth outlook of 50 -10 -15 about 4 percent over 2017-19. 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 The non-oil sectors in most oil exporters are E. Business costs of terrorism F. Oil prices and U.S. crude inventory expected to modestly recover in 2017 from the Index, 1-7 (7=best) Millions of barrels US$/bbl weakness in 2016, as improved revenues from 6 600 U.S. stocks of crude oil 140 higher oil prices provide space for more expan- Thousands 5 EMDE average ex. MENA Oil price (RHS) 120 500 sionary fiscal policy, and as rising deposits increase 4 100 400 80 the funding capacity for bank lending (Miyajima 3 60 2 2017). However, the real economy’s ability to 300 40 1 leverage improving conditions may be limited by 0 200 20 Apr-10 Jun-11 Jan-12 Apr-17 May-14 Jul-15 Nov-10 Aug-12 Mar-13 Oct-13 Dec-14 Feb-16 Sep-16 weaknesses in private sector participation as well as GCC Non-GCC oil exporters Oil importers in the governance framework for investors and Sources: Haver Analytics, International Monetary Fund, U.S. Energy Information Administration, corporations (EBRD et al. 2016; Schiffbauer et al. World Bank, World Economic Forum. 2015). Over 2018-19, growth in oil exporters is Note: MENA stands for Middle East and North Africa. A. Composite PMI for total economy (50+ indicates expansion). Last observation is April 2017. expected to modestly improve as oil prices recover, B. Distance to frontier score, where best practice equals 100. Includes 15 economies. Unweighted averages. Data based on 2016/2017 edition. fiscal consolidation eases, and several economies C. GCC includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. Non- implement planned public investment (e.g., for GCC includes Algeria, Islamic Republic of Iran, and Iraq. Unweighted averages. 2017 and 2018 data are projections. Dubai’s World Expo 2020; Qatar’s World Cup D. Data for 2017-19 are projections. Includes 6 GCC economies, 3 non-GCC oil exporters, and 6 oil importers. Unweighted averages. 2022) and diversification programs, the benefits of E. Based on survey response to “To what extent does the threat of terrorism impose costs on businesses in your country? (1 = to a great extent, imposes huge costs; 7 = no costs at all).” which will be enhanced by ongoing business Unweighted averages. Includes 6 GCC economies, 2 non-GCC oil exporters, and 5 oil importers. climate reforms (Callen et al. 2014). Data based on the World Economic Forum’s Global Competitiveness Index, 2016/17 edition. F. U.S. crude stocks denote monthly average of U.S. stocks of crude oil excluding strategic petroleum reserves. Oil price denotes average of Brent, Dubai, and West Texas Intermediate. Last observation is April 2017. 94 CHAPTER 2.4 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 Among   oil importers, activity is expected to destruction   of capital, displacement of people and, improve. In Morocco and Tunisia, agricultural in the case of the Republic of Yemen, famine. production (e.g., wheat) is projected to rebound Fighting and instability in the Republic of Yemen under more normal weather. Egypt’s growth is limit its hydrocarbon production and have expected to remain near 4 percent in fiscal year imposed human and physical costs (World Bank 2017 and strengthen in the two years thereafter, 2017i). The continued conflict in Syria con- supported by the gradual implementation of tributes to regional instability, depressing business business climate reforms and improved and consumer confidence while restraining private competitiveness, although high inflation weighs consumption and reducing investment inflows in on near-term activity. In many oil importers, neighboring countries, such as Jordan and depreciating currencies and rising food prices may Lebanon. In addition, the continued flow of dampen private consumption. A gradual recovery refugees is causing strains on the public finances of in growth is expected in Jordan as reforms these countries. progress, and in Lebanon as political stability is restored. Fiscal consolidation, including public Deteriorating geopolitical tensions on a broader spending cuts in some economies, and political scale would shake investor confidence. Sovereign uncertainty are the main headwinds to growth in risk, as reflected in sovereign credit default swap this sub-region. spreads, has been declining in the GCC, but is vulnerable to conflict-driven uncertainty. In non- The pace of fiscal and external account adjustment GCC MENA economies, business costs of is contingent upon the movement in oil prices. terrorism are more elevated compared to other More than four-fifths of the region’s economies emerging and developing economies. Tourism, an are projected to have fiscal deficits in 2017. important source of revenue for several oil Several years of fiscal adjustment lie ahead for importers, is at risk; the sector remains weak and both oil exporters and importers. For economies has only recently begun to stabilize in Egypt and with flexible exchange rates, current account Morocco. Efforts to expand tourism through balances are expected to improve as a result of bilateral initiatives, such as Morocco’s tourism- depreciations. For economies with pegged marketing initiative with China in 2016, may help exchange rates, external account balances are cope with some of these risks. Heightened policy expected to be cushioned by fiscal consolidation uncertainty in some advanced economies, and and higher oil prices. Remittance flows to the associated risks of increased protectionism and MENA region, which contracted sharply in 2016, more stringent immigration restrictions, may are expected to recover in 2017, supported by adversely impact the region through reduced more stable exchange rate expectations in Egypt trade, remittance, and financial flows. The region and robust activity in the Euro Area, a major is particularly reliant on the European Union source of remittance flows for several oil importers for financial and trade flows, while the United (World Bank 2017h). States also contributes materially to foreign investment in some economies (IMF 2017c; World Bank 2017j). Risks A lower-than-expected rise in oil prices would The regional growth outlook faces three main likely diminish fiscal space in oil exporters and risks: geopolitical conflicts, a lower-than-expected weigh on confidence (Husain et al. 2015). A rise in oil prices, and political and social obstacles number of forces could limit the price rise. One is to reforms. Geopolitical risks in the region have the extent to which U.S. oil shale production and persisted into 2017. The U.S. sanctions on the crude stocks can offset OPEC production cuts. Islamic Republic of Iran imposed in early 2017 News of record-high U.S. crude inventories in may deter foreign investors’ confidence. Security March pushed down oil prices from $55/bbl to tensions and conflict in Iraq and the Syrian Arab $51/bbl over a four-day period, and inventories Republic are serious obstacles for these economies. did not fall as much as expected in April. Second, Ongoing conflicts in the region have caused compliance with OPEC production cuts may GLOBAL ECONOMIC PROSPECTS | JUNE 2017 MIDDLE EAST AND NORTH AFRICA 95 weaken.   