A World Bank Group Flagship Report JUNE 2018 Global Economic Prospects The Turning of the Tide? JUNE 2018 © 2018 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 21 20 19 18 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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Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. ISSN: 1014-8906 ISBN (paper): 978-1-4648-1257-6 ISBN (electronic): 978-1-4648-1324-5 DOI: 10.1596/978-1-4648-1257-6 Cover design: Bill Pragluski (Critical Stages). The cutoff date for the data used in this report was May 25, 2018. In memory of Phillip Jeremy Hay, 1955-2018 Summary of Contents Chapter 1 e Turning of the Tide? ........................................................................ 1 Special Focus 1 e Role of Major Emerging Markets in Global Commodity Demand ......59 Special Focus 2 Corporate Debt: Financial Stability and Investment Implications .............91 Chapter 2 Regional Outlooks ...............................................................................111 Boxes Box 1.1 Long-term growth prospects: Downgraded no more? .................. 8 Box 1.2 Low-income countries: Recent developments and outlook..........24 Box 1.3 Regional perspectives: Recent developments and outlook ..........30 Box SF1.1 e role of the EM7 in commodity production.........................64 Box SF1.2 Commodity consumption: Implications of government policies..74 V Table of Contents Foreword..................................................................................................................................xiii Acknowledgments ..................................................................................................................... xv Executive Summary.................................................................................................................. xvii Abbreviations ........................................................................................................................... xix Chapter 1 Global Outlook: The Turning of the Tide? ............................................................1 Summary ............................................................................................................3 Major economies: Recent developments and outlook................................................7 United States ................................................................................................ 7 Euro Area ....................................................................................................15 Japan ..........................................................................................................15 China..........................................................................................................16 Global trends ..................................................................................................... 16 Global trade ................................................................................................ 17 Financial markets ........................................................................................ 18 Commodities ............................................................................................. 19 Emerging and developing economies: Recent developments and outlook ................. 21 Recent developments ................................................................................... 21 EMDE outlook ........................................................................................... 28 Risks to the outlook........................................................................................... 32 Disorderly tightening of financing conditions ................................................. 33 Escalating trade protectionism ...................................................................... 35 Policy uncertainty and geopolitical developments ............................................ 36 A combination of global downside risks ......................................................... 37 Region-specific downside risks ...................................................................... 37 Stronger and longer-lasting cyclical recovery ................................................... 38 Policy challenges ............................................................................................... 39 Challenges in advanced economies ................................................................ 39 Challenges in emerging and developing economies .......................................... 41 References ......................................................................................................... 50 Box 1.1 Long-term growth prospects: Downgraded no more?....................................8 Box 1.2 Low-income countries: Recent developments and outlook .......................... 24 Box 1.3 Regional perspectives: Recent developments and outlook ........................... 30 VII Special Focus 1 The Role of Major Emerging Markets in Global Commodity Demand ................. 59 Introduction ..................................................................................................... 61 The role of the EM7 in commodity consumption ................................................. 63 Drivers of commodities consumption .................................................................. 66 Prospects for commodities demand...................................................................... 72 Policy implications............................................................................................. 76 Conclusion ....................................................................................................... 77 Annex SF1.1 Modeling income elasticities ............................................................ 78 References......................................................................................................... 87 Special Focus 2 Corporate Debt: Financial Stability and Investment Implications ..........................91 Introduction ......................................................................................................93 Corporate debt landscape in EMDEs ....................................................................94 Corporate debt and financial stability ...................................................................96 Corporate debt and economic growth ...................................................................98 Policy implications ........................................................................................... 102 Annex SF2.1 Data and methodology: Firm-level analysis ...................................... 105 References ....................................................................................................... 107 Chapter 2 Regional Outlooks .......................................................................................... 111 East Asia and Pacific ....................................................................................... 113 Recent developments......................................................................................113 Outlook........................................................................................................115 Risks ........................................................................................................... 116 Europe and Central Asia ................................................................................. 119 Recent developments..................................................................................... 119 Outlook....................................................................................................... 121 Risks .......................................................................................................... 122 Latin America and the Caribbean ..................................................................... 125 Recent developments..................................................................................... 125 Outlook....................................................................................................... 126 Risks ........................................................................................................... 128 Middle East and North Africa .......................................................................... 131 Recent developments..................................................................................... 131 Outlook....................................................................................................... 132 Risks ........................................................................................................... 133 VIII South Asia .......................................................................................................137 Recent developments ..................................................................................... 137 Outlook ....................................................................................................... 138 Risks ............................................................................................................ 139 Sub-Saharan Africa ..........................................................................................141 Recent developments ..................................................................................... 141 Outlook ....................................................................................................... 143 Risks ............................................................................................................ 144 References..................................................................................................... 147 Statistical Appendix..................................................................................................................149 Selected Topics ........................................................................................................................157 Figures 1.1 Summary - Global prospects ..................................................................... 5 1.2 Global risks and policy challenges.............................................................. 6 1.3 Advanced economies................................................................................ 7 1.1.1 Growth forecasts: Global, groups and aggregates ....................................... 10 1.1.2 Growth forecasts in major economies and in comparison with actual and potential growth.............................................................................. 11 1.1.3 Growth forecasts and change in global GDP ............................................. 14 1.4 United States ........................................................................................ 15 1.5 Euro Area ............................................................................................. 16 1.6 Japan ................................................................................................... 16 1.7 China................................................................................................... 17 1.8 Global trade.......................................................................................... 18 1.9 Global finance....................................................................................... 19 1.10 Commodity markets ........ …………………………………………………..20 1.11 Activity in EMDEs ................................................................................ 22 1.12 Activity in EMDE commodity exporters .................................................. 23 1.2.1 Recent developments in low-income countries .......................................... 25 1.2.2 Outlook ............................................................................................... 26 1.13 Activity in EMDE commodity importers, excluding China ........................ 28 1.14 EMDE growth prospects ........................................................................ 29 1.3.1 Regional growth .................................................................................... 30 1.15 Per capita growth and poverty in EMDEs ................................................ 32 1.16 Risks: Tilted to the downside .................................................................. 33 1.17 Downside risks: Financial stress............................................................... 34 IX 1.18 Downside risks: Trade protectionism.................................................................. 35 1.19 Downside risks: Policy and geopolitical uncertainty ............................................. 37 1.20 Downside risks: History repeating itself? ............................................................. 38 1.21 Upside risks: Longer-lasting upturn ................................................................... 39 1.22 Monetary and fiscal policies in advanced economies ............................................. 40 1.23 Structural policy in advanced economies ............................................................. 41 1.24 Policy challenges in China................................................................................. 42 1.25 EMDE monetary policy.................................................................................... 43 1.26 EMDE fiscal policy .......................................................................................... 44 1.27 EMDE structural policy.................................................................................... 46 SF1.1 Developments in commodity markets ................................................................ 61 SF1.2 Vulnerabilities to oil price fluctuations................................................................ 62 SF1.3 EM7 in the global economy ............................................................................. 63 SF1.1.1 EM7 in commodity production ......................................................................... 65 SF1.4 EM7 in commodity markets.............................................................................. 66 SF1.5 Consumption of industrial commodities and income ........................................... 67 SF1.6 Food consumption and income ......................................................................... 68 SF1.7 Estimated commodity consumption growth ....................................................... 71 SF1.8 Commodity consumption scenarios ................................................................... 73 SF1.2.1 Developments in commodity markets................................................................. 75 SF2.1 Corporate debt in EMDEs: General trends ........................................................ 95 SF2.2 Corporate debt in EMDEs: Composition ........................................................... 96 SF2.3 Corporate debt in China .................................................................................. 97 SF2.4 Corporate debt in EMDEs: Macroeconomic vulnerabilities .................................. 98 SF2.5 Corporate debt riskiness in EMDEs .................................................................. 99 SF2.6 Correlates of corporate debt and private investment growth in EMDEs ................100 SF2.7 Linkage between debt overhang and investment across firms ...............................101 SF2.8 Policy implications .........................................................................................103 2.1.1 EAP: Recent developments...............................................................................114 2.1.2 China ............................................................................................................115 2.1.3 EAP: Outlook and risks ...................................................................................116 2.2.1 ECA: Recent developments ..............................................................................120 2.2.2 ECA: Outlook and risks.................................................................................. 121 2.3.1 LAC: Recent developments ............................................................................. 126 2.3.2 LAC: Outlook and risks .................................................................................. 127 2.4.1 MENA: Recent developments ......................................................................... 132 2.4.2 MENA: Outlook and risks .............................................................................. 133 X 2.5.1 SAR: Recent developments .............................................................................. 138 2.5.2 SAR: Outlook and risks ................................................................................... 139 2.6.1 SSA: Economic activity ................................................................................... 142 2.6.2 SSA: Outlook and risks ................................................................................... 143 Tables 1.1 Real GDP......................................................................................................... 4 1.2.1 Low-income country forecasts ............................................................................27 1.2 List of emerging market and developing economies .............................................49 SF1.1 Estimation results .............................................................................................70 Annex SF1.1A Top 10 commodity consumers, 2016........................................................80 Annex SF1.1B Top 10 commodity consumers, 2016 .......................................................80 Annex SF1.2A Top 10 commodity producers, 2016 .........................................................81 Annex SF1.2B Top 10 commodity producers, 2016 ........................................................81 Annex SF1.3 Literature review of long-run income elasticities of demand for commodities ..82 Annex SF1.4 Economy samples, by commodity modeled ................................................83 Annex SF1.5 Estimation results for pooled mean group estimation ...................................84 Annex SF1.6 Estimation results under generalized method of moments .............................85 Annex SF1.7 Estimation results including trend .............................................................86 SF2.1 Debt overhang and investment: Baseline specification ......................................... 