Weaker oil prices would contribute to a Protests   over tax hikes have also occurred in parts deterioration, or slower improvement, in external of Algeria in 2017. Such developments could and fiscal balances. They would also impose discourage further reform and prolong the period strains on the non-oil sectors of the region, either of adjustment. In Tunisia, where reforms had directly from consolidation programs (e.g., been previously delayed, the new government has reductions in public investment), or indirectly via agreed with the workers’ union on a rescheduling strains on banking liquidity, which tends to be of negotiated salary increases signed in 2015. This driven by public-sector deposits. will help slow wage bill increases to 14.1 percent of GDP in 2017. To further contain the wage bill The implementation of comprehensive reforms in 2018, the government has proposed two could face challenges. The agreement on measures—a voluntary early retirement program Lebanon’s budget on March 27, the first in 12 and a negotiated departure program—both years, marks a step toward political and economic anchored in the IMF Extended Fund Facility stabilization but has prompted protests among program with coordinated technical support from citizens and firms who oppose higher taxes. the IMF and the World Bank. 96 CHAPTER 2.4 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 TABLE 2.4.1  Middle East and North Africa forecast summary   (Real GDP growth at market prices in percent, unless indicated otherwise) 2014 2015 2016 2017 2018 2019 2016 2017 2018 2019 (percentage point difference Estimates Projections from January 2017 projections) EMDE MENA, GDPa 3.4 2.8 3.2 2.1 2.9 3.1 0.5 -1.0 -0.4 -0.3 (Average including economies with full national accounts and balance of payments data only)b EMDE MENA, GDPb 3.4 2.7 3.1 2.2 2.9 3.2 0.5 -0.9 -0.5 -0.3 GDP per capita (U.S. dollars) 1.4 0.8 1.3 0.6 1.4 1.8 0.4 -0.9 -0.6 -0.3 PPP GDP 3.5 2.6 3.3 2.4 3.0 3.3 0.5 -0.9 -0.6 -0.4 Private consumption 6.4 1.5 2.6 2.3 3.0 3.2 -0.2 -0.7 -0.4 -0.3 Public consumption 6.9 1.7 -1.0 1.0 1.6 1.6 -0.4 0.1 -0.5 -0.7 Fixed investment 5.8 3.3 0.1 2.9 4.6 5.6 1.5 -0.8 1.1 1.7 c Exports, GNFS 2.3 1.9 5.8 2.3 3.7 3.9 0.9 -2.9 -1.2 -1.1 c Imports, GNFS 7.0 0.0 2.1 3.0 3.0 3.4 1.3 -1.9 -2.2 -2.0 Net exports, contribution to growth -1.7 0.9 1.9 0.0 0.6 0.5 -0.1 -0.6 0.3 0.2 Memo items: GDP   d Oil exporters 3.4 2.6 3.2 1.8 2.5 2.8 0.5 -1.1 -0.6 -0.3 e GCC countries 3.2 3.8 1.9 1.3 2.3 2.5 0.3 -0.9 -0.3 -0.2 Saudi Arabia 3.7 4.1 1.4 0.6 2.0 2.1 0.4 -1.0 -0.5 -0.5 Iran, Islamic Rep. 4.3 -1.8 6.4 4.0 4.1 4.2 1.8 -1.2 -0.7 -0.3 Oil importersf 3.0 3.7 2.8 3.7 4.1 4.4 -0.2 -0.2 -0.1 -0.1 Egypt, Arab Rep. 3.7 4.4 4.1 4.3 5.0 5.3 -0.1 -0.1 -0.1 -0.1 g Fiscal year basis 2.9 4.4 4.3 3.9 4.6 5.3 0.0 -0.1 -0.1 -0.1 Source: World Bank. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time. a. EMDE refers to emerging market and developing economy. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Libya, Syria, and the Republic of Yemen due to data limitations. b. Aggregate includes all countries in notes d and f except Djibouti, Iraq, Qatar, and West Bank and Gaza, for which data limitations prevent the forecasting of GDP components. c. Exports and imports of goods and non-factor services (GNFS). d. Oil exporters include Algeria, Bahrain, Iraq, the Islamic Republic of Iran, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. e. The Gulf Cooperation Council (GCC) includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. f. Oil importers include Djibouti, Egypt, Jordan, Lebanon, Morocco, Tunisia, and West Bank and Gaza. g. The fiscal year runs from July 1 to June 30 in Egypt; the column labeled 2016 reflects the fiscal year ended June 30, 2016. For additional information, please see www.worldbank.org/gep. GLOBAL ECONOMIC PROSPECTS | JUNE 2017 MIDDLE EAST AND NORTH AFRICA 97 TABLE     forecasts 2.4.2 Middle East and North Africa economy a (Real GDP growth at market prices in percent, unless indicated otherwise)         2014 2015 2016 2017 2018 2019 2016 2017 2018 2019 (percentage point difference Estimates Projections from January 2017 projections) Algeria 3.8 3.8 3.5 1.8 1.0 1.5 -0.1 -1.1 -1.6 -1.3 Bahrain 4.4 2.9 3.0 1.9 1.9 2.3 1.0 0.1 -0.2 -0.1 Djibouti 6.0 6.5 6.5 7.0 7.0 7.2 0.0 0.0 0.0 0.2 Egypt, Arab Rep. 3.7 4.4 4.1 4.3 5.0 5.3 -0.1 -0.1 -0.1 -0.1 Fiscal year basisb 2.9 4.4 4.3 3.9 4.6 5.3 0.0 -0.1 -0.1 -0.1 Iran, Islamic Rep. 4.3 -1.8 6.4 4.0 4.1 4.2 1.8 -1.2 -0.7 -0.3 Iraq 0.7 4.8 10.1 -3.1 2.6 1.1 -0.1 -4.2 1.9 0.0 Jordan 3.1 2.4 2.0 2.3 2.6 3.0 -0.3 -0.3 -0.5 -0.4 Kuwait 0.5 1.8 2.9 0.2 2.7 2.9 0.9 -2.2 0.1 0.1 Lebanon 1.8 1.3 1.8 2.5 2.6 2.6 0.0 0.3 0.3 0.1 Morocco 2.6 4.5 1.1 3.8 3.7 3.6 -0.4 -0.2 0.2 0.0 Oman 2.5 5.7 2.2 0.9 2.4 2.9 -0.3 -2.0 -1.0 -0.7 Qatar 4.0 3.6 2.2 3.2 2.6 2.5 0.4 -0.4 0.5 1.2 Saudi Arabia 3.7 4.1 1.4 0.6 2.0 2.1 0.4 -1.0 -0.5 -0.5 Tunisia 2.3 1.1 1.0 2.3 3.0 3.5 -1.0 -0.7 -0.7 -0.5 United Arab Emirates 3.1 3.8 2.3 2.0 2.5 3.2 0.0 -0.5 -0.5 -0.1 West Bank and Gaza -0.2 3.4 4.1 3.5 3.4 3.4 1.0 0.0 -0.1 -0.2 Source: World Bank. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of economies’ prospects do not significantly differ at any given moment in time. a. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Libya, Syria, and Republic of Yemen due to data limitations. b. The fiscal year runs from July 1 to June 30 in Egypt; the column labeled 2016 reflects the fiscal year ended June 30, 2016. For additional information, please see www.worldbank.org/gep. SOUTH ASIA Growth in South Asia remains strong, with regional output projected to grow by 6.8 percent in 2017 and an average of 7.2 percent in 2018-19. Excluding India, growth is projected to average 5.8 percent in 2017-2019, with some cross-country variation. Robust domestic demand, an uptick in exports, and strong foreign direct investment inflows underpin this forecast. Domestic risks to the outlook include policy uncertainty related to upcoming elections and possible setbacks to reform progress. External risks include an increase in global financial volatility, a slowdown in remittances inflows, and rising geopolitical tensions. Recent developments A pickup in regional growth is underway in 2017. In India, recent data indicate a rebound this year, Regional output expanded by an estimated 6.7 with the easing of cash shortages and rising percent in 2016, despite temporary disruptions exports (World Bank 2017k). An increase in associated with the November withdrawal and government spending in India, including on replacement of large-denomination currency notes capital formation, has partially offset soft private in India, the region’s largest economy (Table investment. While manufacturing purchasing 2.5.1). In general, South Asian economies benefit- managers’ indexes have generally picked up, ed from an improvement in exports, low oil prices, industrial production has been mixed (Figure infrastructure spending, and supportive macro- 2.5.1). In Pakistan, favorable weather and in- economic policies last year. In India, activity was creased cotton prices are supporting agricultural underpinned by favorable monsoon rains that production, and the China-Pakistan Economic supported agriculture and rural consumption, an Corridor infrastructure project, as well as a stable increase in infrastructure spending, and robust macroeconomic environment, is contributing to government consumption (World Bank 2017k). an increase in private investment. In Pakistan, agricultural output rebounded following the end of a drought, while the Growth in Bangladesh has been supported by successful completion of an IMF-supported solid agricultural activity and robust services this program en-hanced macroeconomic conditions year, despite ongoing security concerns. In Sri and foreign direct investment (FDI). Nepal’s Lanka, a resumption of Chinese-funded invest- economy suffered from lingering effects of the ment and infrastructure projects such as the 2015 earthquake and trade disruptions with India Colombo International Financial Centre has lifted (World Bank 2017l). However, in some coun- private investment and FDI inflows; in addition, tries, activity in 2016 was set back by a sharp fiscal consolidation under an IMF program has decline in remittances inflows (e.g., Bangladesh; helped improve investor sentiment. In Bhutan and World Bank 2016g), inclement weather condi- Maldives, growth has continued to gain traction tions that reduced agricultural output (e.g., Sri due to accommodative macroeconomic policies, as Lanka), and security challenges (e.g., Afghanistan). well as support from the energy and construction sectors. Nepal’s growth has rebounded strongly following a good monsoon, reconstruction efforts, Note: This section was prepared by Temel Taskin and Boaz and normalization of trade across the southern Nandwa. Research assistance was provided by Anh Mai Bui. border with India. 100 CHAPTER 2.5 GLOBAL ECONOMIC PROSPECTS | JUNE 2017   SAR: Recent developments FIGURE 2.5.1 accommodative,   encouraging credit to the private sector; that fiscal policy tightens slightly to curb In India, the exchange of large-denominated currency in circulation in late 2016 weighed on investment, albeit temporarily. While purchasing the increase in public debt; and that political managers’ indexes across the region have generally improved in 2017, tensions and insecurity abate. Regional growth is industrial production has been mixed. forecast to increase to 6.8 percent in 2017 and to strengthen to an average of 7.2 percent in 2018- A. Money supply in India B. Consumption and investment in India 19, reflecting a solid expansion of domestic Percent M4 (year-on-year) Percent, year-on-year demand and exports (Figure 2.5.2). Excluding 20 Currency in circulation (contribution) Total consumption Total investment Total deposits (contribution) 15 India, regional growth will remain broadly stable 15 10 10 at an average of 5.8 percent in 2017-19, as easing 5 5 Demonetization growth in Bangladesh and Nepal offset gains in 0 0 -5 Bhutan, Pakistan, and Sri Lanka. -5 -10 -10 India’s growth is forecast to increase to 7.2 percent 2013Q1 2014Q1 2015Q1 2016Q1 2017Q1 2018Q1 2019Q1 Jan-15 Jul-15 Jul-16 Jan-17 Apr-15 Oct-15 Jan-16 Apr-16 Oct-16 Apr-17 in FY2017 (April 1, 2017 - March 31, 2018) and accelerate to 7.7 percent by the end of the forecast C. Purchaser managers’ indexes D. Industrial production horizon—slightly below previous projections. This Index Percent, year-on-year 80 India manufacturing India services 20 India Pakistan Sri Lanka outlook mainly reflects a more protracted recovery 70 Sri Lanka manufacturing Sri Lanka services 10 in private investment than previously envisaged. 60 0 Nonetheless, domestic demand is expected to remain strong, supported by ongoing policy 50 -10 reforms, especially the introduction of the 40 -20 nationwide Goods and Services Tax (GST). May-15 Feb-17 Aug-15 May-16 Nov-15 Feb-16 Aug-16 Nov-16 Jun-15 Apr-16 Jan-15 Nov-15 Sep-16 Feb-17 Significant gains by the ruling party in state elections should support the government’s Sources: Haver Analytics, World Bank. Note: SAR stands for South Asia Region. economic reform agenda, which aims at unlocking A. M4 stands for broad money supply. Last observation is April 2017. B. Shaded areas are projections. Last observation is 2016 Q4. supply constraints, and creating a business C. Index values higher than 50 indicate expansion. Last observation is April 2017. environment that is more conducive to private D. Last observation is March 2017. investment. Macroeconomic vulnerabilities continue to recede. Pakistan’s growth is expected to increase to 5.2 Current account deficits are narrowing further percent in FY2017 (July 1, 2016 - June 30, 2017) amid stable oil prices and an uptick in exports. and remain strong over the forecast horizon, While remittances inflows declined in some reflecting an upturn in private investment, countries (e.g., Bangladesh, India), foreign reserves increased energy supply, and improved security. increased and exchange rates remained stable, with The fiscal deficit should narrow further, as a result rising FDI (e.g., India) and tourist arrivals (e.g., of revenue-led fiscal consolidation. Sri Lanka’s Nepal, Sri Lanka). Inflation has remained benign, growth is expected to pick up to about 4.7 percent hovering below target in Bangladesh, Pakistan, in 2017 and accelerate to 5.1 percent by 2019, as and India. Favorable weather (e.g., India, the IMF-supported program helps improve Pakistan) and lower oil prices have helped keep macroeconomic resilience. Reforms initiated by inflation low, and thereby made possible an the World Bank Development Policy Operation accommodative monetary policy. Despite mixed in 2016 are expected to reduce obstacles to private progress with fiscal consolidation in the region, sector competitiveness in the medium-term and deficits generally declined. help attract FDI. Resumption of the Generalized System of Preferences Plus (GSP+) trading Outlook arrangement with the European Union will boost its export sector. Growth in Bangladesh is forecast The regional forecast assumes that monetary to remain robust, averaging 6.6 percent during policy across South Asia countries remains broadly FY2018-FY2020. This reflects improving remit- GLOBAL ECONOMIC PROSPECTS | JUNE 2017 SOUTH ASIA 101 tances   as GCC economies recover, as well as rising FIGURE   2.5.2 SAR: Outlook and risks business confidence and investment. Regional growth is expected to rebound in 2017 and strengthen thereafter. Domestic demand and exports underlie this pickup. The outlook for Risks remittances inflows is uncertain, as they could be affected by tighter immigration policies in some advanced economies and continued fiscal consolidation in GCC countries. Changing environmental patterns pose A number of downside risks continue to cloud the growing risks to the region, as natural events have affected an increasing number of people in recent years. An abrupt market reassessment about outlook. Setbacks to the assumed pace of U.S. monetary policy tightening could lead to tighter domestic financial structural reform would impede the unlocking of conditions, which have been benign of late. supply constraints, dampen productivity growth, and hold up integration into global value chains. A. GDP growth B. Contributions to growth in SAR This would hurt the business environment, Percent 1990-2008 average 2003-08 average Percent Imports reducing investment and FDI inflows to the 10 Jan 2017 forecast 15 Exports Gross fixed investment Government consumption region (IMF 2017d, 2017e). Security concerns in 8 10 Private consumption GDP some countries (e.g., Afghanistan, Pakistan) could 6 5 also hold back investment and business confi- 4 2 0 dence. For several countries in the region, in- 0 creased political or geopolitical tensions could pose -5 2015 2016e 2017f 2018f 2019f 2015 2016e 2017f 2018f 2019f 2015 2016e 2017f 2018f 2019f 2015 2016e 2017f 2018f 2019f 2015 2016e 2017f 2018f 2019f 2012 2013 2014 2015 2016 2017 2018 2019 major obstacles to economic and financial activity India Pakistan Bangladesh Sri Lanka SAR (e.g., Afghanistan, India, Pakistan). Upcoming elections in Nepal (between 2017 and 2019), C. Growth in remittance inflows D. Sources of remittances, 2015 Bangladesh and Pakistan (in 2018), and India (in Percent US$, billions India Pakistan United Kingdom 2019) could be accompanied by heightened policy 25 Bangladesh Nepal 50 United States 20 Sri Lanka uncertainty, and election results could surprise 15 40 GCC countries financial markets. 10 30 5 0 20 Despite progress in fiscal consolidation, public -5 10 debt remains high across the region. In some cases -10 2013 2014 2015 2016e 0 debt is associated with investments that will pay India Pakistan for themselves (Bhutan), but in others there have been concerns about sustainability (e.g., Maldives) E. People affected by natural F. Sovereign bond spreads disasters or about fiscal strains posed by an uneven Number of people, millions Basis points repayment profile (e.g., Sri Lanka and, to some 140 2003-08 average 1600 Sri Lanka Pakistan Millions extent, Pakistan). In addition, contingent 120 2010-16 average 1200 liabilities are building up, including from the debt 100 80 of power utilities in Pakistan and prospects of debt 60 800 write-offs for farmers in several states in India. 40 400 20 0 Compared to other EMDE regions, South Asia is 0 2010 2011 2012 2013 2014 2015 2016 2017 Rest of world SAR less integrated into the global economy and, Sources: International Disaster Database, J.P. Morgan, World Bank. therefore, would be less affected by the Note: SAR stands for South Asia Region. materialization of a range of negative external A.B. Shaded areas are projections. E. Average annual number of people affected by disasters. shocks. However, two external risks remain a F. J.P. Morgan Emerging Market Bond Index. Last observation is May 23, 2017. concern. First, weaker-than-expected recovery in external demand, or a widespread increase in trade protectionism in advanced economies, could Second, the outlook for remittances is uncertain. weigh on exports (World Bank 2017n). In The main risks would be from tighter immigration addition, an abrupt market reassessment about policies in advanced economies, especially in the U.S. monetary policy tightening could lead to United States and the United Kingdom, and capital outflows, and hence to tighter domestic continued fiscal consolidation in oil-exporting credit conditions (Rai and Suchanek 2014). Gulf Cooperation Council (GCC) countries. Any 102 CHAPTER 2.5 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 substantial   decline in remittances would dampen extreme   weather events has increased substantially consumption and investment in major recipients in recent years (Figure 2.5.3). Natural