104 2.1.1 East Asia and Pacific forecast summary .............................................................. 117 2.1.2 East Asia and Pacific country forecasts............................................................... 117 2.2.1 Europe and Central Asia forecast summary ........................................................ 123 2.2.2 Europe and Central Asia country forecasts ......................................................... 124 2.3.1 Latin America and the Caribbean forecast summary............................................ 129 2.3.2 Latin America and the Caribbean country forecasts............................................. 130 2.4.1 Middle East and North Africa forecast summary ................................................ 135 2.4.2 Middle East and North Africa economy forecasts ............................................... 136 2.5.1 South Asia forecast summary ............................................................................ 140 2.5.2 South Asia country forecasts............................................................................. 140 2.6.1 Sub-Saharan Africa forecast summary................................................................ 145 2.6.2 Sub-Saharan Africa country forecasts................................................................. 146 XI Foreword e current state of the global economy resembles monetary policy in the United States leading to a that of a sailor whose boat was caught on a spike in interest rates could roil financial markets, sandbar but is now freed by the rising tide. e causing a slowdown especially in highly indebted sailor is naturally relieved to be able to set countries. From the 1975 oil crisis, to the Latin sail. But this relief must be tempered by the American debt crisis of the 1980s, to the Asian urgency to pilot toward deeper seas before the financial crisis of the 1990s, to the 2007-09 receding waters beach the ship again. global financial crisis, there has been a financial market crisis every ten years or so. It is now ten As the June 2018 Global Economic Prospects years since the last crisis. report documents, the global economy seems to be leaving the legacy of the global financial crisis Moreover, as the analytical sections of the report of the past decade behind. About half the world’s show, increasing corporate debt in some countries are experiencing an increase in emerging market economies has left them growth. is synchronized recovery may lead to especially vulnerable to interest rate and exchange even faster growth in the near term, as stronger rate shocks. And the prospects for commodity growth in, say, China or the United States spills exporters will be limited as the major commodity over to other parts of the world. All the consensus -importing countries, especially China, shift their forecasts for 2018 and 2019 reflect optimism. demand away from oil and other commodities. And this growth is occurring for the right reasons—investment and trade growth, which ese ominous signs reinforce the finding from had been declining, have risen. Furthermore, in the January 2018 edition of the Global Economic the United States, Europe and Japan, Prospects report, namely, that while current unemployment has declined, while inflation has growth appears robust, potential growth will be not picked up much, suggesting that lower. Underlying factors such as demographics policymakers may have found that “sweet spot” (declining labor supply in many, large countries) in the tradeoff between unemployment and and the legacy of low investment growth in the inflation. e confidence indicators also remain past contribute to this limited potential growth. elevated. e risks described above mean that actual growth may be even lower. But, as the report points out, the medium-term prospects tell a different story. Protectionist e implication is that policy and institutional threats cast a dark cloud over future growth. If reforms that build human capital (to make labor these threats lead to trade wars, the consequences more productive) and improve the business could be devastating. Even if they do not, climate (to increase investment) are needed now uncertainty about economic policy dampens more than ever. e still robust pace of growth investor sentiment. Secondly, a credit event in a provides political space to implement these major emerging market or a sudden tightening of reforms. Now is the time to act. Shantayanan Devarajan Senior Director, Development Economics Acting Chief Economist e World Bank Group XIII 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 Shantayanan Devarajan. Chapters 1 and 2 were led by Carlos Arteta. Chapter 1 The print publication was produced by Maria Hazel (Global Outlook) was prepared by Carlos Arteta and Macadangdang, Adriana Maximiliano, Quinn Sutton, Marc Stocker, with contributions from Patrick Kirby, and Rosalie Singson Dinglasan, in collaboration with Ekaterine Vashakmadze, and Collette M. Wheeler. Luiz H. Almeida, Andrew Charles Berghauser, Adam Additional inputs were provided by John Baffes, Alain Broadfoot, Aziz Gökdemir, Michael Harrup, and Kabundi, Gerard Kambou, Eung Ju Kim, Csilla Jewel McFadden. Lakatos, Peter Nagle, and Dana Vorisek. Many reviewers offered extensive advice and Chapter 2 (Regional Outlooks) was supervised by comments. These included: Kishan Abeygunawardana, Carlos Arteta and Franziska Ohnsorge, with feedback Junaid Kamal Ahmad, Gilles Alfandari, Sara Alnashar, from Marc Stocker and Patrick Kirby. The authors Gallina Andronova Vincelette, Paloma Anos Casero, were Ekaterine Vashakmadze (East Asia and Pacific), Rabah Arezki, Dilek Aykut, Rajni Bajpai, Luca Yoki Okawa (Europe and Central Asia), Dana Vorisek Bandiera, Daniel Barco, Kevin Barnes, Rafael Barroso, (Latin America and the Caribbean), Lei Sandy Ye Robert Carl Michael Beyer, Enrique Blanco Armas, (Middle East and North Africa), Temel Taskin (South Fernando Blanco, Monika Blaszkiewicz-Schwartzman, Asia), and Gerard Kambou (Sub-Saharan Africa). Moussa Blimpo, Florian Blum, Jane Bogoev, Elena Bondarenko, Cesar Calderon, Kevin Carey, Michael The first Special Focus, The Role of Major Emerging Carson, Rodrigo Chaves, Derek Chen, Zivanemoyo Markets in Global Commodity Demand, was Chinzara, Ajai Chopra, Ibrahim Chowdhury, Kevin prepared by John Baffes, Alain Kabundi, Peter Nagle, Chua, Punam Chuhan-Pole, Natalia Cieslik, Kevin and Franziska Ohnsorge. Clinton, Fabiano Colbano, Louise Cord, Tito Cordella, Stefano Curto, Barbara Cunha, Simon The second Special Focus, Corporate Debt: Financial Davies, Annette De Kleine Feige, Agim Demukaj, Stability and Investment Implications, was prepared Allen Dennis, Tatiana Didier, Viet Tuan Dinh, by Eduardo Borensztein and Lei Sandy Ye. Ousmane Dione, Makhtar Diop, Ndiame Diop, Anton Dobronogov, Mariam Dolidze, Jozef Draaisma, The boxes in Chapter 1 were prepared by Carlos Bakyt Dubashov, Sebastian Eckardt, Kim Alan Arteta, Gerard Kambou, Ayhan Kose, Franziska Edwards, Khalid El Massnaoui, Olga Emelyanova, Ohnsorge and Naotaka Sugawara, with contributions Wilfried Engelke, David Evans, Jorge Familiar from Yoki Okawa, Temel Taskin, Ekaterine Calderon, Marianne Fay, Erik Feyen, Cornelius Vashakmadze, Dana Vorisek, and Lei Sandy Ye. Fleischhaker, Melissa Fossberg, Manuela Francisco, Research assistance was provided by Miyoko Asai, Anh Diego Friedheim, Nicole Frost, Adnan Ashraf Mai Bui, Ishita Dugar, Xinghao Gong, Brent Ghumman, Frederico Gil Sander, Fernando Giuliano, Harrison, Julia Roseman, Shijie Shi, and Jinxin Wu. Maria De los Angeles Cuqui Gonzalez Miranda, Poonam Gupta, Gohar Gyulumyan, Graham Hacche, Modeling and data work were provided by Rajesh Kiryl Haiduk, Fiseha Haile Gebregziabher, Michael Kumar Danda, Julia Roseman, and Jinxin Wu. Hamaide, Birgit Hansl, Marek Hanusch, Wissam Harake, Zeina Hasra, Faya Hayati, Johannes The online publication was produced by Graeme Herderschee, Patrick Hettinger, Sandra Hlivnjak, Bert Littler and Mikael Reventar. Mark Felsenthal managed Hofman, Sahar Sajjad Hussain, Zahid Hussain, Elena media relations and dissemination. Mark Felsenthal Ianchovichina, Stella Ilieva, Fernando Im, Amina and Graeme Littler provided editorial support, with Iraqi, Yoichiro Ishihara, Ergys Islamaj, Ivailo V. contributions from Adriana Maximiliano. Izvorski, Carlos Felipe Jaramillo, Gloria Aitalohi XV Joseph-Raji, Frederick Joutz, Priscilla Flaness Qian, Habib Rab, Martin Rama, Nadir Ramazanov, Kandoole, Soukeyna Kane, Atsushi Kawamoto, Majid Richard Record, Alief Aulia Rezza, Daniel Riera- Kazemi, Vera Kehayova, Michel Kerf, Tehmina S. Crichton, David Robinson, Donato de Rosa, David Khan, Ewa Korczyc, Sibel Kulaksiz, Chandana Rosenblatt, Irina Rostovtseva, Miguel Eduardo Kularatne, Marko Kwaramba, Jean Pierre Lacombe, Sanchez Martin, Susana Sanchez, Apurva Sanghi, Ilyas Sumir Lal, Luc Lecuit, Daniel Lederman, Yue Man Sarsenov, Cristina Savescu, Marc Schiffbauer, Philip Lee, Tenzin Lhaden, John Litwack, Julio Ricardo Schuler, Ethel Sennhauser, Claudia Paz Sepúlveda, Loayza, Julie Saty Lohi, Rohan Longmore, Gladys Lazar Sestovic, Smriti Seth, Sudhir Shetty, Alex Lopez-Acevedo, José Roberto López-Cálix, Prakash Sienaert, Emilia Skrok, Karlis Smits, Martin Stuermer, Loungani, Sanja Madzarevic-Sujster, Shireen Mahdi, Abdoulaye Sy, Fulbert Tchana Tchana, Shakira Binti Wael Mansour, Will Martin, Ashwaq Natiq Maseeh, Teh Sharifuddin, Hans Timmer, Emilija Timmis, Andrew D. Mason, Warwick McKibbin, Steisianasari Christopher Towe, Axel van Trotsenburg, Eskender Mileiva, Elitza Mileva, Deepak K. Mishra, Lalita Trushin, Robert Utz, Ralph Van Doorn, Sona Varma, Moorty, Luis Francisco Morano Germani, Lili Carlos Végh, Julio Velasco, Ekaterina Vostroknutova, Mottaghi, Sudip Mozumder, Arvind Nair, Evgenij Guillermo Javier Vuletin, Sashana Whyte, Pinar Yasar, Najdov, François Nankobogo, Nur Nasser Eddin, Jean Hoda Youssef, Paolo Zacchia, Albert Zeufack, Luan -Pascal Nganou, Ha Nguyen, Francesca de Nicola, Zhao, Yongmei Zhou, and Bakhrom Ziyaev. Akihiko Nishio, Antonio Nucifora, Eduardo Olaberria, Harun Onder, Kamer K. Ozdemir, John Regional projections and write-ups were produced in Panzer, Catalin Pauna, Samuel Jaime Pienknagura, coordination with country teams, country directors, Emmanuel Pinto Moreira, Ruslan Pionkivsky, Rong and the offices of the regional chief economists. XVI Executive Summary Global growth has eased but remains robust, although with downside risks. The possibility of financial market stress, escalating trade protectionism and heightened geopolitical tensions continue to cloud the outlook. Financial market stress could arise as a result of escalating investor concerns about the creditworthiness of some emerging market and developing economies or as a byproduct of faster-than-expected normalization of monetary policy in advanced economies. Countries with elevated corporate debt, wide current account or fiscal deficits, or weak growth prospects would be vulnerable to jumps in global financing costs. In commodity- exporting economies, in particular, the expected slowdown in commodity demand growth from major emerging markets weighs on long-term growth outcomes. Global Outlook. Global growth has eased but slowdown over the next decade, especially if long- remains robust and is projected to reach 3.1 term growth forecasts fall—once again—short of percent in 2018. It is expected to edge down over expectations. the next two years as global slack dissipates, trade and investment moderate, and financing Regional Perspectives. A cyclical recovery is conditions tighten. Growth in advanced underway in most EMDE regions that host a economies is forecast to decelerate toward substantial number of commodity exporters. Over potential rates as monetary policy is normalized the next two years, the upturn in these regions is and the effects of U.S. fiscal stimulus wane. In expected to mature, as commodity prices plateau. emerging market and developing economies Robust economic activity in EMDE regions with (EMDEs), growth in commodity importers will large numbers of commodity importers is forecast remain strong, while the rebound in commodity to continue. However, risks to the growth outlook exporters is projected to mature over the next two continue to tilt to the downside in many regions. years. For the first time since 2010, the long-term This edition of Global Economic Prospects includes (10-year-ahead) consensus forecast for global sections on the role of the largest emerging growth appears to have stabilized. Although this markets in global commodity markets and on the development could signal that the legacies of the implications of high corporate debt for financial global financial crisis are fading, past experience stability and investment. cautions that long-term forecasts are often overly optimistic. While well below levels expected a The Role of Major Emerging Markets in Global decade ago, these forecasts also remain above Commodity Demand. Rapid growth among the potential growth estimates. Moreover, risks to the major emerging markets over the past 20 years has outlook are tilted to the downside. They include boosted global demand for commodities. The disorderly financial market movements, escalating seven largest emerging markets (EM7) accounted trade protectionism, and heightened geopolitical for almost all of the increase in global tensions. EMDE policymakers should rebuild consumption of metals and two-thirds of the monetary and fiscal policy buffers and be prepared increase in energy consumption over this period. for rising global interest rates and possible As these economies mature and shift towards less episodes of financial market turbulence. In the commodity-intensive activities, their demand for longer run, adverse structural forces continue to most commodities may level off. While global overshadow long-term growth prospects implying energy consumption growth may remain broadly that EMDEs need to boost potential growth by steady, global metals and foods demand growth promoting competitiveness, adaptability to could slow by one-third over the next decade. technological change, and trade openness. These This would dampen global commodity prices. For steps will help mitigate an expected growth emerging market and developing economies that XVII depend on raw materials for government and firms are expected to rise as advanced economies export revenues, these prospects reinforce the normalize monetary policy, and debt is need for economic diversification and the increasingly held by firms with riskier balance strengthening of policy frameworks. sheets. Elevated debt may be associated with weak investment growth, especially in large firms. Corporate Debt: Financial Stability and Countercyclical and macroprudential policies can Investment Implications. Average corporate debt address financial stability concerns that are raised in emerging market and developing economies by these trends. Structural policies, including the has increased over the past decade, raising strengthening of bankruptcy regimes, are concerns about their financial stability and appropriate tools to address the investment growth prospects. Debt service costs of EMDE implications of sizeable corporate debt. XVIII Abbreviations AE advanced economies AfCFTA African Continental Free Trade Area ASEAN Association of Southeast Asian Nations bbl barrel BRICS Brazil, Russian Federation, India, China, and South Africa CPTPP Comprehensive and Progressive Agreement for Trans-Pacific Partnership CVI corporate vulnerability index EAP East Asia and Pacific EBIT earnings before interest and taxes ECA Europe and Central Asia ECB European Central Bank EMBI Emerging Markets Bond Index EM7 Brazil, China, India, Indonesia, Mexico, Russian Federation, and Turkey EMDE emerging market and developing economies EPU Economic Policy Uncertainty EU European Union FDI foreign direct investment FOMC Federal Open Market Committee FY fiscal year G7 Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States GCC Gulf Cooperation Council GDP gross domestic product GEP Global Economic Prospects GNFS goods and nonfactor services GTAP Global Trade Analysis Project ICT information and communication technology IEA International Energy Agency IMF International Monetary Fund LAC Latin America and Caribbean LIC low-income country MNA Middle East and North Africa NAFTA North American Free Trade Agreement NBER National Bureau of Economic Research NPLs nonperforming loans OECD Organisation for Economic Co-operation and Development OPEC Organization of the Petroleum Exporting Countries PMI purchasing manager’s index XIX PPP purchasing power parity ppt percentage points RHS right-hand side (in figures) SAR South Asia Region SOE state-owned enterprise SSA Sub-Saharan Africa toe tons of oil equivalent TPP Trans-Pacific Partnership UNCTAD United Nations Conference on Trade and Development USDA United States Department of Agriculture WTO World Trade Organization XX CHAPTER 1 GLOBAL OUTLOOK The Turning of the Tide? G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 