disasters (e.g., Bangladesh, Nepal). from extreme weather conditions often adversely affect agricultural output in the region, as recently Finally, changing environmental patterns pose experienced in India, Pakistan, and Sri Lanka growing risks. The number of people affected from (IMF 2016g). TABLE 2.5.1 South Asia forecast summary (Real GDP growth at market prices in percent, unless indicated otherwise) 2014 2015 2016 2017 2018 2019 2016 2017 2018 2019 (percentage point difference Estimates Projections from January 2017 projections) EMDE South Asia, GDPa, b 6.7 6.9 6.7 6.8 7.1 7.3 -0.1 -0.3 -0.2 -0.1 c (Average including countries with full national accounts and balance of payments data only) EMDE South Asia, GDPc 6.7 6.9 6.7 6.8 7.1 7.3 -0.1 -0.3 -0.3 -0.1 GDP per capita (U.S. dollars) 5.3 5.6 5.4 5.5 5.8 6.0 0.0 -0.2 -0.2 -0.1 PPP GDP 6.7 6.9 6.7 6.8 7.1 7.3 -0.1 -0.3 -0.3 -0.1 Private consumption 6.2 6.5 6.6 6.6 6.9 7.1 0.2 -0.1 -0.3 -0.3 Public consumption 8.9 2.6 5.5 5.8 5.8 5.8 -1.5 -1.4 -1.7 -1.8 Fixed investment 2.7 6.3 4.6 5.9 7.3 8.0 -1.9 -1.5 -0.1 0.7 Exports, GNFSd 5.4 -4.9 3.0 6.0 6.3 6.2 0.8 0.4 -0.8 -1.2 Imports, GNFSd 1.1 -1.0 0.4 4.4 5.9 6.3 -1.2 -0.7 -0.7 -0.6 Net exports, contribution to growth 1.0 -0.9 0.6 0.1 -0.2 -0.3 0.5 0.2 0.0 -0.1 Memo items: GDPb 14/15 15/16 16/17 17/18 18/19 19/20 16/17 17/18 18/19 19/20 South Asia excluding India 5.3 5.5 5.7 5.7 5.8 6.0 0.4 0.2 0.1 0.2 India 7.2 7.9 6.8 7.2 7.5 7.7 -0.2 -0.4 -0.3 -0.1 Pakistan (factor cost) 4.0 4.7 5.2 5.5 5.8 5.8 0.0 0.0 0.0 0.0 Bangladesh 6.6 7.1 6.8 6.4 6.7 7.0 0.0 -0.1 0.0 0.0 Source: World Bank. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time. a. EMDE refers to emerging market and developing economy. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. b. National income and product account data refer to fiscal years (FY) for the South Asian countries, while aggregates are presented in calendar year (CY) terms. The fiscal year runs from July 1 through June 30 in Bangladesh and Pakistan, from July 16 through July 15 in Nepal, and April 1 through March 31 in India. c. Sub-region aggregate excludes Afghanistan, Bhutan, and Maldives, for which data limitations prevent the forecasting of GDP components. d. Exports and imports of goods and non-factor services (GNFS). For additional information, please see www.worldbank.org/gep. GLOBAL ECONOMIC PROSPECTS | JUNE 2017 SOUTH ASIA 103 TABLE   2.5.2 South Asia country forecasts   (Real GDP growth at market prices in percent, unless indicated otherwise)   2014 2015 2016 2017 2018 2019 2016 2017 2018 2019 (percentage point difference Estimates Projections from January 2017 projections) Calendar year basisa Afghanistan 1.3 1.1 2.2 2.6 3.4 3.1 0.0 0.6 0.4 -0.5 Bhutan 5.7 6.5 6.8 6.8 7.7 10.5 -0.6 -3.1 -3.9 -1.2 Maldives 6.0 2.8 4.1 4.5 4.6 4.6 0.6 0.6 0.0 0.0 Sri Lanka 5.0 4.8 4.4 4.7 5.0 5.1 -0.4 -0.3 -0.1 0.0 Fiscal year basisa 14/15 15/16 16/17 17/18 18/19 19/20 16/17 17/18 18/19 19/20 Bangladesh 6.6 7.1 6.8 6.4 6.7 7.0 0.0 -0.1 0.0 0.0 India 7.2 7.9 6.8 7.2 7.5 7.7 -0.2 -0.4 -0.3 -0.1 Nepal 3.3 0.4 7.5 5.5 4.5 4.5 1.0 0.7 -0.2 -0.2 Pakistan (factor cost) 4.0 4.7 5.2 5.5 5.8 5.8 0.0 0.0 0.0 0.0 Source: World Bank. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. a. Historical data are reported on a market price basis. National income and product account data refer to fiscal years (FY) for the South Asian countries with the exception of Afghanistan, Bhutan, Maldives, and Sri Lanka, which report in calendar year (CY). The fiscal year runs from July 1 through June 30 in Bangladesh and Pakistan, from July 16 through July 15 in Nepal, and April 1 through March 31 in India. For additional information, please see www.worldbank.org/gep. SUB-SAHARAN AFRICA Growth in Sub-Saharan Africa is projected to recover to 2.6 percent in 2017 from the sharp deceleration to 1.3 percent in 2016, and to strengthen somewhat in 2018. The upturn reflects recovering global commodity prices and improvements in domestic conditions. Most of the rebound will come from Angola and Nigeria—the largest oil exporters. However, investment is expected to recover only very gradually, reflecting still tight foreign exchange liquidity conditions in oil exporters and low investor confidence in South Africa. Fiscal consolidation will slow the pace of recovery in metals exporters. Growth is expected to remain solid among non-resource- intensive countries. External downside risks to the outlook include stronger-than-expected tightening of global financing conditions, weaker-than-envisioned improvements in commodity prices, and the threat of protectionism. A key domestic risk is the lack of implementation of reforms that are needed to maintain durable macroeconomic stability and sustain growth. Recent developments Several factors are preventing a more vigorous recovery. In Angola and Nigeria, foreign exchange After slowing sharply in 2016, growth in Sub- controls are distorting the foreign exchange Saharan Africa (SSA) is recovering, supported by market, thereby constraining activity in the non- modestly rising commodity prices, strengthening oil sector. In South Africa, political uncertainty external demand, and the end of drought in and low business confidence are weighing on several countries. Despite recent declines, oil investment. The previously delayed fiscal prices are 10 percent higher than their average adjustment to lower oil revenues in the Central levels in 2016. Metals prices have strengthened African Economic and Monetary Community more than expected. Meanwhile, above-average (CEMAC) has started, restraining domestic rainfalls are boosting agricultural production and demand. In Mozambique, the government’s electricity generation in countries that were hit default in January and heavy debt burden are earlier by El Niño-related droughts (e.g., South deterring investment. In contrast to oil and metals Africa, Zambia). Security threats subsided in prices, world cocoa prices dropped, reducing several countries. In Nigeria, militants’ attacks on exports and fiscal revenues in cocoa producers oil pipelines decreased. The economic recession in (e.g., Côte d’Ivoire, Ghana). In many countries, Nigeria is receding. In the first quarter of 2017, banks are seeking to limit credit risk by tightening GDP fell by 0.5 percent (y/y), compared with a lending standards and reducing credit to the 1.7 percent contraction in the fourth quarter of private sector. Lastly, the drought in East Africa, 2016. The Purchasing Managers’ Index for which reduced agricultural production at the end manufacturers returned to expansionary territory of 2016, continued into 2017, adversely affecting in April (Figure 2.6.1), indicating growth in the activity in some countries (e.g., Kenya, Uganda), sector after contraction in the first quarter. Non- and contributing to famine in others (e.g., resource-intensive countries, including those in Somalia, South Sudan). the West African Economic and Monetary Union Current account deficits of oil and metals (WAEMU), have been expanding at a solid pace. exporters are narrowing, helped by the pickup in commodity prices. Oil exports are rebounding in Note: This section was prepared by Gerard Kambou. Research Nigeria on the back of an uptick in oil production assistance was provided by Xinghao Gong. from fields previously damaged by militants’ 106 CHAPTER 2.6 GLOBAL ECONOMIC PROSPECTS | JUNE 2017   SSA: Recent developments FIGURE 2.6.1 emerging   market and developing economies (EMDE) assets. At the start of 2017, a modest pickup in activity was underway in the region’s largest economies. Inflation began to ease, but was still high in oil- exporters. A drought in East Africa pushed up food prices in several Regional inflation is gradually decelerating from countries. Current account and fiscal balances are improving somewhat its high level in 2016. Although a process of among oil and metals exporters, helped by the increase in commodity disinflation has started in Angola and Nigeria, prices. However, they remain under pressure in non-resource-intensive countries, reflecting the continued expansion in public investment. inflation in both countries remains elevated, owing to a highly depreciated parallel market A. Manufacturing purchasing B. Inflation exchange rate. Inflation eased in metals exporters, managers’ indexes and crude oil production reflecting stabilizing currencies after sharp depre- Index, SA, 50+=expansion mb/d Percent ciations, and lower food prices due to improved 56 1.9 30 Sub-Sarahan Africa weather conditions (e.g., South Africa, Zambia). Thousands 54 Oil-exporting SSA 25 52 1.8 Metal-exporting SSA Non-resource intensive SSA An exception is Mozambique, where inflation was 50 20 48 1.7 15 still above 21 percent (y/y) in April, reflecting 46 1.6 10 continued depreciation. Inflationary pressures 44 Nigeria PMI 42 South Africa PMI 1.5 5 increased in non-resource-intensive countries. In Angola crude oil production (RHS) 40 1.4 0 East Africa, drought led to a spike in food prices, Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jan-14 Jul-14 Jan-15 Jan-16 Jul-16 Jan-17 Jul-15 notably in Kenya. However, in countries where the drought has been less severe, inflation has C. Current account balance D. Fiscal balance remained within central banks’ targets. Low Percent of GDP 2015 2016e 2017f Percent of GDP 2015 2016e 2017f inflation in Tanzania, Uganda, and Zambia, and 0 0 steadily falling inflation in Ghana allowed central -2 banks to cut interest rates in early 2017. -10 -4 -6 Fiscal deficits remain elevated across the region. -20 -8 Oil and metals exporters are still running sizable Sub-Saharan Africa SSA oil exporters SSA metal exporters SSA non- resource Sub-Saharan Africa SSA oil exporters SSA metal exporters SSA non- resource fiscal deficits. Fiscal balances have deteriorated in excl. Nigeria intensive excl. Nigeria intensive countries countries several non-resource-intensive countries, reflecting Sources: Central Bank of Nigeria, Haver Analytics, International Monetary Fund, World Bank. a continued expansion in public infrastructure. Notes: SSA stands for Sub-Saharan Africa. Oil-exporting SSA consists of Angola, Ghana, and Nigeria; metal-exporting SSA consists of Botswana, Mozambique, Namibia, South Africa, and Large fiscal deficits and, in some cases, steep Zambia. Non-resource-intensive countries include agriculture-based economies and commodity importers. exchange rate depreciations, have resulted in rising A. SA stands for seasonally adjusted. public debt ratios in the region (Box 2.6.1). A B.-.D. Unweighted average of available countries in the region. C.D. e stands for estimate; f for forecast. number of countries have embarked on fiscal consolidation to stabilize government debt (e.g., attacks. Mining companies across the region are Chad, South Africa). In early April, S&P Global resuming production and exports. In contrast, Ratings and Fitch downgraded South Africa’s current account balances have remained under sovereign credit rating to sub-investment status on pressure in a number of non-resource-intensive account of heightened political uncertainty. countries. In these countries, capital goods imports have been strong, reflecting ambitious Outlook public investment programs. Capital inflows in the region are rebounding from their low level in Growth in SSA is forecast to pick up to 2.6 2016. Nigeria tapped the Eurobond market twice percent in 2017, and average 3.4 percent in 2018- in the first quarter of 2017, followed by Senegal in 19, slightly above population growth (Figure May. Sovereign spreads have declined across the 2.6.2). The recovery is predicated on moderately region from their November 2016 peak, with the rising commodity prices and reforms to tackle notable exception of Ghana where they rose due macroeconomic imbalances. The forecasts are to concerns about fiscal policy slippages. This below those in January, reflecting a slower-than- trend reflects low financial market volatility, and a anticipated recovery in several oil and metals broader rebound in investor risk appetite for exporters. Per capita output growth—which is GLOBAL ECONOMIC PROSPECTS | JUNE 2017 SUB-SAHARAN AFRICA 107       BOX 2.6.1 Deteriorating public finances in Sub-Saharan Africa Public debt ratios have risen sharply, post-crisis. In several total debt in Mozambique and Zambia, respectively, in countries, government debt has increased by more than 10 2016. Political instability and its adverse effects on growth percentage points of GDP between 2014 and 2016 and have pushed up debt-to-GDP ratios in Burundi, where the now exceeds 50 percent of GDP (World Bank 2017n). government has continued to resort to central bank These include four commodity exporters (Angola, advances and the issuance of treasury bills to finance Mozambique, Republic of Congo, and Zambia) and two persistently high fiscal deficits. commodity importers (Burundi, Ethiopia). Debt servicing costs have risen but remain sustainable for Rising fiscal deficits have been the key driver of debt most countries. The rise in government debt, exchange accumulation in most countries. Angola and the Republic rate depreciation, and increased recourse to non- of Congo, hit by a large drop in oil revenues, delayed or concessional borrowing for infrastructure development slowed fiscal consolidation. Both countries have run large have resulted in rising debt servicing costs. However, for fiscal deficits, which reached 17 percent of GDP in the most countries in the region, the interest-to-revenue ratio Republic of Congo in 2016. Among metals exporters, remains sustainable, helped by the high share of Mozambique undertook large external borrowing through concessional borrowing. A notable exception is Nigeria, state-owned enterprises. Zambia’s large fiscal deficits have where the federal government’s interest-to-revenue ratio been driven by elevated expenditure overruns. In non- rose from 33 percent in 2015 to 59 percent in 2016. In resource-intensive countries, borrowing to finance large Mozambique, debt levels have increased sharply to an public investment projects underpinned the rise in public estimated 125 percent of GDP at end-2016, and the debt in Ethiopia. interest-to-revenue ratio has risen to above 15 percent, which is weighing on the ability of the government to Other contributory factors included exchange rate meet debt service payments. As monetary policies in depreciation and civil conflict. Large exchange rate advanced economies continue to normalize, and global depreciations contributed to the increase in fiscal debt/ interest rates increase, pro-active public debt management GDP ratios in Mozambique and Zambia. Foreign will be needed to manage rollover risks in the region. currency debt accounted for 80 percent and 67 percent of projected to increase from -0.1 percent in 2017 to subdued recovery in the region’s largest economies 0.7 percent in 2018-19—will remain insufficient reflects the slower-than-expected adjustment to to achieve poverty reduction goals in the region if low commodity prices in Angola and Nigeria, and the constraints to more vigorous growth persist higher-than-anticipated policy uncertainty in (Bhorat and Tarp 2016). South Africa. Growth in South Africa is projected to recover In other oil exporters, growth is expected to from 0.6 percent in 2017 to 1.5 percent in 2018- strengthen in Ghana as increased oil and gas 19. A rebound in net exports is expected to only production boosts exports and domestic electricity partially offset weaker than previously forecast production. Growth will be weaker than growth of private consumption and investment, as previously projected in CEMAC, as larger-than- borrowing costs rise following the sovereign rating envisioned fiscal adjustment reduces public downgrade to sub-investment level. For Nigeria, investment. In several metals exporters, high growth is expected to rise from 1.2 percent in inflation and tight fiscal policy will be a greater 2017 to 2.5 percent in 2018-19, helped by a drag on activity than previously expected. rebound in oil production, as security in the oil- producing region improves, and by an increase in Growth in non-resource-intensive countries should fiscal spending. In Angola, growth is projected to remain solid, on the basis of infrastructure increase from 1.2 percent in 2017 to 1.5 percent investment, resilient services sectors, and the in 2019, reflecting a slight pickup of activity in the recovery of agricultural production. Ethiopia and industrial sector as energy supplies improve. The Tanzania in East Africa, and Côte d’Ivoire and 108 CHAPTER 2.6 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 FIGURE 2.6.2   SSA: Outlook