3 Global growth has eased, but remains robust, and is projected to reach 3.1 percent in 2018. It is expected to edge down in the next two years to 2.9 percent by 2020, as global slack dissipates, trade and investment moderate, and financing conditions tighten. Growth in advanced economies is predicted to decelerate toward potential rates, as monetary policy normalizes and the effects of U.S. fiscal stimulus wane. In emerging market and developing economies (EMDEs), growth in commodity importers will remain robust, while the rebound in commodity exporters is projected to mature over the next two years. Progress in per capita income growth will be uneven, however, remaining particularly subdued in Sub-Saharan Africa. Risks to the outlook remain tilted to the downside. They include disorderly financial market movements, escalating trade protectionism, heightened policy uncertainty, and rising geopolitical tensions, all of which continue to cloud the outlook. EMDE policymakers need to rebuild monetary and fiscal policy buffers and be prepared for rising global interest rates and possible episodes of financial market turbulence. In the longer run, EMDEs need to tackle ongoing structural challenges and boost potential growth by promoting competitiveness, adaptability to technological change, and trade openness. Summary exporters is still lagging that of exporters of other commodities, reflecting ongoing adjustments to Global growth remains robust but has softened in the 2014-16 collapse in oil prices and production recent months, as manufacturing activity and cuts in key oil exporters. Across commodity trade have shown signs of moderation (Figure exporters, inflation is generally moderating as the 1.1). The ongoing withdrawal of monetary policy impact of past currency depreciations wanes. accommodation in advanced economies has led to Activity in commodity importers continues to be some tightening of global financing condi- robust. Growth in China is gradually slowing, but tions, while oil prices are substantially higher than remains resilient, while constraints to growth are previously expected. Global inflation is trending dissipating in other large commodity importers— up, but only gradually and from low levels. notably India and Mexico, where investment is In advanced economies, activity continues to grow recovering. Inflation remains broadly stable so far, above potential, notwithstanding some recent despite higher commodity prices and limited moderation, while additional fiscal stimulus remaining slack. measures are expected to provide a further lift to Notwithstanding the ongoing global expansion, near-term growth in the United States. Labor only 45 percent of countries are expected to markets have improved steadily. With output gaps experience a further acceleration of growth this nearly or already closed, inflation expectations year, down from 56 percent in 2017. Moreover, have crept up and monetary policy is becoming global activity is still lagging previous expansions less expansionary. Inflation, however, remains despite a decade-long recovery from the global below central bank targets in many advanced financial crisis. Accordingly, after reaching 3.1 economies. percent in 2018, global growth is projected to Among emerging market and developing moderate in 2019-20, edging down to 2.9 percent economies (EMDEs), the recovery in commodity by the end of the forecast period. Global growth exporters has continued, as consumption and projections are above estimates of potential, investment firm. The upturn in many energy suggesting that capacity constraints will become more binding and inflation will continue to rise during the forecast horizon. Note: is chapter was prepared by Carlos Arteta and Marc Stocker, with contributions from Patrick Kirby, Ekaterine Growth in advanced economies is expected to Vashakmadze, and Collette M. Wheeler. Additional inputs were decelerate toward potential rates over the forecast provided by John Baffes, Alain Kabundi, Gerard Kambou, Eung Ju period, as monetary policy stimulus is pared Kim, Csilla Lakatos, Peter Nagle, and Dana Vorisek. Research assistance was provided by Anh Mai Bui, Ishita Dugar, Xinghao down, higher energy prices weigh on con- Gong, Brent Harrison, Julia Roseman, and Jinxin Wu. sumption, and the effect of U.S. fiscal expansion 4 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 TABLE 1.1 Real GDP1 Percentage point differences (Percent change from previous year) from January 2018 projections 2015 2016 2017e 2018f 2019f 2020f 2018f 2019f 2020f World 2.8 2.4 3.1 3.1 3.0 2.9 0.0 0.0 0.0 Advanced economies 2.3 1.7 2.3 2.2 2.0 1.7 0.0 0.1 0.0 United States 2.9 1.5 2.3 2.7 2.5 2.0 0.2 0.3 0.0 Euro Area 2.1 1.8 2.4 2.1 1.7 1.5 0.0 0.0 0.0 Japan 1.4 1.0 1.7 1.0 0.8 0.5 -0.3 0.0 0.0 Emerging market and developing economies 3.7 3.7 4.3 4.5 4.7 4.7 0.0 0.0 0.0 (EMDEs) Commodity-exporting EMDEs 0.5 0.8 1.8 2.5 3.0 3.0 -0.2 -0.1 -0.1 Other EMDEs 6.1 5.9 6.2 5.8 5.8 5.7 0.1 0.1 0.0 Other EMDEs excluding China 5.2 4.9 5.3 5.1 5.1 5.1 0.3 0.0 0.0 East Asia and Pacific 6.5 6.3 6.6 6.3 6.1 6.0 0.1 0.0 0.0 China 6.9 6.7 6.9 6.5 6.3 6.2 0.1 0.0 0.0 Indonesia 4.9 5.0 5.1 5.2 5.3 5.4 -0.1 0.0 0.1 Thailand 3.0 3.3 3.9 4.1 3.8 3.8 0.5 0.3 0.4 Europe and Central Asia 1.1 1.7 4.0 3.2 3.1 3.0 0.3 0.1 0.0 Russia -2.5 -0.2 1.5 1.5 1.8 1.8 -0.2 0.0 0.0 Turkey 6.1 3.2 7.4 4.5 4.0 4.0 1.0 0.0 0.0 Poland 3.8 2.9 4.6 4.2 3.7 3.5 0.2 0.2 0.4 Latin America and the Caribbean -0.4 -1.5 0.8 1.7 2.3 2.5 -0.3 -0.3 -0.2 Brazil -3.5 -3.5 1.0 2.4 2.5 2.4 0.4 0.2 -0.1 Mexico 3.3 2.9 2.0 2.3 2.5 2.7 0.2 -0.1 0.1 Argentina 2.7 -1.8 2.9 1.7 1.8 2.8 -1.3 -1.2 -0.4 Middle East and North Africa 2.8 5.0 1.6 3.0 3.3 3.2 0.0 0.1 0.0 Saudi Arabia 4.1 1.7 -0.7 1.8 2.1 2.3 0.6 0.0 0.1 Iran -1.3 13.4 4.3 4.1 4.1 4.2 0.1 -0.2 -0.1 Egypt2 4.4 4.3 4.2 5.0 5.5 5.8 0.5 0.2 0.0 South Asia 7.1 7.5 6.6 6.9 7.1 7.2 0.0 -0.1 0.0 India3 8.2 7.1 6.7 7.3 7.5 7.5 0.0 0.0 0.0 Pakistan2 4.1 4.6 5.4 5.8 5.0 5.4 0.3 -0.8 -0.6 Bangladesh2 6.6 7.1 7.3 6.5 6.7 7.0 0.1 0.0 0.3 Sub-Saharan Africa 3.1 1.5 2.6 3.1 3.5 3.7 -0.1 0.0 0.1 Nigeria 2.7 -1.6 0.8 2.1 2.2 2.4 -0.4 -0.6 -0.4 South Africa 1.3 0.6 1.3 1.4 1.8 1.9 0.3 0.1 0.2 Angola 3.0 0.0 1.2 1.7 2.2 2.4 0.1 0.7 0.9 Memorandum items: Real GDP1 High-income countries 2.3 1.7 2.2 2.2 2.0 1.8 0.0 0.1 0.0 Developing countries 3.7 3.8 4.6 4.7 4.8 4.8 0.0 0.0 -0.1 Low-income countries 4.9 4.8 5.5 5.7 5.9 6.3 0.3 0.4 0.6 BRICS 4.0 4.4 5.3 5.4 5.4 5.4 0.1 0.0 0.0 World (2010 PPP weights) 3.4 3.2 3.7 3.8 3.8 3.7 0.1 0.1 0.0 World trade volume4 2.7 2.8 4.8 4.3 4.2 4.0 0.3 0.3 0.2 Commodity prices Oil price5 -47.3 -15.6 23.3 32.6 -1.4 0.1 23.2 -3.1 -1.6 Non-energy commodity price index -15.8 -2.6 5.5 5.1 0.2 0.5 4.5 -0.6 -0.7 Source: World Bank. Notes: PPP = purchasing power parity; e = estimate; f = forecast. 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. dollar 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. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 5 wanes. A projected deceleration of capital FIGURE 1.1 Summary - Global prospects spending in these economies, combined with that The global economic expansion remains robust but has softened, although in China, will contribute to more moderate global commodity-exporting EMDEs continue to recover. Global activity still lags trade growth in 2019 and 2020. Shifts in the previous expansions, and growth is projected to decelerate in 2019-20 as trade and investment moderate. Progress in per capita income will be policy mix of advanced economies—most notably, uneven and insufficient to tackle extreme poverty in Sub-Saharan Africa. monetary policy tightening and fiscal policy loosening in the United States—are expected to A. Global growth B. Global manufacturing output and result in a faster-than-previously-anticipated export orders increase in global interest rates, and hence in EMDE borrowing costs. As international trade and financial conditions become less supportive, and the cyclical upturn in commodity exporters matures, overall EMDE growth is projected to plateau, reaching 4.7 percent in 2019 and 2020. Over this period, only about half of commodity exporters, and less than half of commodity importers, are expected to C. Growth in commodity-exporting D. Global GDP during expansion periods grow above their pre-crisis long-term averages. In EMDEs the longer term, absent policy reforms, potential growth in EMDEs is expected to weaken, reflecting softening productivity and demographic headwinds. Progress in per capita income growth will be uneven. Per capita growth in Sub-Saharan Africa, where nearly half of the extreme poor live, is projected to remain below or around 1 percent, while it is expected to reach 6 percent in South Asia, a region that includes the second largest E. Global trade and investment F. Per capita EMDE GDP growth, by number of people in extreme poverty. growth, volumes region Uncertainty around global growth projections has risen, partly driven by the possibility of policy shocks from major economies (Figure 1.2). While a synchronous upturn in large economies could lead to further growth upgrades in the near term, risks remain tilted to the downside, with some becoming more acute. Sources: Haver Analytics, World Bank. In particular, the possibility of financial market A.C.E.F. Shaded areas indicate forecasts. disruptions has increased amid shifting monetary A. EMDEs = emerging market and developing economies. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. Data for 2017 are estimates. policy expectations in major advanced economies. B. Figure shows Purchasing Managers’ Index (PMI) for manufacturing output and new export orders. Readings above 50 indicate expansion in economic activity; readings below 50 indicate contraction. A sudden tightening of global financing condi- Last observation is April 2018. tions, combined with disorderly exchange rate C. Simple average of GDP growth. Orange lines indicate interquartile ranges of growth in each group. D. Global GDP levels in constant 2010 U.S. dollars, indexed to 100 at start of expansion periods. movements, would leave highly indebted EMDEs Cycle dates based on global recessions and slowdowns identified in Kose and Terrones (2015). Dashed line corresponds to 2018-20 forecasts. particularly vulnerable, with rising debt service E. Trade measured as the average of export and import volumes. costs hampering investment and heightening F. SAR = South Asia and SSA = Sub-Saharan Africa. GDP per capita calculated using constant 2010 U.S. dollar GDP weights. financial stability risks. The risk of mounting trade Click here to download data and charts. protectionism has also intensified. A worldwide escalation of tariffs up to the limits permitted under existing international trade rules could lead 6 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE 1.2 Global risks and policy challenges to cumulative trade losses equivalent to those experienced during the global financial crisis in Uncertainty surrounding the outlook remains elevated and risks are tilted to the downside. EMDEs are susceptible to a sudden increase in borrowing 2008-09, with particularly severe consequences for costs amid elevated debt levels, and could be severely impacted by EMDEs. Other risks include the possibility of escalating trade protectionism. Improving education outcomes could help raise EMDE per capita income levels and growth prospects. Regional increasing policy uncertainty and geopolitical trade agreements could rekindle stalled trade liberalization at the global tensions. A further rise in oil prices, while level. beneficial for oil exporters, could amplify current account fragilities in some oil-importing EMDEs. A. Probability of global growth in 2019 B. EMDE debt as a share of GDP, being below/above baseline by borrowing sector The probability of an abrupt slowdown in global growth has risen and could increase further if one or several downside risks materialize. Many countries would be unprepared to confront such an outcome, in view of their depleted policy buffers and the moderating outlook for potential growth. In this context, both advanced economies and EMDEs face acute policy challenges. C. Impact of interest-rate shock on D. Impact on trade from worldwide The immediate policy challenge for advanced fiscal sustainability gaps in EMDEs, increase in tariffs to bound levels economies is to calibrate their fiscal, monetary, by region by 2020 and trade policy stances to nurture the recovery and to avoid disorderly financial adjustments. In the longer term, they need to confront the slow pace of potential growth and demographic pressures through structural reforms that boost productivity, labor force participation, and fiscal sustainability. In EMDEs, monetary and fiscal buffers need to be E. Students proficient in math and F. Size of new regional trade rebuilt in order to prepare for monetary policy agreements reading, by region tightening in advanced economies and restore the scope for policy support against negative shocks. In particular, rising global interest rates will heighten corporate vulnerability and raise EMDE debt-service costs and fiscal sustainability gaps. In the longer run, EMDE policy makers also need to confront intensifying structural challenges and accelerate measures to tackle poverty. The decisive implementation of growth-enhancing structural Sources: Bank for International Settlements, International Monetary Fund, Kose et al. (2017b), Kutlina-Dimitrova and Lakatos (2017), World Bank. reforms is critical in light of the likelihood of A. Bars show the probability that global growth is 1-percentage-point above or below baseline forecasts 18 months ahead. Probabilities for 2019 are computed from the forecast distribution of 18- weaker-than-expected long-term growth out- month-ahead oil price futures, S&P 500 equity price futures, and term spread forecasts. Each of the risk factor’s weight is derived from the model described in Ohnsorge, Stocker, and Some (2016). Last comes—which, given past experience, is a material observation is May 2018. B. Debt is defined as loans and debt securities. Sample includes 16 EMDEs. possibility (Box 1.1). C.E. EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the Caribbean, MNA = Middle East and North Africa, SAR = South Asia, and SSA = Sub-Saharan Africa. C. Figure shows the estimated deterioration in the fiscal sustainability gap driven by a 1-standard For commodity exporters, prospects of a secular deviation interest rate increase. Sustainability gap is measured as the difference between the primary balance and the debt-stabilizing primary balance. A negative bar indicates government debt is rising slowdown in demand for commodities call for along an accelerated trajectory. Sample includes 70 EMDEs. D. Bars denote the percent deviation from baseline in 2020. Data are calculated from simulations accelerated efforts to diversify and transform their using the GDyn computable general equilibrium model (Ianchovichina and McDougall 2000; Ianchovichina and Walmsley 2012). Trade-weighted aggregates include 36 advanced economies and economies as a way of boosting income per capita 71 EMDEs. E. Data for South Asia are unavailable. Dashed horizontal lines show advanced-economy average. and mitigating volatility. For all EMDEs, rapid F. CPTPP = Comprehensive and Progressive Agreement for Trans-Pacific Partnership, AfCFTA = African Continental Free Trade Area. Data are as of 2017. technological changes highlight the need to Click here to download data and charts. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 7 support skill acquisition and adaptability. This FIGURE 1.3 Advanced economies would assist the process of integration in regional Despite recent signs of softening, growth in major advanced economies is and global value chains, as well as bolster firms’ still generally solid. It is projected to moderate toward subdued potential ability to absorb new technologies and compete rates over the forecast horizon, as labor market slack diminishes and monetary policy stimulus is gradually withdrawn. internationally. For many low- and middle- income countries, improving basic numeracy, literacy, and skills related to information and A. GDP and demand component growth B. Growth communication technologies remains a key priority. Comprehensive preferential trade agreements can help boost income per capita of member countries and rekindle stalled trade liberalization at the global level. Recent regional initiatives are a promising step toward that goal. Major economies: Recent developments and outlook C. Unemployment rate D. Actual and potential growth in 2018-19 In advanced economies, growth remains above potential despite signs of softening. In the United States, significant fiscal stimulus will boost near-term activity. As the recovery matures over the forecast horizon and monetary policy accommodation is pared down, growth is projected to moderate toward its potential rate. In China, growth remains solid and is expected to gradually slow as rebalancing continues. Sources: Haver Analytics, World Bank. A.B. Green diamonds correspond with the January 2018 edition of the Global Economic Prospects Although recent indicators in advanced economies report. Shaded areas indicate forecasts. suggest some moderation, they continue to point A. Aggregate growth rates and contributions calculated using constant 2010 U.S. dollar GDP weights. C. Data are seasonally adjusted. Last observation is April 2018 for the United States, and is March to solid investment and above-potential growth 2018 for Japan and the Euro Area. D. Blue bars refer to average actual growth over 2018-19 period and vertical orange lines show the this year across countries (Figure 1.3). Consumer minimum-maximum range of potential growth estimates based on eight different methodologies (production function approach, multivariate filter, three univariate filters—Hodrick-Prescott filter, confidence is still high and new jobs are being Christiano-Fitzgerald filter, and Butterworth filter—IMF World Economic Outlook estimates, and created at a solid pace. In all, advanced-economy estimates in OECD Economic Outlook and Long-Term Baseline Projections), over 2018-19. For further details on potential growth estimates, refer to the January 2018 edition of the Global growth is projected at 2.2 percent for 2018—a Economic Prospects report. Click here to download data and charts. slight deceleration from last year, as additional fiscal stimulus in the United States is offset by moderating growth in other major economies. are moving toward peaks attained prior to the Over the forecast period, growth is expected to financial crisis (Figure 1.4). Wage growth has decelerate toward its potential rate, as output gaps picked up slightly, but is still weak compared to close and become positive, inflation rises toward previous recoveries. target rates amid higher energy prices, and central banks continue to remove monetary stimulus. The Bipartisan Budget Act passed in early February, which will add about 1.5 percent of United States GDP in government spending to the economy over the next three years, is the main factor behind Growth in the United States reached 2.3 percent the forecast upgrade relative to January projec- in 2017, supported by broad-based strength in tions. Combined with the Tax Cuts and Jobs Act domestic demand, especially investment. The enacted last year, additional discretionary expend- economy may be near its productive potential, as itures result in a highly procyclical fiscal stance, both capacity utilization and the employment rate which is expected to cost almost 5 percent of GDP 8 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 BOX 1.1 Long-term growth prospects: Downgraded no more? Consensus forecasts for long-term growth have recently stabilized after a series of downgrades since 2010. Although this development could be another encouraging sign the global economy is finally enjoying a healthy expansion, long- term forecasts are often overly optimistic. While well below levels expected a decade ago, these forecasts are above potential growth estimates. Moreover, adverse structural forces continue to overshadow long-term growth prospects. A prolonged period of weaker growth expectations, growth rates. Third, long-term growth expectations characterized by the systematic downgrading of long- have in the past proven overly optimistic and above term forecasts, seems to have come to an end. For the model-based estimates of potential growth, which has first time since 2010, the 10-year-ahead consensus been dampened by multiple structural forces. forecast for global growth appears to have stabilized (Figure 1.1.1). In 2018, long-term growth Against this background, this box briefly analyzes the expectations were upgraded for more than half of behavior of long-term global growth expectations to countries—the largest number since 2010—and there address the following questions: have also been recent upgrades in short-term forecasts. • How have long-term global growth expectations A sustained upgrading of long-term forecasts could be evolved? another sign that the legacies of the global financial crisis are fading. Growth is expected to remain at a • How do these expectations compare with actual post-2011 high this year, and the negative global outcomes and estimates of potential growth? output gap is likely to be closed for the first time since 2008 (World Bank 2018a). The recent synchronized • When do long-term growth expectations tend to global upturn has even sparked hopes that the crisis- be higher? induced damage to potential growth—“hysteresis” effects, which entrench weak growth after deep • What does the recent stabilization in forecasts recessions—could be reversed if investment, imply for long-term prospects? productivity and employment continue to improve (Yellen 2016; Draghi 2018).1 Over the past decade, the implications of rapid technological innovations for long-term growth However, such enthusiasm needs to be tempered by prospects have been a subject of intense debate. Some several considerations. First, the benign short-term claim that in the coming decades the global economy global growth outlook is predicated on highly will enjoy a surge in productivity growth driven by accommodative monetary policy by major central new digital technologies (Brynjolfsson and McAfee banks and, in some advanced economies, significant 2014). Others argue that growth will be much slower fiscal stimulus. Second, long-term global growth because of the declining marginal impact of new forecasts are stabilizing at levels well below those technologies on productivity (Gordon 2016). This expected a decade earlier and well below current box focuses on long-term growth prospects as captured in 10-year-ahead growth forecasts and model-based potential growth estimates. It is very Note: is box was prepared by M. Ayhan Kose, Franziska Ohnsorge difficult, if not impossible, to undertake a credible and Naotaka Sugawara. Research assistance was provided by Shijie Shi. quantitative analysis of the impact of new 1Hysteresis effects caused by the global financial crisis were sizable and technologies on long-term productivity and growth persistent (Ball 2014; Lo and Rogoff 2015; Oulton and Sebastiá-Barriel 2017). Some argue that, absent monetary and fiscal demand stimulus, outcomes. growth may have been much lower because of the underlying forces of “secular stagnation,” a phenomenon of a rising propensity to save, weak Long-term growth expectations here refer to 10-year- demand and persistently low real interest rates (Summers 2015, 2016; Rachel and Smith 2015). ahead growth forecasts of real GDP from Consensus G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 9 BOX 1.1 Long-term growth prospects: Downgraded no more? (continued) Economics.2 Short-term growth forecasts are defined the post-crisis decline in long-term output growth as 1-year-ahead consensus forecasts. All forecasts are expectations was accompanied by weakening forecasts for annual growth and refer to averages of semi- for global investment and consumption growth. annual or quarterly projections. The pattern of pre-crisis upgrades and post-crisis Evolution of expectations downgrades in long-term forecasts was also evident in some major economies (Figure 1.1.2). In 1998, U.S. Pre-crisis upgrades, post-crisis downgrades. The growth was expected to be about 2.4 percent over the global financial crisis marked a turning point in long- following decade but, by 2008, the long-term growth term global growth expectations. From 1998 to forecasts had been revised upwards by 0.3 percentage 2007, long-term expectations improved slightly point. Similarly, growth in China was expected to be (from 3 percent to 3.4 percent). During the same 7.5 percent over the following decade in 1998, but period, 18 of the 38 economies’ long-term growth by 2008, the long-term forecast had been increased forecasts were upgraded. Following the 2007-09 by 0.2 percentage point following its remarkably global financial crisis, however, long-term forecasts strong performance in the previous decade. Although have steadily declined, from 3.3 percent in 2010 to long-term growth forecasts for Brazil and India were 2.5 percent in 2017, reflecting a broad-based upgraded in 2008 relative to expectations a decade downgrading of growth prospects. Since the crisis, earlier, these upgrades did not last. By 2018, all of long-term growth forecasts were lowered for all these economies’ long-term growth forecasts had economies (by about 1.4 percentage points, on declined (0.3-2.4 percentage points) below their average). The evolutions of forecasts over various 1998 levels. horizons (from 2- to 10-year-ahead) all point to gradual deterioration in global growth expectations Recent stabilization. Since 2017, long-term growth since the financial crisis. expectations have stabilized. In 21 of 38 economies, long-term growth expectations improved from 2017 The pattern of initial strength and subsequent to 2018—the largest number of countries since 2010. weakness in growth expectations is broadly shared, Ten-year-ahead forecasts for EMDEs registered their albeit at different speeds and intensities, among first upgrade in 2018 following seven consecutive different country groups and alternative measures of years of declines. growth. Emerging market and developing economies (EMDEs) enjoyed improvements in their growth Factors driving the evolution of forecasts. The prospects before the crisis, while advanced economies evolution of long-term forecasts has reflected the began experiencing a gradual decline in growth global economy’s roller coaster ride over the past two forecasts in the early 2000s. Post-crisis, both groups decades. Pre-crisis strength in growth prospects in witnessed deteriorating long-term growth forecasts. part reflected rapid expansion of investment and Similar trends occurred in per capita growth and international trade and financial flows with the medium-term (5-year-ahead) forecasts. In addition, spread of information and communications technology (Kose and Prasad 2010; World Bank 2018a). Thanks to these developments, the global 2 Consensus Economics reports an average of 6- to 10-year-ahead economy registered one of its best growth records growth forecasts, which are labelled here as “10-year-ahead forecast.” ese forecasts are consistently available for 38 countries (20 advanced since the early 1970s in the 2003-07 period. economies and 18 EMDEs) from 1998. ese 38 countries constitute 87 percent of global GDP in 2010-18. Forecasts are available for 45 Tailwinds, however, turned into headwinds during countries (25 advanced economies and 20 EMDEs) for as early as 1989. the 2009 global recession, which was followed by an Consensus Economics has been canvassing long-term forecasts from multiple institutions four times a year since 2015. Prior to that, long- anemic recovery, especially in advanced economies. term forecasts were made available twice a year or three times a year. e The post-crisis period was marked by widespread forecast made in a particular year is defined as the average of the 2-4 unemployment and weak investment growth. In available forecast vintages in that year. For 2018, the forecast is the average of January and April vintages. many countries, elevated debt burdens weighed on 10 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 BOX 1.1 Long-term growth prospects: Downgraded no more? (continued) FIGURE 1.1.1 Growth forecasts: Global, groups, and aggregates After a prolonged period of downgrades, long-term forecasts of global growth, per capita growth, investment, and consumption may have stabilized in 2018, while short-term forecasts have been upgraded recently. This still leaves current long-term forecasts considerably lower than a decade ago. Downgrades were particularly steep, but started later (after the global financial crisis), for EMDEs than for advanced economies. A. Ten-year-ahead global growth B. Share of countries with upgrades in C. One- to three-year-ahead global forecasts 10-year-ahead growth forecasts growth forecasts D. Global growth forecasts, by forecast E. Ten-year-ahead output growth F. Ten-year-ahead global investment and horizon forecasts consumption growth forecasts Sources: Consensus Economics, United Nations, World Bank. Notes: Sample includes 38 countries, consisting of 20 advanced economies and 18 EMDEs, for which consensus forecasts are consistently available during 1998-2018. These economies account for 87 percent of global GDP over 2010-18. Unless otherwise noted, annual averages of results from multiple surveys conducted in each year are presented. A.B.E.F. The horizontal axis refers to the year of consensus forecast surveys. A.C.D.E. Global, advanced-economy, and EMDE growth is computed with constant 2010 U.S. dollar GDP weights. A. Per capita global output growth is computed as the difference between 10-year-ahead global growth forecasts and population growth estimates in the years for which forecast surveys are conducted. B. Share of countries with positive changes in 10-year-ahead growth forecasts from the previous year. C. Lines are based on consensus forecast surveys conducted in September or October of denoted years, except 2018, for which data are based on surveys in April. D. Lines show the years of consensus forecast surveys. F. Global private consumption and investment growth is computed, respectively, with constant 2010 U.S. dollar private consumption and investment weights. Click here to download data and charts. investment growth (World Bank 2017a). Over 2010- Bank 2018a). A slowdown in total factor 15, long-term prospects were further clouded by the productivity growth that had begun in advanced 2011-12 Euro Area debt crisis, and by a sharp economies in 2004 was compounded, from 2008, by slowdown in EMDEs that was partly related to the an even steeper decline in EMDEs.3 Similarly, bursting of the commodity price boom. 3 In advanced economies, the highly synchronized slowdown in These adverse cyclical effects were compounded by productivity growth has been attributed to several factors, including the lack of transformative technologies, slowing improvements in educational structural weaknesses, namely poor productivity attainment, and the maturation of information technologies (Cette, growth and a broadening slowdown in the growth of Fernald, and Mojon 2016; Hirata, Islamaj, and Kose 2018; Kilic Celik et working-age population (Didier et al. 2015; World al. 2018; World Bank 2018a). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 11 BOX 1.1 Long-term growth prospects: Downgraded no more? (continued) FIGURE 1.1.2 Growth forecasts in major economies and in comparison with actual and potential growth Since the global financial crisis, long-term growth forecasts have declined in all major economies. This slowdown has followed adverse cyclical effects, compounded by structural weakness, including declines in the share of the working-age population. For most countries, long-term growth forecasts have systematically exceeded potential growth and actual growth over the past decade, and forecast optimism is stronger for longer-term forecasts than for shorter-term forecasts. A. Ten-year-ahead growth forecasts in B. Ten-year-ahead growth forecasts in C. Global working-age population advanced economies EMDEs D. Ten-year-ahead growth forecast errors E. Global growth forecast errors, by F. Comparison of global forecasts and forecast horizon potential growth Sources: Consensus Economics, Kilic Celik et al. (2018), United Nations, World Bank. Notes: Sample includes 38 countries (20 advanced economies and 18 EMDEs). A.B. Years denoted show the years of consensus forecast surveys. A.B.D.E.F. For growth forecasts, annual averages of results from multiple surveys conducted in each year are presented. A.B.D.F. Growth in aggregate groups is computed with constant 2010 U.S. dollar GDP weights. A. Euro Area is a weighted average of France, Germany, Italy, the Netherlands, and Spain. C. Population-weighted averages. The working-age population is defined as people aged 15-64 years. Shaded area refers to forecasts. D. A forecast error is defined as a difference between consensus output growth forecasts a decade earlier and actual growth, weighted by GDP. The horizontal axis refers to the years for which growth forecasts are surveyed, with the forecast survey years in parentheses. E. A forecast error is defined as a difference between growth forecasts at different horizons (over three years, five years, and 10 years) and actual growth. Averages and medians are computed from available observations up to 2017. F. Figure shows period averages of GDP-weighted global actual growth, potential growth, and growth forecasts. For 10-year-ahead growth forecasts, the horizontal axis refers to the forecast survey years. Potential growth is measured by production function. Click here to download data and charts. in 2010, the share of the working-age population The recent stabilization in long-term growth in EMDEs began, first, to plateau and, then, started expectations is associated with improved global to fall—a turning point that advanced economies growth and trade since mid-2016, tight labor markets had already passed in the mid-1980s. As a result, and a rebound in industrial production in major global potential growth—the rate of change in advanced economies that also benefited their trading output an economy would sustain at full capacity partners, and recoveries in some large commodity- utilization and full employment—was 0.9 percentage exporting EMDEs. Indeed, global GDP is expected point lower in 2013-17 than a decade earlier (World to return to its potential this year for the first time Bank 2018a). since 2008. 