and risks Risks   Regional growth is expected to rebound to 2.6 percent in 2017, and to reach 3.5 percent in 2019, reflecting a modest recovery in Angola, Nigeria, The regional outlook is subject to significant and South Africa. Growth in non-resource-intensive countries is expected external risks. A sharp increase in global interest to remain solid, supported by domestic demand. Weaker-than-forecast rates could discourage sovereign bond issuance, commodity prices, worsening drought conditions, and cutbacks to U.S. which has become a key financing strategy for official development assistance pose significant downside risks to the regional outlook. governments in recent years, as they have increasingly looked to global markets for the funds A. GDP growth B. Growth forecasts to finance domestic investment (Papadavid 2016). Percent Percent 2015 If sustained, increases in global interest rates could SSA 7 7 SSA excl. Angola, Nigeria and South Africa 6 2016 2017f further reduce the ability of governments in the EMDE excl. China 5 2018f 6 4 3 region to access foreign bond markets. In addition, 5 2 4 1 weaker-than-expected growth in advanced 0 3 -1 economies or in large emerging markets could Sub-Saharan SSA oil exporters SSA metal SSA agriculture SSA commodity exporters 2 exporters reduce demand for exports, depress commodity importers Africa 1 0 prices, and curtail foreign direct investment in 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 mining and infrastructure in the region (Chen and Nord 2017). Finally, the announcement of C. SSA countries affected by drought D. U.S. official development assistance proposed cutbacks to U.S. official development Number of countries affected Percent of total assistance will be a source of concern for some of 12 1970-2016 annual average Latin America South and Central Asia East Asia and Pacific Sub-Sarahan Africa the region’s smaller economies and fragile states. Middle East and North Africa Europe 10 100 8 80 On the domestic front, in countries where 6 60 significant fiscal adjustments are needed, failure to 4 40 implement appropriate policies could weaken 2 20 macroeconomic stability and slow the recovery. 0 0 2010 2011 2012 2013 2014 2015 2016 2009 2010 2011 2012 2013 2014 2015 This risk is particularly significant for Angola, Sources: EM-DAT, OECD Geographical Distribution of Financial Flows to Developing Countries, CEMAC countries, Mozambique, and Nigeria. In The International Disaster Database, World Bank. addition, increased militants’ activity (e.g., Notes: SSA stands for Sub-Saharan Africa. Non-resource-intensive countries include agricultural- based economies and commodity importers. Nigeria), political uncertainty ahead of key A. GDP-weighted averages. C. Chart shows number of SSA countries experiencing at least one drought in any given year. elections (e.g., South Africa), and drought pose D. Regional assistance is not included. risks to the outlook. Weather-related risks are elevated in East Africa. Inadequate rainfalls have Senegal in WAEMU will continue to expand at a led to abnormal seasonal dryness in areas of robust pace on the back of public investment, Kenya, southern Ethiopia, South Sudan, and although some countries (e.g., Ethiopia, Côte Uganda (Famine Early Warning Systems Network d’Ivoire) may not reach the high growth rates of 2017). Worsening drought conditions will severely the recent past. Many countries need to contain affect agricultural production, push food prices debt accumulation and rebuild policy buffers. higher, and increase food insecurity. GLOBAL ECONOMIC PROSPECTS | JUNE 2017 SUB-SAHARAN AFRICA 109 TABLE   2.6.1 Sub-Saharan Africa forecast summary   (Real GDP growth at market prices in percent, unless indicated otherwise) 2014 2015 2016 2017 2018 2019 2016 2017 2018 2019 (percentage point difference Estimates Projections from January 2017 projections) EMDE SSA, GDPa 4.6 3.1 1.3 2.6 3.2 3.5 -0.2 -0.3 -0.4 -0.2 b (Average including countries with full national accounts and balance of payments data only) b EMDE SSA, GDP 4.6 3.1 1.3 2.6 3.2 3.5 -0.2 -0.3 -0.4 -0.2 GDP per capita (U.S. dollars) 1.9 0.4 -1.3 -0.1 0.6 0.9 -0.2 -0.3 -0.4 -0.2 PPP GDP 4.9 3.3 1.6 2.8 3.5 3.7 -0.1 -0.3 -0.4 -0.3 Private consumption 2.9 5.7 1.2 2.2 2.6 2.8 -0.3 -0.7 -0.8 -0.6 Public consumption 1.6 -3.3 2.0 2.5 2.7 2.8 -0.1 -0.2 -0.3 -0.2 Fixed investment 9.6 0.7 3.4 5.1 7.0 7.2 0.1 -0.3 0.0 0.1 Exports, GNFSc 7.0 2.4 1.1 2.7 3.0 3.3 -0.4 0.7 0.4 0.7 Imports, GNFSc 3.7 0.5 1.9 2.9 3.5 3.7 -0.4 -0.2 -0.2 -0.1 Net exports, contribution to growth 0.9 0.6 -0.2 -0.1 -0.2 -0.1 0.1 0.3 0.2 0.3 Memo items: GDP SSA excluding South Africa 5.3 4.3 3.5 4.3 4.7 4.8 -0.4 -0.6 -0.4 -0.4 and Nigeria SSA excluding South Africa, 5.4 4.5 4.1 4.8 5.2 5.2 -0.4 -0.6 -0.5 -0.6 Nigeria, and Angola d Oil exporters 5.4 2.9 -0.4 1.7 2.6 2.7 -0.2 -0.2 -0.3 -0.3 e CFA countries 5.5 4.0 2.8 3.6 4.1 4.3 -1.5 -1.2 -1.2 -1.2 South Africa 1.6 1.3 0.3 0.6 1.1 2.0 -0.1 -0.5 -0.7 0.2 Nigeria 6.3 2.7 -1.6 1.2 2.4 2.5 0.1 0.2 -0.1 0.0 Angola 4.8 3.0 0.0 1.2 0.9 1.5 -0.4 0.0 0.0 0.6 Source: World Bank. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time. a. EMDE refers to emerging market and developing economies. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Central African Republic, São Tomé and Príncipe, Somalia, and South Sudan. b. Sub-regional aggregate excludes Central African Republic, São Tomé and Príncipe, Somalia, and South Sudan, for which data limitations prevent the forecasting of GDP components. c. Exports and imports of goods and non-factor services (GNFS). d. Includes Angola, Cameroon, Chad, Democratic Republic of Congo, Gabon, Ghana, Nigeria, Republic of Congo, and Sudan. e. Includes Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Côte d’Ivoire, Equatorial Guinea, Gabon, Mali, Niger, Republic of Congo, Senegal, and Togo. For additional information, please see www.worldbank.org/gep. 110 CHAPTER 2.6 GLOBAL ECONOMIC PROSPECTS | JUNE 2017 TABLE 2.6.2  Sub-Saharan Africa country forecasts a   (Real GDP growth at market prices in percent, unless indicated otherwise) 2014 2015 2016 2017 2018 2019 2016 2017 2018 2019 (percentage point difference Estimates Projections from January 2017 projections) Angola 4.8 3.0 0.0 1.2 0.9 1.5 -0.4 0.0 0.0 0.6 Benin 6.4 2.1 4.0 5.5 6.0 6.3 -0.6 0.3 0.7 1.0 Botswanab 4.1 -1.7 2.9 4.0 4.2 4.3 -0.2 0.0 -0.1 0.0 Burkina Faso 4.0 4.0 5.4 6.1 6.3 6.3 0.2 0.6 0.3 0.3 Burundi 4.7 -3.9 -0.6 1.5 2.0 2.6 -0.1 -1.0 -1.5 -0.9 Cabo Verde 0.6 1.5 3.9 3.3 3.7 3.7 0.9 0.0 0.2 0.2 Cameroon 5.9 5.8 4.5 3.9 4.4 4.6 -1.1 -1.8 -1.7 -1.5 Chad 6.9 1.8 -7.0 0.2 3.2 3.1 -3.5 0.5 -1.5 -3.2 Comoros 2.1 1.0 2.2 3.3 4.0 4.0 0.2 0.8 1.0 1.0 Congo, Dem. Rep. 9.0 6.9 2.2 4.7 4.9 4.9 -0.5 0.0 -0.1 -0.1 Congo, Rep. 6.8 2.6 -2.1 1.0 1.5 1.5 -6.7 -3.3 -2.2 -2.2 Côte d'Ivoire 8.5 9.2 7.8 6.8 6.5 6.3 0.0 -1.2 -1.6 -1.8 Equatorial Guinea -0.7 -8.3 -7.3 -5.9 -7.0 -6.0 -1.6 -0.2 -0.4 0.6 Ethiopiab 10.3 9.6 7.5 8.3 8.0 7.9 -0.9 -0.6 -0.6 -0.7 Gabon 4.3 4.0 2.3 1.3 2.4 2.9 -0.9 -2.5 -2.2 -1.7 Gambia, The 0.9 4.1 2.1 2.5 3.8 4.0 1.6 1.7 1.2 1.4 Ghana 4.0 3.9 3.6 6.1 7.8 6.2 0.0 -1.4 -0.6 -2.2 Guinea 0.4 0.1 4.6 4.4 4.6 4.6 -0.6 -0.2 0.0 0.0 Guinea-Bissau 2.5 4.8 4.9 5.1 5.1 5.1 0.0 0.0 0.0 0.0 Kenya 5.3 5.7 5.8 5.5 5.8 6.1 -0.1 -0.5 -0.3 0.0 Lesotho 4.5 1.6 2.5 3.0 3.4 3.6 0.1 -0.7 -0.6 -0.4 Liberia 0.7 0.0 -1.2 3.0 5.3 5.7 -3.7 -2.8 0.0 0.4 Madagascar 3.3 3.8 4.4 3.5 6.4 4.7 0.3 -1.0 1.6 -0.1 Malawi 5.7 2.8 2.5 4.4 4.9 5.3 0.0 0.2 0.4 0.8 Mali 7.0 6.0 5.6 5.3 5.2 5.1 0.0 0.2 0.2 0.1 Mauritania 5.6 1.4 2.0 3.5 2.7 4.6 -2.0 -0.7 -1.1 0.8 Mauritius 3.7 3.5 3.5 3.4 3.5 3.3 0.3 -0.1 -0.3 -0.5 Mozambique 7.4 6.6 3.3 4.8 6.1 6.7 -0.3 -0.4 -0.5 0.1 Namibia 6.5 5.3 1.2 3.0 4.0 4.2 -0.4 -2.0 -1.4 -1.2 Niger 7.0 3.6 4.7 5.2 5.5 5.5 -0.3 -0.1 -0.5 -0.5 Nigeria 6.3 2.7 -1.6 1.2 2.4 2.5 0.1 0.2 -0.1 0.0 Rwanda 7.0 6.9 5.9 6.0 6.8 7.0 -0.1 0.0 -0.2 0.0 Senegal 4.3 6.5 6.6 6.7 6.9 7.0 0.0 -0.1 -0.1 0.0 Seychelles 3.3 3.5 4.4 4.2 3.8 3.5 0.6 0.7 0.3 0.0 Sierra Leone 4.6 -20.6 5.0 5.4 5.6 5.9 1.1 -1.5 -0.3 0.0 South Africa 1.6 1.3 0.3 0.6 1.1 2.0 -0.1 -0.5 -0.7 0.2 Sudan 2.7 4.9 4.7 4.1 3.9 3.9 1.2 0.4 0.2 0.2 Swaziland 2.7 1.9 -0.6 1.7 3.1 3.2 0.3 -0.2 0.0 0.1 Tanzania 7.0 7.0 6.9 7.2 7.2 7.4 0.0 0.1 0.1 0.3 Togo 5.9 5.4 5.0 4.6 5.5 5.5 -0.4 -0.4 0.0 0.0 Ugandab 5.6 5.6 4.8 4.6 5.2 5.6 0.2 -1.0 -0.8 -0.4 Zambia 5.0 2.9 3.3 4.1 4.5 4.7 0.4 0.1 0.3 0.5 Zimbabwe 3.8 0.5 0.7 2.3 1.8 1.7 0.3 -1.5 -1.6 -1.7 Source: World Bank. 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STATISTICAL APPENDIX GLOBAL ECONOMIC PROSPECTS | JUNE 2017 STATISTICAL APPENDIX 117 TABLE 1 Real GDP Growth                                 Annual estimates and forecastsa Quarterly growthb 2014 2015 2016e 2017f 2018f 2019f 15Q4 16Q1 16Q2 16Q3 16Q4 17Q1e World 2.8 2.7 2.4 2.7 2.9 2.9 2.5 2.2 2.4 2.3 2.6 2.7 Advanced Economies 1.9 2.1 1.7 1.9 1.8 1.7 1.8 1.5 1.7 1.7 1.8 2.0  United States 2.4 2.6 1.6 2.1 2.2 1.9 1.9 1.6 1.3 1.7 2.0 2.0  Euro Area 1.2 2.0 1.8 1.7 1.5 1.5 2.3 1.7 2.2 1.7 1.4 1.7  Japan 0.3 1.1 1.0 1.5 1.0 0.6 0.9 0.5 0.9 1.1 1.7 1.6  United Kingdom 3.1 2.2 1.8 1.7 1.5 1.5 1.7 1.6 1.7 2.0 1.9 2.0 Emerging Market and Developing 4.3 3.6 3.5 4.1 4.5 4.7 3.7 3.6 3.7 3.5 4.0 4.0 Economies East Asia and Pacific 6.8 6.5 6.3 6.2 6.1 6.1 6.5 6.3 6.4 6.4 6.5 6.5  Cambodia 7.1 7.0 6.9 6.9 6.9 6.7 .. .. .. .. .. ..  China 7.3 6.9 6.7 6.5 6.3 6.3 6.8 6.7 6.7 6.7 6.8 6.9  Fiji 5.6 3.6 2.0 3.7 3.5 3.3 .. .. .. .. .. ..  Indonesia 5.0 4.9 5.0 5.2 5.3 5.4 5.2 4.9 5.2 5.0 4.9 5.0  Lao PDR 7.5 7.4 7.0 7.0 6.8 7.2 .. .. .. .. .. ..  Malaysia 6.0 5.0 4.2 4.9 4.9 5.0 4.6 4.1 4.0 4.3 4.5 5.6  Mongolia 6.9 2.2 1.0 -0.2 1.9 8.0 -2.2 3.0 -0.3 -7.3 9.8 4.2  Myanmar 8.0 7.3 6.5 6.9 7.2 7.3 .. .. .. .. .. ..  Papua New Guinea 7.4 6.8 2.4 3.0 3.2 3.4 .. .. .. .. .. ..  Philippines 6.1 6.1 6.9 6.9 6.9 6.8 6.7 6.9 7.1 7.1 6.6 6.4  Solomon Islands 2.0 3.3 3.0 3.3 3.0 3.0 .. .. .. .. .. ..  Thailand 0.9 2.9 3.2 3.2 3.3 3.4 2.7 3.1 3.6 3.2 3.0 3.3  Timor-Leste 5.9 4.3 5.1 4.0 5.0 6.0 .. .. .. .. .. ..  Vietnam 6.0 6.7 6.2 6.3 6.4 6.4 7.0 5.5 5.6 6.6 6.8 5.1 Europe and Central Asia 2.3 1.0 1.5 2.5 2.7 2.8 1.4 1.6 2.0 0.3 2.1 ..  Albania 1.8 2.6 3.2 3.5 3.5 3.8 1.8 3.3 3.4 3.1 4.0 ..  Armenia 3.6 3.0 0.2 2.7 3.1 3.4 .. .. .. .. .. ..  Azerbaijan 2.0 1.1 -3.8 -1.4 0.6 1.3 0.1 -2.9 -2.4 -2.3 -2.5 ..  Belarus 1.7 -3.9 -2.6 -0.4 0.5 1.2 -4.5 -3.7 -1.5 -3.6 -1.9 ..  Bosnia and Herzegovina 1.1 3.0 2.8 3.2 3.7 4.0 .. .. .. .. .. ..  Bulgaria 1.3 3.6 3.4 3.0 3.2 3.3 3.6 3.6 3.5 3.2 3.5 3.4  Croatia -0.4 1.6 2.9 2.9 2.5 2.6 1.8 2.7 2.8 2.9 3.4 ..  Georgia 4.6 2.9 2.7 3.5 4.0 4.5 3.0 3.3 2.8 2.2 2.7 ..  Hungary 4.0 3.1 2.0 3.7 3.7 3.0 3.4 1.1 2.8 2.2 1.6 4.1  Kazakhstan 4.2 1.2 1.0 2.4 2.6 2.9 1.0 -0.3 -0.3 1.5 2.5 ..  Kosovo 1.2 4.1 3.6 3.9 4.2 4.4 .. .. .. .. .. ..  Kyrgyz Republic 4.0 3.9 3.8 3.4 4.0 4.8 .. .. .. .. .. ..  Macedonia, FYR 3.6 3.8 2.4 2.8 3.3 3.8 6.0 2.4 2.9 2.0 2.4 ..  Moldova 4.8 -0.5 4.1 4.0 3.7 3.5 .. .. .. .. .. ..  Montenegro 1.8 3.4 2.5 3.3 3.0 2.0 .. .. .. .. .. ..  Poland 3.3 3.9 2.8 3.3 3.2 3.2 4.6 2.6 3.1 2.0 3.3 4.2  Romania 3.1 3.9 4.8 4.4 3.7 3.5 4.0 4.3 6.0 4.3 4.8 5.7  Russia 0.7 -2.8 -0.2 1.3 1.4 1.4 -3.2 -0.4 -0.5 -0.4 0.3 0.5  Serbia -1.8 0.8 2.8 3.0 3.5 3.5 1.1 3.9 2.0 2.8 2.5 1.0  Tajikistan 6.7 6.0 6.9 5.5 5.9 6.1 .. .. .. .. .. ..  Turkey 5.2 6.1 2.9 3.5 3.9 4.1 7.4 4.5 5.3 -1.3 3.5 ..  Turkmenistan 10.3 6.5 6.2 6.3 6.5 6.5 .. .. .. .. .. ..  Ukraine -6.6 -9.8 2.3 2.0 3.5 4.0 -2.4 0.1 1.5 2.3 4.8 2.4 Uzbekistan 8.1 8.0 7.8 7.6 7.7 7.8 .. .. .. .. .. .. 118 STATISTICAL APPENDIX GLOBAL ECONOMIC PROSPECTS | JUNE 2017 TABLE 1 Real GDP Growth (continued)         Annual estimates and forecastsa Quarterly growthb 2014 2015 2016e 2017f 2018f 2019f 15Q4 16Q1 16Q2 16Q3 16Q4 17Q1e Latin America and the Caribbean 0.9 -0.8 -1.4 0.8 2.1 2.5 -1.2 -1.4 -0.8 -0.6 -0.2 ..  Argentina -2.5 2.6 -2.3 2.7 3.2 3.2 2.6 0.6 -3.7 -3.7 -2.1 ..  Belize 4.1 1.0 -1.5 2.1 2.0 2.0 .. .. .. .. .. ..  Bolivia 5.5 4.9 4.3 3.7 3.7 3.4 6.0 4.9 3.2 5.0 .. ..  Brazil 0.5 -3.8 -3.6 0.3 1.8 2.1 -5.8 -5.4 -3.6 -2.9 -2.5 ..  Chile 1.9 2.3 1.6 1.8 2.0 2.3 1.9 2.5 1.7 1.8 0.5 0.1  Colombia 4.4 3.1 2.0 2.0 3.1 3.4 3.4 2.7 2.5 1.2 1.6 1.1  Costa Rica 3.7 4.7 4.3 3.8 3.6 3.5 3.7 5.1 4.6 3.4 4.2 ..  Dominica 3.9 2.2 0.6 3.0 2.1 2.1 .. .. .. .. .. ..  Dominican Republic 7.6 7.0 6.6 5.3 5.0 4.8 .. .. .. .. .. ..  Ecuador 4.0 0.2 -1.5 -1.3 -0.4 0.3 -2.0 -4.0 -2.1 -1.2 1.5 ..  El Salvador 1.4 2.3 2.4 2.0 1.8 1.7 2.4 2.1 2.4 2.4 2.6 ..  Guatemala 4.2 4.1 3.1 3.5 3.5 3.6 4.0 2.9 3.7 2.6 3.0 ..  Guyana 3.8 3.1 3.3 3.5 3.6 3.7 .. .. .. .. .. ..  Haitic 2.8 1.2 1.4 0.5 1.7 2.3 .. .. .. .. .. ..  Honduras 3.1 3.6 3.6 3.4 3.3 3.3 5.0 3.7 4.0 2.9 3.8 ..  Jamaica 0.7 1.0 1.4 2.0 2.1 2.3 .. .. .. .. .. ..  Mexico 2.3 2.6 2.3 1.8 2.2 2.5 2.5 2.2 2.6 2.0 2.3 2.8  Nicaragua 4.8 4.9 4.7 4.3 4.2 4.2 6.2 3.3 6.7 4.7 4.2 ..  Panama 6.1 5.8 4.9 5.2 5.4 5.8 .. .. .. .. .. ..  Paraguay 4.7 3.0 4.1 3.6 3.8 3.8 0.7 1.5 6.5 5.4 3.4 ..  Peru 2.4 3.3 3.9 2.8 3.8 3.6 4.8 4.4 3.7 4.5 3.0 2.1  St. Lucia 0.5 1.6 0.8 0.5 0.7 0.7 .. .. .. .. .. ..  St. Vincent and the Grenadines -0.5 2.1 1.8 2.5 2.8 2.9 .. .. .. .. .. ..  Suriname 0.4 -2.7 -10.4 0.9 2.2 1.2 .. .. .. .. .. ..  Trinidad and Tobago -0.6 -0.6 -5.1 0.3 3.4 3.3 .. .. .. .. .. ..  Uruguay 3.2 0.4 1.5 1.6 2.4 3.4 -1.3 0.0 1.3 1.1 3.4 .. Venezuela, RB -3.9 -8.2 -12.0 -7.7 -1.2 0.7 .. .. .. .. .. .. Middle East and North Africa 3.4 2.8 3.2 2.1 2.9 3.1 3.9 2.6 1.9 2.2 2.4 ..  Algeria 3.8 3.8 3.5 1.8 1.0 1.5 .. .. .. .. .. ..  Bahrain 4.4 2.9 3.0 1.9 1.9 2.3 2.8 4.5 2.5 3.9 1.1 ..  Djibouti 6.0 6.5 6.5 7.0 7.0 7.2 .. .. .. .. .. ..  Egypt, Arab Rep.c 2.9 4.4 4.3 3.9 4.6 5.3 4.0 3.6 4.5 3.4 3.8 ..  Iran, Islamic Rep. 4.3 -1.8 6.4 4.0 4.1 4.2 .. .. .. .. .. ..  Iraq 0.7 4.8 10.1 -3.1 2.6 1.1 .. .. .. .. .. ..  Jordan 3.1 2.4 2.0 2.3 2.6 3.0 2.6 2.3 1.9 1.8 2.0 ..  Kuwait 0.5 1.8 2.9 0.2 2.7 2.9 .. .. .. .. .. ..  Lebanon 1.8 1.3 1.8 2.5 2.6 2.6 .. .. .. .. .. ..  Morocco 2.6 4.5 1.1 3.8 3.7 3.6 .. .. .. .. .. ..  Oman 2.5 5.7 2.2 0.9 2.4 2.9 .. .. .. .. .. ..  Qatar 4.0 3.6 2.2 3.2 2.6 2.5 3.9 1.4 1.8 3.9 1.7 ..  Saudi Arabia 3.7 4.1 1.4 0.6 2.0 2.1 4.3 2.6 0.9 1.2 2.2 ..  Tunisia 2.3 1.1 1.0 2.3 3.0 3.5 0.7 0.6 1.1 1.3 1.2 ..  United Arab Emirates 3.1 3.8 2.3 2.0 2.5 3.2 .. .. .. .. .. .. West Bank and Gaza -0.2 3.4 4.1 3.5 3.4 3.4 .. .. .. .. .. .. GLOBAL ECONOMIC PROSPECTS | JUNE 2017 STATISTICAL APPENDIX 119 TABLE 1 Real GDP Growth (continued)         Annual estimates and forecastsa Quarterly growthb 2014 2015 2016e 2017f 2018f 2019f 15Q4 16Q1 16Q2 16Q3 16Q4 17Q1e South Asia 6.7 6.9 6.7 6.8 7.1 7.3 6.8 8.5 7.0 7.3 6.9 ..  Afghanistan 1.3 1.1 2.2 2.6 3.4 3.1 .. .. .. .. .. ..  Bangladeshc d 6.1 6.6 7.1 6.8 6.4 6.7 .. .. .. .. .. ..  Bhutan 5.7 6.5 6.8 6.8 7.7 10.5 .. .. .. .. .. ..  Indiac d 7.2 7.9 6.8 7.2 7.5 7.7 6.9 8.6 7.2 7.4 7.0 ..  Maldives 6.0 2.8 4.1 4.5 4.6 4.6 .. .. .. .. .. ..  Nepalc d 6.0 3.3 0.4 7.5 5.5 4.5 .. .. .. .. .. .. Pakistanc d 4.0 4.0 4.7 5.2 5.5 5.8 .. .. .. .. .. .. Sri Lanka 5.0 4.8 4.4 4.7 5.0 5.1 2.8 5.1 2.4 4.6 5.3 .. Sub-Saharan Africa 4.6 3.1 1.3 2.6 3.2 3.5 1.4 -0.2 -0.2 -0.5 -0.2 ..  Angola 4.8 3.0 0.0 1.2 0.9 1.5 .. .. .. .. .. ..  Benin 6.4 2.1 4.0 5.5 6.0 6.3 .. .. .. .. .. ..  Botswanac 4.1 -1.7 2.9 4.0 4.2 4.3 -3.5 2.3 3.9 6.9 4.2 ..  Burkina Faso 4.0 4.0 5.4 6.1 6.3 6.3 .. .. .. .. .. ..  Burundi 4.7 -3.9 -0.6 1.5 2.0 2.6 .. .. .. .. .. ..  Cabo Verde 0.6 1.5 3.9 3.3 3.7 3.7 .. .. .. .. .. ..  Cameroon 5.9 5.8 4.5 3.9 4.4 4.6 .. .. .. .. .. ..  Chad 6.9 1.8 -7.0 0.2 3.2 3.1 .. .. .. .. .. ..  Comoros 2.1 1.0 2.2 3.3 4.0 4.0 .. .. .. .. .. ..  Congo, Dem. Rep. 9.0 6.9 2.2 4.7 4.9 4.9 .. .. .. .. .. ..  Congo, Rep. 6.8 2.6 -2.1 1.0 1.5 1.5 .. .. .. .. .. ..  Côte d'Ivoire 8.5 9.2 7.8 6.8 6.5 6.3 .. .. .. .. .. ..  Equatorial Guinea -0.7 -8.3 -7.3 -5.9 -7.0 -6.0 .. .. .. .. .. ..  Ethiopiac 10.3 9.6 7.5 8.3 8.0 7.9 .. .. .. .. .. ..  Gabon 4.3 4.0 2.3 1.3 2.4 2.9 .. .. .. .. .. ..  Gambia, The 0.9 4.1 2.1 2.5 3.8 4.0 .. .. .. .. .. ..  Ghana 4.0 3.9 3.6 6.1 7.8 6.2 .. .. .. .. .. ..  Guinea 0.4 0.1 4.6 4.4 4.6 4.6 .. .. .. .. .. ..  Guinea-Bissau 2.5 4.8 4.9 5.1 5.1 5.1 .. .. .. .. .. ..  Kenya 5.3 5.7 5.8 5.5 5.8 6.1 5.7 5.9 6.2 5.7 .. ..  Lesotho 4.5 1.6 2.5 3.0 3.4 3.6 .. .. .. .. .. ..  Liberia 0.7 0.0 -1.2 3.0 5.3 5.7 .. .. .. .. .. ..  Madagascar 3.3 3.8 4.4 3.5 6.4 4.7 .. .. .. .. .. ..  Malawi 5.7 2.8 2.5 4.4 4.9 5.3 .. .. .. .. .. ..  Mali 7.0 6.0 5.6 5.3 5.2 5.1 .. .. .. .. .. ..  Mauritania 5.6 1.4 2.0 3.5 2.7 4.6 .. .. .. .. .. ..  Mauritius 3.7 3.5 3.5 3.4 3.5 3.3 .. .. .. .. .. ..  Mozambique 7.4 6.6 3.3 4.8 6.1 6.7 .. .. .. .. .. ..  Namibia 6.5 5.3 1.2 3.0 4.0 4.2 .. .. .. .. .. ..  Niger 7.0 3.6 4.7 5.2 5.5 5.5 .. .. .. .. .. ..  Nigeria 6.3 2.7 -1.6 1.2 2.4 2.5 1.8 -0.7 -1.6 -2.4 -1.6 -0.7 Rwanda 7.0 6.9 5.9 6.0 6.8 7.0 .. .. .. .. .. ..  