12 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 BOX 1.1 Long-term growth prospects: Downgraded no more? (continued) Comparison with outcomes and potential gap between long-term expectations and the model- growth based estimate is mostly driven by advanced economies but long-term growth forecasts are Systematic optimism. Not surprisingly, during currently larger than potential growth in the majority 2008-17, long-term global growth forecasts made a of countries. decade earlier exceeded actual growth outcomes in all years except 2010. Growth forecasts were higher than Causes of optimism. The over-optimism in long- eventual growth outcomes in the majority of term growth forecasts is a result of both cyclical and countries in almost all years since 2008, except structural factors. In part, this optimism reflected an during 2010-11. Even during those two years, initial underappreciation of the headwinds to forecasts were overly optimistic for around 50 potential growth, especially in advanced economies, percent of advanced economies and 25 percent of from demographics and weak investment and EMDEs. The analysis here covers mainly the crisis productivity. In part, optimism was a natural and post-crisis periods that witnessed an unusual outcome of the failure to predict, or even recognize series of negative growth shocks. However, it is in real time, shocks that could trigger crises or widely documented that forecasts for long-term business cycle turning points and their lasting impact growth tend to be more optimistic than growth (Juhn and Loungani 2002; Ho and Mauro 2016).6 outcomes even in data samples that include the pre- crisis period (Ho and Mauro 2016). Moreover, the The global financial crisis, one of the largest such longer the forecast horizon, the larger the degree of episodes in a century, was not foreseen by most over-optimism is. On average, 10-year-ahead growth forecasters. The post-crisis period has also been forecasts overshot by 1.2 percentage points and 5- marked by additional severe and unforeseen shocks, year-ahead forecasts over-estimated growth by 0.8 such as the Euro Area debt crisis and the 2014-16 oil percentage point over the period until 2017.4 price collapse. These episodes—which could not be foreseen 10 years earlier—were followed by Above potential growth. Since long-term growth substantial and persistent downward growth re- expectations presumably abstract from cyclical visions. They were accompanied by weak business effects, they should reflect forecasters’ judgment confidence and policy uncertainty. Long-term about an economy’s potential growth. By forecasts adjusted gradually, as new information comparison, model-based estimates of potential revealed the lasting damage these shocks had dealt to growth can be made using a number of methods. To the global economy. Indeed, long-term growth study whether long-term growth expectations differ forecast downgrades have been historically associated from other measures of potential growth, estimates of with disappointing growth outcomes: when growth potential growth based on a production function fell short of 1-year-ahead forecasts in three consecu- model are compared with 10-year-ahead growth tive years (in a sample of 55 country-year episodes), forecasts made in the same year (Kilic Celik et al. 10-year-ahead forecasts were, on average, down- 2018; World Bank 2018a). Ten-year-ahead forecasts graded by 0.2 percentage point. When compared for global growth often exceed the model-based with forecast changes in other years, this downgrade global potential growth over the next decade.5 The was statistically significant. 4 For 5-year-ahead forecasts, this is larger than the average growth Factors associated with higher long-term disappointments of 0.34 percentage point in World Economic Outlook forecasts forecasts for 188 countries for 1990-2012 (Ho and Mauro 2016). 5 Estimating potential output is fraught with measurement challenges As shown in the preceding section, long-term forecast (World Bank 2018a). However, 10-year-ahead forecasts remain above revisions are quite common over time and across multiple model-based measures of potential growth available in Kilic Celik et al. (2018). For commodity exporters, accounting for resource rents can materially alter potential growth estimates and may account in 6 e average 10-year-ahead forecast error for the growth in years up part for the difference between 10-year-ahead forecasts and cross-country- to 2000-08 was correspondingly smaller, at 0.1 percentage point, com- consistent potential growth estimates. pared with 1.2 percentage points for the sample from 2000-17. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 13 BOX 1.1 Long-term growth prospects: Downgraded no more? (continued) countries. To analyze the major factors associated However, past experience cautions that long-term with higher forecasts, two simple event studies are forecasts may yet again turn out to be overly undertaken. These illustrate how forecasts are revised optimistic. Specifically, if forecast errors of the during periods of strong output or investment magnitude observed in the past materialize yet again, growth. These episodes are particularly relevant growth in the coming decade may turn out to be considering that the recent stabilization in growth much weaker than current long-term growth expectations has also coincided with above-potential forecasts, around 2.1 percent instead of 2.8 percent. growth in some major economies and an acceleration Over-optimism has reflected an underappreciation of in investment since mid-2016. structural headwinds to potential growth as well as a failure to forecast global recessions. Over the past Sustained output growth. Sustained periods of half-century, the global economy experienced a above-potential growth were generally accompanied recession every decade (in 1975, 1982, 1991, and by higher 10-year-ahead growth forecasts. The event 2009).7 This record suggests that it is possible that study sample includes 55 episodes (of which 43 the global economy is due for another recession over concluded before the global financial crisis in 2009) the next 10 years. during which actual growth exceeded potential growth in at least three consecutive years. Conversely, Yet, even if a growth forecast disappointment is not in 49 setback episodes, of which 17 straddled the triggered by an outright global recession, average crisis and 24 were pre-crisis, actual growth fell short potential growth over the next decade is estimated to of potential growth in three or more consecutive be slower than during 2013-17. This reflects an years. During growth spurts, long-term growth awareness that weak productivity growth, increas- forecasts were, on average, 0.3 percentage point (and ingly unfavorable demographic trends, and subdued statistically significantly) higher than during growth investment prospects are likely to weigh on global setbacks (Figure 1.1.3). potential growth in the coming years. Model-based estimates suggest that average global potential growth Investment surges. The event sample includes 88 during 2018-27 will be about 2.5 percent, much episodes (of which 66 ended before 2009) in which lower than the post-crisis average actual growth of 3 investment growth was positive in at least three percent (World Bank 2018a). consecutive years and 41 setback episodes in which investment growth was negative for at least three Over a decade, such seemingly small differences in consecutive years. Again, long-term growth forecasts growth outcomes translate into significant changes in were, on average, 1 percentage point (and statistically global income and living standards. For example, significantly) higher during investment growth spurts should global growth average current consensus than investment growth contractions. forecasts, incomes a decade from now would be, cumulatively, 31 percent higher than in 2018 (but 3 Implications: A respite from gloom about percentage points less than if growth remained at its growth prospects? post-crisis average pace). This income gain could turn Recent long-term growth forecasts indicate that the period of post-crisis gloom about growth prospects may be coming to an end. Long-term growth 7 In 1975, a surge in oil prices coincided with recessions in major advanced economies and debt crises in EMDEs. In 1982, monetary forecasts currently envision global growth in 2028 policy tightening in major advanced economies precipitated further debt at 2.6 percent—slightly higher than a year ago but crises in many EMDEs. In 1991, an abrupt tightening of credit in the less than this year’s projected growth (3.1 percent). United States coincided with banking and currency crises in many European countries. And in 2007-09, there were particularly deep If the recent stabilization of long-term growth financial crises in major advanced economies. In addition to these four forecasts heralds a period of sustained upgrades, it global recessions, the global economy experienced two major slowdowns: during 1997-98, the Asian Crisis was followed by the Russian crisis and, may signal that the effects of the global financial crisis in 2001, the U.S. stock market corrected in the dot-com crash (Kose and are waning. Terrones 2015). 14 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 BOX 1.1 Long-term growth prospects: Downgraded no more? (concluded) FIGURE 1.1.3 Growth forecasts and change in global GDP Revisions in long-term growth forecasts are common over time and across countries. Ten-year-ahead forecasts became higher during sustained growth spurts and investment surges. Over a decade, growth disappointments can make a major difference to global incomes. A. Ten-year-ahead growth forecasts B. Global growth forecasts and potential C. Cumulative change in global GDP, during strong growth and investment growth 2018-27 episodes Sources: Consensus Economics, Kilic Celik et al. (2018), World Bank. Note: For growth forecasts, annual averages of results from multiple surveys conducted in each year are presented. A. Bars show average growth forecasts during events. *** and ** denote that average forecasts between two events are statistically significantly different at the 1 percent and 5 percent levels, respectively. Sample includes 45 countries for which consensus forecasts are available even over the shorter period. Growth spurt and setback events are defined as, respectively, at least three consecutive years of actual growth above and below potential growth: 55 spurts in 37 countries and 49 setbacks in 36 countries. Investment surge and slowdown events are defined as, respectively, at least three consecutive years of positive and negative investment growth from the previous year: 88 surges in 42 countries and 41 slowdowns in 26 countries. B.C. Growth in aggregate groups is computed with constant 2010 U.S. dollar GDP weights. Potential growth is measured by production function. Sample includes 38 countries. B. Actual growth (2010-17) and potential growth (2018-27) are period-averages. A bar for “forecast” is an average of growth forecasts for 2018-27 surveyed in 2018. Bias in forecast is corrected in the following ways: A bar refers to an average of consensus growth forecasts for 2018-27 after an average forecast error for each time horizon (as partly shown in Figure 1.1.2.E) is adjusted; and an orange ticker shows average forecast growth corrected for the average error over 10 years. C. Cumulative change in global GDP since 2018, when growth in every year during 2018-27 is assumed to be as defined in Panel B. Click here to download data and charts. out to be 4 percentage points lower should growth risk of further adverse shocks and underlying instead average its estimated potential rate, and about structural weaknesses still suggest an urgent need to 9 percentage points lower should growth fall short of press ahead with growth-enhancing policy consensus forecasts by the average historical forecast adjustments—including reforming product and labor error. markets, raising investment in human capital, and building the policy buffers needed to allow an The analysis here warns that the recent stabilization appropriate counter-cyclical response to shocks when in long-term growth prospects may be fleeting. The they materialize. over 2018-2020 (CBO 2018a; CBO 2018b; CBO 2018). As fiscal stimulus measures have been 2018c; JCT 2017). In all, the stimulus adds just introduced and inflation has moved toward target, over 1 percentage point to the growth forecast the Federal Reserve has signaled a faster pace of over the next couple of years, but is expected to policy tightening. lead to budget deficits of around 5 percent of GDP for the next decade, up from 3.5 percent in Recent trade policy changes are not expected to 2017. As a consequence, net federal public debt, have a substantial effect on U.S. growth, which is currently at about 80 percent of GDP, is set to rise projected to reach 2.7 percent in 2018 and edge in coming years (Auerbach, Gale, and Krupkin down to 2.5 percent in 2019. As fiscal and G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 15 monetary stimulus fade, growth is forecast to slow FIGURE 1.4 United States to 2 percent in 2020, above the mid-point of the 1 The U.S. economy remains robust and may be near its productive to 2.4 percent range of estimates of its potential capacity. Nevertheless, wage growth remains soft, especially compared to pace (Fernald et al. 2017; World Bank 2018a). previous expansions. Procyclical fiscal stimulus is expected to provide a temporary boost to growth, which has contributed to a rise in the Federal Reserve’s policy rate projections. Euro Area A. Productive capacity B. Wage growth during expansions The Euro Area economy grew 2.4 percent in 2017, its fastest increase since the financial crisis, reflecting strong consumption, investment, and exports. However, data releases since the start of 2018 point to decelerating activity (Figure 1.5). Headline inflation stands at 1.2 percent, well under the central bank target of close to, but below, 2 percent. Wages and inflation expecta- tions have edged up intermittently, pointing to incipient signs of rising price pressures. The C. Federal deficit and unemployment D. U.S. Federal Reserve policy rate European Central Bank (ECB) has committed to rate projections over time growing its balance sheet until at least September 2018, with its policy rate remaining unchanged “well past” this date, until inflation is clearly converging toward target (ECB 2018). Amid continued monetary policy stimulus, growth is projected to be 2.1 percent in 2018. It is forecast to slow to 1.7 percent in 2019 and 1.5 percent in 2020, as slack dissipates, higher oil prices weigh on consumption, monetary accom- Sources: Board of Governors of the Federal Reserve System, Bureau of Labor Statistics, Congressional Budget Office, Federal Reserve Bank of St. Louis, Haver Analytics, World Bank. modation is gradually unwound, and borrowing A. The dashed horizontal lines indicate the peak values for capacity utilization and the employment to working-age population ratio in the two years prior to the global financial crisis (i.e., December 2005 costs increase. Net exports are also expected to to December 2007). The local peak was 81.1 percent for capacity utilization and 80.3 percent for the employment to working-age population ratio. Last observation is April 2018. become a drag on near-term growth, as the earlier B. Wage growth is the average hourly earnings of private, non-farm production, and nonsupervisory strengthening of the euro and improving domestic employees. Wages have been indexed to the trough of the corresponding National Bureau of Economic Research (NBER) business cycle. Last observation is April 2018. demand translate into a narrowing of the sizable C. Shaded area indicates forecasts. Forecast for the federal deficit based on the most recent Congressional Budget Office (CBO) baselines. Forecast for the unemployment rate based on World current account surplus. Positive spillovers from Bank calculations using an Okun’s law coefficient of 0.5. D. Figure shows the minimum-maximum range and median of the federal funds rate projections for expansionary U.S. fiscal policy are expected to be 2018, 2019, and 2020 released in September 2017, December 2017, and March 2018. The limited. Throughout the projection horizon, projections show the median and range of FOMC participants’ (i.e., Federal Reserve Board members and Federal Reserve Bank presidents) assessment of the midpoint of the projected appropriate target growth is projected to remain above the mid-point range for the federal funds rate, or the projected appropriate target level for the federal funds rate at the end of the specified calendar year. of the 0.7 to 1.5 percent range of potential growth Click here to download data and charts. estimates (ECB 2017; World Bank 2018a). Japan and wages and inflation expectations have been generally stable, suggesting that monetary policy Growth in Japan reached 1.7 percent in 2017, will likely remain accommodative for some time. underpinned by supportive financial conditions and strong exports, but contracted at the Over the forecast period, growth is expected to beginning of this year. Nonetheless, unemploy- decelerate to 1 percent in 2018, 0.8 percent in ment is falling to levels not seen since the 1990s, 2019, and 0.5 percent in 2020, as higher oil prices while the participation rate has increased, erode real incomes, employment growth slows, primarily due to greater entry of women into the and fiscal consolidation starts to drag on growth, labor force (Figure 1.6). Inflation remains low, notably due to the effects of the VAT hike 16 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE 1.5 Euro Area scheduled for late 2019. The long-term growth While data releases since the start of 2018 point to decelerating activity, outlook remains constrained by an aging and growth is still above potential. Inflation continues to be below target, shrinking labor force (World Bank 2018a). though wage growth and inflation expectations have edged up intermittently. The current account surplus remains sizable. China A. Composite PMIs B. Headline and core inflation Growth in China reached 6.9 percent in 2017 and has remained solid this year (Figure 1.7; World