Senegal 4.3 6.5 6.6 6.7 6.9 7.0 .. .. .. .. .. ..  Seychelles 3.3 3.5 4.4 4.2 3.8 3.5 .. .. .. .. .. ..  Sierra Leone 4.6 -20.6 5.0 5.4 5.6 5.9 .. .. .. .. .. .. 120 STATISTICAL APPENDIX GLOBAL ECONOMIC PROSPECTS | JUNE 2017 TABLE 1 Real GDP Growth (continued)         Annual estimates and forecastsa Quarterly growthb 2014 2015 2016e 2017f 2018f 2019f 15Q4 16Q1 16Q2 16Q3 16Q4 17Q1e Sub-Saharan Africa (continued)              South Africa 1.6 1.3 0.3 0.6 1.1 2.0 0.6 -0.6 0.3 0.7 0.7 ..  Sudan 2.7 4.9 4.7 4.1 3.9 3.9 .. .. .. .. .. ..  Swaziland 2.7 1.9 -0.6 1.7 3.1 3.2 .. .. .. .. .. ..  Tanzania 7.0 7.0 6.9 7.2 7.2 7.4 .. .. .. .. .. ..  Togo 5.9 5.4 5.0 4.6 5.5 5.5 .. .. .. .. .. ..  Ugandac 5.6 5.6 4.8 4.6 5.2 5.6 .. .. .. .. .. ..  Zambia 5.0 2.9 3.3 4.1 4.5 4.7 .. .. .. .. .. .. Zimbabwe 3.8 0.5 0.7 2.3 1.8 1.7 .. .. .. .. .. .. Sources: World Bank and Haver Analytics. a. Aggregate growth rates calculated using constant 2010 U.S. dollars GDP weights. b. Year-over-year quarterly growth of not-seasonally-adjusted real GDP, except for the United States, Ecuador, and Tunisia, where only seasonally-adjusted data are available. Year-over-year quarterly growth in the United Kingdom is calculated using seasonally-adjusted real GDP. Regional averages are calculated based on data from following countries. East Asia and Pacific: China, Indonesia, Malaysia, Mongolia, Philippines, Thailand, and Vietnam. Europe and Central Asia: Albania; Azerbaijan; Belarus; Bulgaria; Croatia; Georgia; Hungary; Kazakhstan; Macedonia, FYR; Poland; Romania; Russia; Serbia; Turkey; and Ukraine. Latin America and the Caribbean: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Paraguay, Peru, and Uruguay. Middle East and North Africa: Bahrain, Egypt, Jordan, Qatar, Saudi Arabia, and Tunisia. South Asia: India and Sri Lanka. Sub-Saharan Africa: Botswana, Kenya, Nigeria, and South Africa. c. Annual GDP is on fiscal year basis, as per reporting practice in the country. d. GDP data for Pakistan are based on factor cost. For Bangladesh, Nepal, and Pakistan, the column labeled 2017 refers to FY2016/17. For India, the column labeled 2016 refers to FY2016/17. For additional information, please see www.worldbank.org/gep. GLOBAL ECONOMIC PROSPECTS | JUNE 2017 SELECTED TOPICS 121   Global Economic Prospects: Selected Topics, 2015-17 Growth and Business Cycles Low-income countries Recent developments and outlook June 2017, Box 1.1 Recent developments and outlook January 2017, Box 1.1 Recent developments and outlook June 2016, Box 1.1 Graduation, recent developments, and prospects January 2015, Chapter 1 Regional perspectives Recent developments and outlook June 2017, Box 1.2 Recent developments and outlook January 2017, Box 1.2 Recent developments and outlook June, 2016, Box 1.2 Recent investment slowdown Europe and Central Asia January 2017, Box 2.2.1 Latin America and the Caribbean January 2017, Box 2.3.1 Middle East and North Africa January 2017, Box 2.4.1 South Asia January 2017, Box 2.5.1 Sub-Saharan Africa January 2017, Box 2.6.1 Regional Integration and spillovers East Asia and Pacific January 2016, Box 2.1.1 Europe and Central Asia January 2016, Box 2.2.1 Latin America and the Caribbean January 2016, Box 2.3.1 Middle East and North Africa January 2016, Box 2.4.1 South Asia January 2016, Box 2.5.1 Sub-Saharan Africa January 2016, Box 2.6.1 Other topics Investment developments and outlook: East Asia and Pacific January 2017, Box 2.1.1 Weak investment in uncertain times: Causes, implications and policy responses January 2017, Chapter 3 Implications of rising uncertainty for investment in EMDEs January 2017, Box 3.2 Implications of the investment slowdown in China January 2017, Box 3.3 Interactions between public and private investment January 2017, Box 3.4 Quantifying uncertainties in global growth forecasts June 2016, SF 2 Who catches a cold when emerging markets sneeze? January 2016, Chapter 3 Sources of the growth slowdown in BRICS January 2016, Box 3.1 Understanding cross-border growth spillovers January 2016, Box 3.2 Within-region spillovers January 2016, Box 3.3 Recent developments in emerging and developing country labor markets June 2015, Box 1.3 What does weak growth mean for poverty in the future? January 2015, Box 1.1 What does a slowdown in China mean for Latin America and the Caribbean? January 2015, Box 2.2 How resilient is Sub-Saharan Africa? January 2015, Box 2.4   122 SELECTED TOPICS GLOBAL ECONOMIC PROSPECTS | JUNE 2017   Global Economic Prospects: Selected Topics, 2015-17 Commodity Markets From commodity discovery to production: Vulnerabilities and policies in LICs January 2016, Chapter 1 After the commodities boom: What next for low-income countries? June 2015, Chapter 1, SF Low oil prices in perspective June 2015, Box 1.2 Understanding the plunge in oil prices: Sources and implications January 2015, Chapter 4 What do we know about the impact of oil prices on output and inflation? A brief survey January 2015, Box 4.1 Globalization of Trade and Financial Flows Arm’s-Length Trade: A Source of Post-Crisis Trade Weakness June 2017, SF The U.S. economy and the world January 2017, Special Focus Regulatory convergence in mega-regional trade agreements January 2016, Box 4.1.1 Can remittances help promote consumption stability? January 2016, Chapter 4 Potential macroeconomic implications of the Trans-Pacific Partnership Agreement January 2016, Chapter 4 Regulatory convergence in mega-regional trade agreements January 2016, Box 4.1.1 China’s integration in global supply chains: Review and implications January 2015, Box 2.1 What lies behind the global trade slowdown? January 2015, Chapter 4 Monetary and Exchange Rate Policies Investment-less credit booms January 2017, Box 3.1 Recent credit surge in historical context June 2016, SF1 Peg and control? The links between exchange rate regimes and capital account policies January 2016, Chapter 4 Negative interest rates in Europe: A glance at their causes and implications June 2015, Box 1.1 Hoping for the best, preparing for the worst: Risks around U.S. rate liftoff and policy options June 2015, SF1.1 Countercyclical monetary policy in emerging markets: Review and evidence January 2015, Box 1.2 Fiscal Policy Debt Dynamics in Emerging Markets and Developing Economies: Time to Act? June 2017, SF Having fiscal space and using it: Fiscal challenges in developing economies January 2015, Chapter 3 Revenue mobilization in South Asia: Policy challenges and recommendations January 2015, Box 2.3 Fiscal policy in low-income countries January 2015, Box 3.1 What affects the size of fiscal multipliers? January 2015, Box 3.2 Chile’s fiscal rule—An example of success January 2015, Box 3.3 Narrow fiscal space and the risk of a debt crisis January 2015, Box 3.4   GLOBAL ECONOMIC PROSPECTS | JUNE 2017 SELECTED TOPICS 123   Development Economics Prospects Group (DECPG): Selected Other Publications on the Global Economy, 2015-17 Commodity Markets Outlook Investment weakness in commodity exporters January 2017, SF OPEC in historical context: Commodity agreements and market fundamentals October 2016, SF Energy and food prices: Moving in tandem? July 2016, SF Resource development in an era of cheap commodities April 2016, SF Weak growth in emerging market economies: What does it imply for commodity markets? January 2016, SF Understanding El Niño: What does it mean for commodity markets? October 2015, SF How important are China and India in global commodity consumption July 2015, SF Anatomy of the last four oil price crashes April 2015, SF Putting the recent plunge in oil prices in perspective January 2015, SF High-Frequency Monitoring Global Monthly Global Weekly   124 SELECTED TOPICS GLOBAL ECONOMIC PROSPECTS | JUNE 2017   ECO-AUDIT Environmental Benefits Statement The World Bank Group is committed to reducing its environmental footprint. In support of this commitment, we leverage electronic publishing options and print-on-demand technology, which is located in regional hubs worldwide. Together, these initiatives enable print runs to be lowered and shipping distances decreased, resulting in reduced paper consumption, chemical use, greenhouse gas emissions, and waste. We follow the recommended standards for paper use set by the Green Press Initiative. 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