Bank 2018b). Activity continues to shift to consumption, while investment growth rates remain well below those in recent years. Industrial production has stabilized following significant cuts in overcapacity sectors implemented over the past two years. In the first quarter of 2018, China recorded its first current account deficit since C. Inflation expectations and wage D. Euro Area current account balance growth 2001. During the first half of 2018, fiscal policy has become less expansionary, while monetary and prudential policies continue to rein in excessive credit growth, especially shadow financing. The stock of outstanding debt is high, although the largest component—credit to non-financial corporations—has been declining as a share of Sources: Bloomberg, European Central Bank (ECB), Haver Analytics, World Bank. GDP (BIS 2018a). Tight housing market A. Purchasing Managers’ Index (PMI) readings above 50 indicate expansion in economic activity; readings below 50 indicate a contraction. Last observation is April 2018. regulations have contributed to some correction in B. Horizontal line represents 1.9 percent, consistent with the ECB’s inflation target of close to, but below, 2 percent. Last observation is April 2018. the housing sector. Consumer price inflation C. Long-term inflation expectations are derived from 5-year over 5-year forward swap rates, averaged remains below target, and producer price inflation over the quarter. Wage growth is year-on-year, and includes industry and services, excluding public administration. Last observation is 2018Q1 for inflation expectations and 2017Q4 for wage growth. has moderated. Tight enforcement of capital flow D. Aggregates calculated using constant 2010 GDP weights. Last observation is 2017Q4. Click here to download data and charts. management measures continues to limit capital outflows and exchange rate pressures. FIGURE 1.6 Japan China’s growth is projected to edge down to 6.5 Despite a contraction in activity at the start of 2018, the labor market percent in 2018 and slow further to 6.3 percent continues to add workers as unemployment falls and the participation rate on average in 2019-20, as export growth rises. Increases in earnings have been moderate, and core inflation remains low. moderates and deleveraging takes hold. In addition, policy accommodation is expected to A. Unemployment and labor B. Core inflation and wage growth further diminish as authorities continue to tighten participation rates macroprudential regulation and gradually remove their supportive fiscal stance. Downside risks to the outlook stem from financial sector vulnerabilities and an intensification of trade tensions amid increased protectionism in key trading partners. Global trends Sources: Haver Analytics; Japan Ministry of Health, Labor, and Welfare; Japan Ministry of Internal Affairs and Communications. A. Last observation is March 2018. Global trade was robust last year, benefiting from an B. Average monthly earnings are 12-month moving averages and are the average monthly earnings of workers in companies with 30 or more employees, in all industries. The core CPI index excludes upturn in capital spending and manufacturing ac- fresh food and energy, and has been adjusted to exclude the impact of Value-Added Tax (VAT) hikes. Last observation is April 2018 for core CPI and March 2018 for average monthly earnings. tivity. It is expected to moderate over the forecast Click here to download data and charts. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 17 period amid decelerating global investment. FIGURE 1.7 China Financing conditions are expected to tighten more Growth in China remains solid and rebalancing continues, amid robust rapidly than previously envisioned, along with the consumption and a slowdown in investment. In the first quarter of 2018, possibility of faster normalization of monetary policy China recorded its first current account deficit since 2001. Stricter enforcement of capital flow management measures has helped ease in major advanced economies, in part because of capital outflows and exchange rate pressures. Credit growth continues to expanded U.S. fiscal stimulus measures. Capital decline because of regulatory tightening. flows to EMDEs have eased amid rising borrowing costs and are likely to further moderate. Oil prices A. Contribution to growth B. Investment growth are substantially higher than previously expected, and other commodity prices have also risen. While near- term projections for commodity prices have been revised up, they are expected to level off later in the forecast horizon. Global trade Following a prolonged period of marked weakness, a cyclical recovery in global C. Balance of payments D. Credit growth manufacturing and investment propelled global goods trade growth to 4.6 percent in 2017, three times the pace observed the previous year. The momentum remained sustained in early 2018, despite easing export orders (Figure 1.8). Services trade also gained strength last year. Since the global financial crisis, services trade has grown at a faster pace and continues to have the largest untapped potential for future growth (Georgieva, Sources: China National Bureau of Statistics, Haver Analytics, International Institute of Finance, Loayza, and Mendez-Ramos 2018; Lodefalk People’s Bank of China, World Bank. A. Shaded area indicates forecasts. Investment refers to gross capital formation, which includes 2017; Miroudot and Cadestin 2017). change in inventories. B. Investment refers to fixed asset investment (urban area). Deflated by fixed asset investment price index. Last observation is 2018Q1. Overall, growth in global trade of goods and C. Current account balance is based on seasonally adjusted data. Net capital flows and change in reserves are estimates. Last observation is 2018Q1 for the current account balance. services combined is expected to moderate to 4.3 D. Credit refers to total loans in domestic and foreign currency. Last observation is 2018Q1. Click here to download data and charts. percent in 2018, down from a six-year high of 4.8 percent in 2017. These projections have been revised up due to stronger-than-expected intra- Over the medium term, structural factors— regional trade growth in Asia and import demand including slower growth of global value chains and from major advanced economies. The additional a reduced appetite for further trade liberal- fiscal stimulus in the United States is expected to ization—will continue to constrain global trade lift U.S. import growth, benefiting key U.S. growth. These factors have contributed to the trading partners. Although benefits from the decline in the long-run income elasticity of trade strength of global trade are broad-based across over the last decade. EMDE regions, they were most pronounced in East Asia and Pacific and Eastern Europe and On trade policy front, the outcome of some trade Central Asia. Export growth in these two regions negotiations is still uncertain, and the risk of peaked in 2017 and is forecast to remain robust in escalating trade restrictions has intensified, as new 2018-19. More generally, a projected deceleration tariff announcements by the United States have of capital spending in China and in most led to retaliatory responses by major trading advanced economies will contribute to more partners. In other policy developments, the moderate global trade growth over the forecast European Union and the United Kingdom horizon (Freund 2018; Auboin and Borino 2017). reached agreement on guidelines for trade 18 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE 1.8 Global trade negotiations, the U.S.-Korea Free Trade Goods trade was particularly strong in 2017, supported by solid flows in Agreement was successfully re-negotiated, the Asia and Europe, while services trade also recovered. However, trade Comprehensive and Progressive Trans-Pacific growth is moderating and should continue to ease in 2019-20 as global Partnership (CPTPP) was signed by 11 member investment decelerates, while structural factors are still weighing on the income elasticity of trade. Trade flows between the United States and countries, and leaders from more than 40 African China have been the subject of intense policy discussions. nations endorsed a framework establishing a future African Continental Free Trade Area. A. Global goods trade growth, B. Goods trade growth between major volumes regions in 2017, values Financial markets Following a prolonged period of stable and exceptionally favorable global financing condi- tions, prospects of a faster withdrawal of monetary policy accommodation in advanced economies have led to rising global borrowing costs since the start of 2018. In particular, U.S. long-term yields have hovered around 3 percent, their highest level since mid-2014, as inflation expectations picked C. Global goods and services trade, D. Global trade and investment up and markets factored in the possibility of values growth, volumes accelerated interest rate hikes by the Federal Reserve, amid expanded U.S. fiscal stimulus measures (Figure 1.9). This reassessment—along with fears of escalating trade tensions and rising geopolitical risks—contributed to bouts of volatility in global equity markets in the first half of 2018. Concerns in some advanced economies about overstretched stock valuations, as well as the increasing use of complex derivatives allowing E. Income elasticity of trade F. Trade flows between the United investors to make bets on volatility, have also States and China amplified price movements (BIS 2018b). Looking forward, global interest rates are expected to rise at a faster pace than previously predicted, as upward revisions to the U.S. growth outlook lead to a somewhat steeper pace of U.S. interest rate hikes in 2019-20 (FOMC 2018). Above-trend growth and narrowing economic slack will also lead to further monetary policy normalization in other advanced economies. Policy interest rates in Sources: CPB Netherlands Bureau for Economic Policy Analysis, International Monetary Fund, U.S. Census Bureau, World Bank, World Trade Organization (WTO). the Euro Area and Japan are not expected to A. Dashed horizontal line indicates the historical median, which is computed from January 2001 to March 2018. Last observation is March 2018. increase before 2019, but a drawdown of net asset B. Global trade growth from 2016 to 2017. Average of export and import values. Bilateral trade flows purchases by major central banks is projected to measured using the Direction of Trade Statistics. Last observation is December 2017. C. Trade measured as the average of export and import values. GDP measured in current U.S. put upward pressure on global long-term yields. dollars. Data are 4-quarter moving averages, indexed to 100 in 2005Q4. Last observation is 2017Q4. D. Trade measured as the average of export and import volumes. Shaded area indicates forecasts. In particular, the European Central Bank is E. Income elasticity measured as the ratio of real trade growth to real GDP growth. Horizontal line expected to bring its asset purchase program to a denotes an income elasticity of one, which would indicate a proportional relationship between income and trade. close by the end of 2018, and the U.S. Federal F. Figure shows top five traded goods categories based on 2017 trade values in U.S. dollars. Man. denotes miscellaneous manufactured goods, plastics refers to plastic and rubber goods, and metals Reserve is on track to shrink its balance sheet by 4 is base metals. Click here to download data and charts. percent of GDP by the end of 2020. The latter reduction could add a cumulative 40 basis points to U.S. long-term yields over the same period (Bonis, Ihrig, and Wei 2017). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 19 A rise in global interest rates, combined with U.S. FIGURE 1.9 Global finance dollar appreciation, have contributed to tighter U.S. long-term yields have increased this year, reflecting rising inflation external financing conditions for EMDEs in expectations and prospects of a faster pace of U.S. interest rate hikes. This 2018. In particular, some EMDE currencies have contributed to bouts of stock market volatility, higher borrowing costs, and capital outflows in EMDEs. However, EMDE debt issuance remained solid, fallen sharply. More generally, capital inflows to so far matching record levels reached in 2017. As global bond yields are EMDEs have decelerated. During recent periods expected to continue to increase, capital inflows to EMDEs are likely to of financial market volatility, EMDEs experienced moderate further. portfolio outflows, reminiscent to those during previous episodes. Credit quality has continued to A. U.S. yield curve since the start of B. Global equity market the tightening cycle in December 2015 deteriorate, leading to further debt rating downgrades in several countries in 2018. Although appetite for higher-yielding EMDE debt has diminished and borrowing costs have increased, international bond issuance remains robust, so far matching the record levels observed in 2017. The pace of international debt issuance is currently driven by corporate borrowing in China and a significant uptick in sovereign issuance in Sub-Saharan Africa. C. Long-term U.S. and EMDE bond D. EMDE portfolio flows during yields selected episodes Foreign direct investment (FDI) flows to EMDEs continue to be subdued, as flows to China remain below their long-term trend and the recent recovery in commodity prices has not been sufficient to stimulate a significant revival of investment in resource sectors. Increased partici- pation in more complex global value chains could foster stronger FDI in many countries, particularly in Sub-Saharan Africa (World Bank et al. 2017; Amendolagine et al. 2017). Over the E. EMDE international bond issuance F. Capital inflows to EMDEs forecast horizon, capital flows to EMDEs are expected to further moderate, as global financing conditions continue to tighten. Investors are also likely to increasingly differentiate among countries, depending on their exposure to rising interest rates and currency pressures. Commodities Crude oil prices rose 10 percent in the first Sources: Bloomberg, Dealogic, Federal Reserve Bank of St. Louis, Haver Analytics, Institute of quarter of 2018 and have averaged $67 per barrel International Finance, J.P. Morgan, U.S. Department of the Treasury, World Bank. A. Yield values from the yield curve at fixed maturities, from 3 months to 30 years. Last observation is (bbl) over the first half of 2018 (Figure 1.10). May 25, 2018. Oil demand has been robust, with consumption B. World MSCI indices are weighted benchmarks that use large- and mid-cap securities in emerging and developed markets, respectively, in order to reflect market conditions across relevant regions increasing 1.6 million barrels per day (mb/d), and sectors. Volatility is measured by the VIX implied volatility index of option prices on the U.S. S&P 500. Last observation is May 25, 2018. or 1.6 percent, in the first quarter of 2018 from C. EMDE long-term yields are estimated using the U.S. 10-year treasury yield augmented by J.P Morgan’s Emerging Market Bond spread (excluding Venezuela). Last observation is May 21, 2018. a year earlier. An agreement between most D. Horizontal axis indicates number of days of outflows since event. The 2018 global market Organization of the Petroleum Exporting correction starts on April 15, 2018. Last observation is May 25, 2018. E. Last observation is May 2018. Countries (OPEC) members and some non- F. Shaded area indicates forecasts. Total non-resident inflows. The 23 EMDEs in the sample include Argentina, Brazil, Chile, China, Colombia, Egypt, Hungary, India, Indonesia, Lebanon, Malaysia, OPEC oil producers to extend output cuts to the Mexico, Nigeria, Philippines, Poland, Russia, Saudi Arabia, South Africa, Thailand, Turkey, United Arab Emirates, Ukraine, and Venezuela. end of 2018 boosted prices in late 2017 and into Click here to download data and charts. 2018—despite further increases in U.S. oil 20 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE 1.10 Commodity markets 2014, after the U.S. government announced that it would reinstate sanctions on the Islamic Crude oil prices rose substantially over the first half of 2018 amid robust demand and supply concerns related to recent geopolitical developments, Republic of Iran. Although there is considerable despite rising U.S. oil production. Metals prices increased in the first half of uncertainty regarding the ultimate impact of the the year following a pickup in demand from China. Grain stocks, in general, remain very high, which will continue to weigh on agricultural sanctions, it is possible that they will reduce prices, while soybean production has fallen substantially. Iranian exports by several hundred thousand barrels per day. The rise in oil prices was partially A. Crude oil prices B. Contribution to oil consumption reversed in late May on news that Saudi Arabia growth and Russia were discussing an easing of production caps, by up to 1mb/d, given concerns about weaker oil supply and higher prices. Oil prices are expected to average $70/bbl in 2018 and $69/bbl in 2019, up $12/bbl in 2018 and $10/bbl in 2019 relative to January forecasts. Upside price risks primarily arise from geopolitical developments involving key oil-producers in the Middle East and North Africa—particularly those C. Crude oil production D. Contribution to metals demand growth related to the reinstatement of sanctions on Iran. In addition, the recent imposition of sanctions on República Bolivariana de Venezuela could lead to further declines in Venezuelan oil production, where output has already fallen 0.9 mb/d over the past two years. Downside price risks include a loosening of the OPEC/non-OPEC planned cuts, which could be decided at the June OPEC meeting; faster-than-expected U.S. shale oil production; or lower demand for oil as a result of E. Soybean production F. Stocks-to-use ratios of main grains higher prices. Metals prices, which increased 24 percent in 2017 due to robust global demand and environmentally-driven supply cuts in China, rose modestly in the first quarter of 2018. Prices posted further gains in April, after the imposition of U.S. sanctions on a large Russian aluminum producer. Metals prices are expected to increase 9 percent in Sources: Bloomberg, Energy Information Administration, International Energy Agency, U.S. 2018, reflecting strong demand, but then Department of Agriculture, World Bank, World Bureau of Metal Statistics. A. Average of Brent, Dubai, and WTI. Weekly data. Last observation is May 25, 2018. moderate in 2019. Upside risks to prices include B. Shaded area (2018Q2-2018Q4) represents IEA projections. C. Data for Saudi Arabia are unavailable before 1984. Last observation is April 2018 for Saudi stricter pollution-control policies in China or Arabia and February 2018 for the United States. stronger-than-expected demand, since China D. Last observation is March 2018. E.F. Data reflect the May 10, 2018 update of the USDA’s World Agricultural Supply and Demand accounts for about half of global metals Estimates. Years represent crop seasons (e.g., 2016 refers to 2016-17 crop season). Click here to download data and charts. consumption (Special Focus 1). A broadening of sanctions on key metals producers could also lead to higher prices. production, which reached an estimated 10.6 million barrels per day in April. Agricultural prices gained 4 percent during the first half of 2018 compared to a year earlier, Geopolitical concerns boosted the price of Brent following three years of price stability. The price crude in May to $80/bbl, its highest level since uptick was primarily driven by lower plantings of G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 21 wheat and maize in the United States, as well as Recent economic activity data and sentiment some weather-related disruptions to soybean indicators across EMDEs—including confidence, production in South America. Lower plantings industrial production, and purchasing managers have contributed to a decline in stocks-to-use indexes (PMIs)—have remained mostly solid. ratios—a measure of global supply availability However, some are showing signs of softening, relative to demand—for some grains. However, partly reflecting country-specific developments. In these remain high by historical standards, reducing particular, confidence has deteriorated in some the likelihood of a food price spike. large EMDEs that have recently experienced financial market stress. Emerging and developing Commodity-exporting EMDEs economies: Recent developments and outlook After a strong rebound in 2017, activity in commodity exporters has continued to pick up in EMDE growth is expected to reach 4.5 percent in 2018 (Figure 1.12). The recovery is expected to 2018. The rebound in commodity exporters has continue in a majority of countries in this group. continued, and activity in commodity importers Almost all economies that experienced a recession remains robust. Beyond this year, however, EMDE in the past two years—about 20 percent of growth is projected to strengthen only slightly, commodity exporters in 2016 and about 10 approaching its potential pace, as the recovery in percent in 2017—are expected to see positive commodity exporters matures. Over the forecast growth this year. horizon, commodity exporters and importers will see uneven progress in per capita income growth, which Many commodity exporters have eased monetary is projected to remain subdued in Sub-Saharan policy as inflation moderates (e.g., Azerbaijan, Africa. Brazil, Colombia, Kazakhstan, Mozambique, Peru, Russian Federation, Uganda, South Africa, Recent developments Zambia). Although fiscal consolidation continues, its pace has generally diminished as revenues from Growth in EMDEs accelerated to 4.3 percent in commodity exports increased. Higher commodity 2017 and has generally continued to firm in 2018. prices and robust trade have supported the This reflects an ongoing cyclical upturn in ongoing recovery. commodity exporters, whose contribution to overall EMDE growth is rising, as well as robust Against this backdrop, investment is rebounding activity in commodity importers (Figure 1.11). in more than two thirds of commodity exporters. The recovery in commodity exporters has This partly reflects increased commodities broadened, as investment has strengthened amid production (e.g., Chile, Nigeria, Peru ), as well as higher commodity prices, rising corporate large infrastructure investment programs (e.g., earnings, and supportive monetary policies. Colombia, Côte d’Ivoire, Qatar, Saudi Arabia, Private consumption growth has also firmed, Senegal, United Arab Emirates). Private benefiting from improving labor markets consumption is also recovering (e.g., Armenia, and rising household income amid moderating Azerbaijan, Brazil, Kazakhstan, Russia, South inflation. Trade flows have risen, although by Africa, United Arab Emirates, Zambia), boosted varying degrees. In commodity importers, growth by wage gains, improving labor markets, and remains strong, supported by robust domestic stronger consumer purchasing power amid demand and solid exports. Activity in EMDEs moderating inflation and firming currencies. To excluding China has firmed, led by countries varying degrees, export and import growth in in Europe and Asia, which have particularly commodity exporters have generally continued to benefited from the recovery of global manufac- recover, as domestic demand strengthens and turing, investment, and trade. global trade remains robust. 22 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE 1.11 Activity in EMDEs albeit lackluster, as the impact of oil production cuts and policy uncertainty has been offset by EMDE growth has generally continued to strengthen, mainly reflecting the ongoing cyclical recovery in commodity exporters. Domestic demand, more accommodative monetary policy and higher particularly investment, has firmed in commodity exporters and remains oil prices (World Bank 2018d). In South Africa, robust in commodity importers. High-frequency indicators have for the most part remained solid, but they are showing signs of softening. the political transition and economic reform initiatives have supported investor confidence and contributed to stronger activity this year (World A. Growth B. Contribution to EMDE growth Bank 2018e). Recent indicators for these economies have, however, been mixed, highlight- ing lingering headwinds. The cyclical recovery continues in several other large commodity exporters with negative output gaps (e.g., Azerbaijan, Colombia, Saudi Arabia, United Arab Emirates; World Bank 2018d, World Bank 2018f). In particular, in oil-exporting C. GDP and demand component D. Business confidence economies that implemented significant growth reductions in oil production in 2017 (e.g., Algeria, Iraq, Kuwait), growth has been recovering this year, reflecting diminishing fiscal adjustment amid substantially higher oil prices and easing oil production cuts (World Bank 2018f). In contrast, activity remains weak in energy exporters that delayed policy adjustment to the earlier terms-of- trade shock, or that face country-specific challenges such as exchange rate misalignments, social tensions, and security issues (e.g., Equatorial E. Industrial production growth F. Manufacturing PMIs Guinea, Venezuela). In all, growth in many energy exporters continues to lag that of exporters of other commodities. Activity continues to show resilience in a number of more diversified economies and agriculture exporters (e.g., Benin, Burkina Faso, Côte d’Ivoire, Ethiopia, Indonesia, Malaysia, Morocco, Senegal, Uganda; World Bank 2018e). Supported Sources: Haver Analytics, Organisation for Economic Co-operation and Development, World Bank. A.-C. Shaded areas indicate forecasts. Aggregate growth rates calculated using constant 2010 U.S. by higher metals prices, growth among metals dollar GDP weights. B. Horizontal line indicates EMDE average. exporters continues to improve, albeit at varying D. Median of confidence index for Brazil, Chile, Colombia, Hungary, Indonesia, India, Mexico, Poland, degrees, reflecting country-specific conditions. In Russia, Turkey, and South Africa. Confidence is normalized through amplitude adjustments, such that any cyclical movements have the same amplitude and the long-term average of a respective country some economies, temporary disruptions previously series is equal to 100. Last observation is April 2018. E.F. Figures show 3-month moving averages. weighing on growth (e.g., policy uncertainty in E. Dashed horizontal lines indicate 1995-2017 averages. Last observation is March 2018. Peru, mining strikes in Chile) have dissipated. In F. PMI = Purchasing Managers’ Index. Readings above 50 indicate expansion in economic activity; readings below 50 indicate contraction. Dashed horizontal lines indicate January 2012-April 2018 others, new mines are coming on stream and averages. Last observation is April 2018. Click here to download data and charts. investment into existing mines continues (e.g., Armenia, Mongolia, Zambia). Among the largest commodity exporters, Commodity-importing EMDEs supportive policies in Brazil continue to underpin a recovery of domestic demand (World Bank Growth in commodity importers remains strong, 2018c). In Russia, growth has remained stable, although it is moderating somewhat this year G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 23 (Figure 1.13). With output gaps closed, or in FIGURE 1.12 Activity in EMDE commodity exporters many cases positive, capacity constraints are The recovery in commodity exporters continues to reflect improvements in becoming increasingly binding. Accommodative large economies, but it is also broad-based across countries. Investment is policies and solid labor markets have continued to strengthening amid higher commodity prices and greater monetary policy accommodation. Despite a notable increase in energy prices, growth in support domestic demand in a number of econ- many energy exporters continues to lag behind that of other commodity omies. However, with price and wage pressures exporters, mainly due to ongoing production cuts. rising, and amid markedly higher oil prices, several large commodity importers have begun to tighten A. Contribution to growth B. Share of commodity exporters with policies (e.g., Georgia, Pakistan, the Philippines, increasing/decreasing growth Romania, Turkey). The moderation in activity is most notable in countries where highly accommodative policies are being scaled back or financial markets have shown signs of strain. Aggregate investment in commodity importers excluding China remains solid, partly reflecting a cyclical rebound in Mexico and Thailand, where it was previously held back by country-specific factors (World Bank 2018b). In India, investment C. Contribution to investment growth D. Growth growth has firmed recently, as the effects of temporary factors wane. Still robust sentiment and support from European Union structural funds are bolstering investment in Europe and Central Asia. Investment in EMDEs in Asia is receiving an additional boost from pan-Asian infrastructure initiatives, supported by the China-led Belt and Road initiative (e.g., Bangladesh, Cambodia, Pakistan, Sri Lanka; World Bank 2018b; World Source: World Bank. Bank 2018g). A.-D. Shaded areas indicate forecasts. A.B. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. Trade flows have continued to firm this year, B. Sample includes 85 commodity-exporting EMDEs. Increasing/decreasing growth are changes of at least 0.1 percentage point from the previous year. Countries with a slower pace of contraction although to varying degrees, reflecting strong from one year to the next are included in the increasing growth category. C. Investment refers to fixed asset investment. global manufacturing activity, trade, and D. Simple average of GDP growth. Orange lines indicate interquartile ranges of growth in each group. Click here to download data and charts. investment, as well as stronger intra-regional trade, especially in emerging Asia and Europe. Robust investment and exports are boosting demand for imports of machinery, equipment, and inter- Vietnam). In Latin America, growth in Mexico is mediate goods. improving, reflecting positive spillovers from strong U.S. growth, which have been offsetting Positive trade and financial spillovers from the uncertainties related to the renegotiation of stronger Euro Area growth and steady activity in NAFTA and upcoming elections. Russia are supporting activity in Europe and Central Asia, and in the Middle East and North Low-income countries Africa (e.g., Belarus, Bosnia and Herzegovina, Bulgaria, Arab Republic of Egypt, Georgia, The economic recovery among low-income Hungary, Jordan, former Yugoslav Republic of countries (LICs) is firming (Box 1.2). Among Macedonia, Moldova, Poland, Romania, Tunisia). metals exporters, mining production is increasing, Asian economies continue to benefit from robust as new projects come onstream and investment in growth in China and India, including resurgent the expansion of existing mines continues, trade and substantial infrastructure investment encouraged by the recovery in metals prices (e.g., (e.g., Cambodia, Maldives, Sri Lanka, Thailand, Democratic Republic of Congo, Guinea). Oil 24 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 BOX 1.2 Low-income countries: Recent developments and outlook Growth in low-income countries is expected to rise to 5.7 percent in 2018 and to an average of 6.1 percent in 2019-20, from 5.5 percent in 2017. is upswing reflects rising mineral production, spurred by higher oil and metals prices, improving agricultural output, and continued infrastructure investment. However, poverty headcounts are projected to decline only slightly. e main downside risks to the outlook are lower commodity prices, heightened policy uncertainty, and weak implementation of reforms. Recent developments Current account deficits are widening in many countries. They are rising among metals exporters, Economic activity has strengthened in most low- reflecting the effects of a pickup in import-intensive income countries (LICs), helped by favorable external mining investment. In non-resource-intensive coun- conditions (Figure 1.2.1).1 Among metals exporters, tries, these deficits are expected to widen, as import mining production has risen, as new projects came growth remains strong due to high public investment on stream and investment in the expansion of levels. However, in oil exporters, the marked existing mines continued, encouraged by higher improvement in current account deficits in 2017 is metals prices (e.g., Democratic Republic of Congo, expected to continue, helped by higher oil prices and Guinea). Nevertheless, in some cases, high govern- subdued import growth due to soft domestic ment debt levels are weighing on activity (e.g., demand. Foreign reserve positions have gradually Mozambique, Sierra Leone). Among non-resource- improved. However, in many countries, foreign intensive countries, the economic pickup is reserves are well below the three-month-of-imports supported by improving agricultural output benchmark, indicating continued vulnerability to following droughts and continuing infrastructure terms-of-trade shocks. investment (e.g., Rwanda, Uganda). In some countries, rising household spending, helped by low Exchange rates have been broadly stable in real inflation and recovering remittance flows, has effective terms, reflecting tight domestic policies in underpinned the economic expansion, along with some countries. Remittances have also rebounded, some improvement in political stability (e.g., The following two years of decline (World Bank 2017b). Gambia, Haiti). However, oil exporters (e.g., Chad) Non-oil foreign direct investment flows have risen in are struggling to emerge from recession as they some countries (e.g. Ethiopia, Guinea), and portfolio continue to adjust to the sharp decline in oil inflows have continued, led by sovereign bond revenues. issuances (e.g., Senegal). Inflation continues to fall across LICs, helped by declining food prices, Poverty levels are high in most LICs. Nearly half of prompting central banks in some countries to further the population in LICs continues to live below the cut interest rates (e.g., Mozambique, Uganda). international poverty line—$1.90 a day, at 2011 However, inflationary pressures are high in several purchasing power parity (PPP) exchange rates. The countries, owing to currency depreciations (e.g., proportion of the LICs’ population below the Democratic Republic of Congo, Ethiopia, Liberia). poverty line is higher in Sub-Saharan Africa (SSA) Fiscal deficits have gradually narrowed across LICs. than in other regions, reflecting the relatively slow The improvement reflects strong fiscal adjustment in decline in poverty levels among fragile countries and some oil exporters (e.g., Chad), and an increase in metals exporters in SSA (Beegle et al 2016). domestic revenue among non-resource-intensive countries where commodity revenues account for a smaller share of total revenue. Fiscal deficits remain Note: is box was prepared by Gerard Kambou. Research assistance elevated among metals exporters, as governments was provided by Xinghao Gong. struggle to raise revenue and control spending. 1 For the current 2018 fiscal year, low-income economies are defined as those with a gross national income (GNI) per capita, calculated using the Debt levels are high and rising across a wide range of World Bank Atlas method, of $1,005 or less in 2016. LICs, especially in SSA (IMF 2018). This is raising G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 25 BOX 1.2 Low-income countries: Recent developments and outlook (continued) FIGURE 1.2.1 Recent developments in low-income countries The rebound in activity in low-income countries (LICs) has continued. Output and investment have picked up in oil and metals exporters, encouraged by higher commodity prices. Fiscal and current account deficits are narrowing among oil exporters, reflecting strong fiscal adjustment, but are rising among metals exporters due to high expenditure and import levels. In non- resource-intensive countries, rising domestic revenue is helping reduce fiscal deficits, but current account deficits are widening, as import demand remains strong. Debt burdens are high, especially among metals exporters. The poverty headcount is also high among metals exporters, reflecting persistently low per capita growth. A. Growth B. Investment growth C. Current account balance D. Fiscal balance E. Government debt F. Poverty Sources: Haver Analytics, International Monetary Fund, World Bank. Notes: LICs = low-income countries. Non-resource-intensive countries include agricultural-based economies and commodity importers. A. GDP-weighted averages. B.-E. Median of country groups. F. Based on the international poverty line of $1.90 a day, at 2011 purchasing power parity (PPP) exchange rates. Shaded area indicates forecasts. Click here to download data and charts. concerns about debt sustainability in some countries tion in the debt-to-GDP ratio partly reflects (Devarajan 2018). Debt levels among metals governance issues, including the weak management exporters are increasing, reflecting previously of state-owned enterprises. In Ethiopia, low public undisclosed borrowing in Mozambique and low saving rates and high public investment are domestic revenue in other economies (e.g., Liberia, contributing to the increase in government debt. The Sierra Leone). Although fiscal consolidation efforts high and rising debt levels point to the need for are helping to stabilize debt levels among oil significant fiscal consolidation, as well as higher exporters, the debt burden remains high in some of domestic revenue in a number of LICs. them (e.g., Chad). A large part of Chad’s debt is owed to commercial creditors. Debt levels among Outlook non-resource-intensive countries are also elevated Growth in LICs is expected to pick up to 5.7 percent (e.g., The Gambia), and continue to rise in some in 2018, and strengthen to an average of 6.1 percent cases (e.g., Ethiopia). In The Gambia, the deteriora- in 2019-20, slightly below the level reached earlier in 26 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 BOX 1.2 Low-income countries: Recent developments and outlook (continued) the decade (Figure 1.2.2). This upswing is predicated on firming commodity prices and policy actions to FIGURE 1.2.2 Outlook tackle macroeconomic imbalances. These forecasts The ongoing recovery in LICs is expected to pick up are higher than in January, and reflect a stronger- further this year and firm in 2019-20, reflecting a gradual rebound among oil and metals exporters and continued than-expected recovery in some metals exporters, as robust growth in non-resource-intensive countries. higher metals prices help boost mining production. However, per capita income growth will recover only slowly among oil exporters and remain modest among In metals exporters such as Mozambique, growth will metals exporters. remain subdued, reflecting the effects of rising debt levels on investor sentiment. The recovery in oil A. GDP growth forecasts exporters will also be slower than previously envisioned, as the fiscal adjustment that is still needed to stabilize government debt is expected to weigh on growth. Growth among non-resource-intensive countries is expected to remain robust, supported by increasing agricultural production, high public investment levels, and rising remittance flows, with the larger economies expanding at a faster pace. Although growth in Ethiopia—the largest LIC—is projected to soften as policy tightens to contain inflationary pressures, it will remain high. In some smaller economies (e.g., The Gambia, Haiti), improved B. Per capita GDP growth political stability will allow for a modest pickup in activity, as opportunities for reforms boost investor sentiment; however, in fragile countries, security concerns will continue to weigh on investment (e.g., Afghanistan, Burundi). In Malawi, growth is expected to be lower than anticipated, reflecting the adverse effects of a dry spell and the spread of the fall armyworm—a pervasive agricultural pest—on food production. Per capita GDP growth is projected to rise from 1.6 percent in 2017 to 2.3 percent in 2018, and to an average of 2.5 percent in 2019-20. Nonetheless, the Source: World Bank. effect on poverty alleviation seems likely to be Note: Shaded area indicates forecasts. subdued. The poverty headcount among LICs is A. GDP-weighted averages. B. Median of country groups. Non-resource-intensive countries include projected to decrease only modestly, and decline agricultural exporters and commodity importers. Click here to download data and charts. most slowly among fragile countries and metals exporters in SSA. Higher population growth is worsening the poverty headcount. Furthermore, Tarp 2016). These structural constraints will prevent growth for a significant proportion of LICs in SSA faster poverty reduction unless structural reforms are centers around capital-intensive sectors, which introduced to increase productivity and support contribute less to poverty reduction (Bhorat and economic diversification (Chapter 1). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 27 BOX 1.2 Low-income countries: Recent developments and outlook (continued) TABLE 1.2.1 Low-income country forecastsa Percentage point differences from (Real GDP growth at market prices in percent, unless indicated otherwise) January 2018 projections 2015 2016 2017e 2018f 2019f 2020f 2018f 2019f 2020f Low Income Country, 4.9 4.8 5.5 5.7 5.9 6.3 0.3 0.4 0.6 GDPb Afghanistan 1.3 2.4 2.6 2.2 2.5 3.3 -1.2 -0.6 0.2 Benin 2.1 4.0 5.6 6.0 6.1 6.3 0.0 -0.2 -0.4 Burkina Faso 3.9 5.9 6.4 6.0 6.0 6.0 0.0 0.0 0.0 Burundi -3.9 -0.6 0.5 1.9 2.3 2.5 0.4 -0.2 0.0 Chad 2.8 -6.3 -3.0 2.6 2.5 5.8 -1.1 -0.4 -1.0 Comoros 1.0 2.4 2.5 2.9 3.0 3.0 0.2 0.1 0.1 Congo, Dem. Rep. 6.9 2.4 3.4 3.8 4.1 4.4 0.8 0.8 1.1 Ethiopiac 10.4 7.6 10.3 9.6 9.7 9.9 1.4 1.9 2.1 Gambia, The 4.3 2.2 3.5 5.4 5.2 4.9 1.9 1.0 0.7 Guinea 3.8 10.5 8.2 6.0 5.9 6.0 0.2 0.0 0.1 Guinea-Bissau 6.1 5.8 5.7 5.1 5.2 5.4 -0.1 -0.2 0.0 Haitic 1.2 1.5 1.2 1.8 2.4 2.4 -0.4 -0.1 -0.1 Liberia 0.0 -1.6 2.5 3.2 4.7 4.8 -0.7 -0.3 -1.2 Madagascar 3.1 4.2 4.1 5.1 5.6 5.3 0.0 0.0 -0.1 Malawi 2.8 2.5 4.0 3.7 4.1 4.9 -1.3 -1.3 -0.5 Mali 6.0 5.8 5.3 5.0 4.7 4.7 0.0 0.0 0.0 Mozambique 6.6 3.8 3.7 3.3 3.4 3.6 0.1 0.0 0.2 Nepalc 3.3 0.6 7.9 6.3 4.5 4.2 1.7 0.0 -0.3 Niger 4.0 5.0 5.2 5.3 5.4 5.8 0.1 0.0 0.2 Rwanda 8.8 6.0 6.1 6.8 7.1 7.5 0.9 0.3 0.7 Senegal 6.5 6.7 6.8 6.8 6.8 7.0 -0.1 -0.2 0.0 Sierra Leone -20.5 6.3 4.3 5.1 5.7 6.5 -1.2 -1.0 -0.2 Tanzania 7.0 7.0 6.4 6.6 6.8 7.0 -0.2 -0.1 0.1 Togo 5.3 5.0 4.4 4.8 5.0 5.0 -0.5 -0.4 -0.4 Ugandac 5.2 4.7 4.0 5.5 6.0 6.5 0.4 0.3 0.5 Zimbabwe 1.7 0.6 3.4 2.7 3.8 4.0 1.8 3.6 3.8 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 Rep., 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. For additional information, please see www.worldbank.org/gep. Risks debt sustainability are also high in some LICs. Risks to the outlook remain tilted to the downside. Inadequate fiscal adjustment or large currency On the external front, a large drop in commodity depreciation could lead to an increase in the cost of prices could have a significant impact on sentiment servicing external debt. Based on the LIC debt toward LICs, given that many of these countries sustainability framework, The Gambia and Ethiopia depend on extractive industries. A collapse in oil are deemed to be facing high risk of debt distress. and metals prices would also severely undermine Chad and Mozambique were rated as in debt distress efforts at fiscal consolidation and to rein in the by end-2017. In addition, most LICs remain highly public debt burden, and crowd out poverty-reducing vulnerable to weather-related shocks, and a return of expenditures. drought conditions could severely disrupt ongoing On the domestic front, while political uncertainty recoveries. The Ebola outbreak in the Democratic has declined in some LICs, it remains a key risk for Republic of Congo could slow economic activity in growth and reform momentum. For example, in the country and the sub-region, if it spreads faster Ethiopia, political tensions could intensify following than anticipated to major urban centers and to the reimposition of the state of emergency. Risks to neighboring countries. 28 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE 1.13 Activity in EMDE commodity importers, Ethiopia). Poverty levels are elevated, especially excluding China among LICs in Sub-Saharan Africa, where nearly half of the population lives below the poverty line. Growth in commodity importers excluding China remains solid but is moderating somewhat this year, partly due to capacity constraints. Investment growth continues to be robust, particularly in EMDE commodity EMDE outlook importers in Europe and Asia. Export growth has generally been strong this year, albeit to varying degrees. Growth outlook A. Contribution to growth B. Share of commodity importers with increasing/decreasing growth EMDE growth is expected to accelerate from 4.3 percent in 2017 to 4.5 percent in 2018 and stabilize at 4.7 percent in both 2019 and 2020, reflecting a continued, but maturing, cyclical recovery in commodity exporters (Figure 1.14). In the near term, the positive spillovers of U.S. fiscal stimulus on EMDE activity are assumed to be offset by a faster pace of U.S. monetary policy normalization, which contributes to higher borrowing costs and a moderation in EMDE C. Contribution to investment growth D. Export growth capital flows. Toward the end of the forecast horizon, the projected slowdown in advanced- economy growth toward potential rates is expected to put a lid on further acceleration in EMDE growth. As global financing conditions continue to tighten, the cyclical rebound in investment in EMDEs, especially among commodity exporters, Source: World Bank. is projected to moderate in 2019-20. Moreover, A.-D. Shaded areas indicate forecasts. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. the ongoing monetary policy easing in commodity A.C.D. Others refer to other commodity-importing EMDEs, excluding China. B. Sample includes 60 commodity-importing EMDEs. Increasing/decreasing growth are changes of at exporters is expected to gradually end, while fiscal least 0.1 percentage point from the previous year. Countries with a slower pace of contraction from consolidation will continue, particularly in many one year to the next are included in the increasing growth category. C.D. EAP = East Asia and Pacific, excluding China; SAR = South Asia; ECA = Europe and Central oil-exporting economies. Policies in commodity Asia. C. Investment refers to fixed asset investment. importers are expected to tighten, as capacity D. Data refer to trade volume of goods and non-factor services. constraints become more binding and price Click here to download data and charts. pressures accelerate amid higher energy prices. exporters (e.g., Chad) are slowly emerging from Growth in commodity exporters is projected to recession, helped by rising oil prices. In non- plateau toward the end of the forecast horizon. resource-intensive countries, the pickup in After reaching 2.5 percent in 2018—the highest economic activity is being supported by improving pace since 2013—it is projected to strengthen harvests following droughts (e.g., Rwanda, only slightly and stabilize at an average of 3 Uganda), infrastructure investment (e.g., Benin, percent in 2019 and 2020, as output gaps close Senegal), and consumer spending as inflation and labor market slack gradually diminishes. By moderates and remittances recover (e.g., The the end of the projection period, only about half Gambia, Haiti). However, debt burdens are high of commodity exporters are expected to grow at or and rising in a number of LICs, reflecting a mix of above their pre-crisis long-term averages. Forecasts factors including the disclosure of previously were adjusted slightly down from January, as an unreported debt (e.g., Mozambique), governance upward revision to a number of large commodity issues (e.g., The Gambia), the earlier plunge in oil exporters (e.g., Angola, Brazil, Kazakhstan, South prices (e.g., Chad), and low public saving (e.g., Africa) was more than offset by a downgrade in G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 29 some other economies (e.g., Argentina, Nigeria, FIGURE 1.14 EMDE growth prospects Venezuela). This overall outlook of a maturing The recovery in EMDE growth is projected to mature during the forecast cyclical recovery is also reflected in forecasts for horizon, as negative output gaps in commodity exporters gradually narrow EMDE regions with a substantial number of and investment growth stabilizes. commodity exporters (Box 1.3; Chapter 2). A. Growth B. Contribution to investment growth Growth in commodity importers is expected to decelerate to 5.8 percent in 2018 and edge further down to 5.7 percent by 2020, broadly in line with its potential rate. A structural slowdown in China is expected to be partly offset by a moderate pickup in other large economies, including India and Mexico. In commodity importers excluding China, an upgrade to growth projections in 2018 reflects an upward revision to forecasts for some Source: World Bank. large economies (e.g., Egypt, Mexico, Poland, A.B. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. Shaded area indicates forecasts. Thailand). B. Investment refers to fixed asset investment. Click here to download data and charts. Growth in low-income countries is projected to pick up to 5.7 percent in 2018, and stabilize at about 6.1 percent on average in 2019-20, slightly compared to its long-term average and will not be below the level reached earlier in the decade (Box sufficient to offset headwinds to potential growth. 1.2). These forecasts are higher than in January, Furthermore, tightening global financing reflecting a stronger pickup in some metals conditions, higher borrowing costs, moderating exporters as higher metals prices help boost capital flows, and lingering policy uncertainty may mining production. Growth in non-resource- hamper investment growth in the coming years, intensive countries is projected to remain solid, further constraining potential growth (World supported by increasing agricultural production, Bank 2018a). infrastructure investment, and a rebound in remittances, with the larger economies expanding Outlook for per capita income and poverty at a faster pace. In some fragile countries (e.g., The Gambia, Zimbabwe), political transitions will Current near-term growth prospects are allow for a pickup in activity, as opportunities for encouraging but may not be sufficient to ensure reforms boost investor sentiment. However, the continued progress toward global poverty recovery will be slower than previously anticipated alleviation (World Bank 2016). Countries that are among oil exporters, as they continue to adjust to home to most of the world’s poor are expected to low oil revenue and the heavy burden of external grow at a faster clip than other EMDEs. However, commercial debt. their population growth is also generally higher, implying that per capita prospects in those Despite the projected firming of activity in countries are still modest, particularly where EMDEs in the near term, underlying potential extreme poverty is more prevalent (Figure 1.15). growth—which has fallen considerably over the That said, significant disparities exist between the past decade—appears likely to decline further over outlooks for the two regions comprising more the long term, reflecting earlier investment than 80 percent of the world’s extreme poor: weakness, softening productivity, and increasingly South Asia and Sub-Saharan Africa. In South Asia, adverse demographic patterns. Trends in these GDP per capita growth remains significantly fundamental drivers of long-term growth suggest above EMDE averages and will likely help a that EMDE potential growth could decrease by further reduction in poverty rates in coming years. 0.5 percentage point on average over 2018-27. In Sub-Saharan Africa, per capita income growth Notwithstanding its recent turnaround, in- in countries with high poverty headcounts will vestment growth in many EMDEs is still modest remain modest, complicating efforts to reduce 30 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 BOX 1.3 Regional perspectives: Recent developments and outlook e ongoing cyclical recovery in most EMDE regions with a substantial number of commodity exporters is projected to continue in 2018. ereafter, the upturn in these regions is expected to mature, as commodity prices plateau. Robust activity in EMDE regions with large numbers of commodity importers is forecast to continue. Risks to the growth outlook continue to tilt to the downside. East Asia and Pacific. Growth in the region is FIGURE 1.3.1 Regional growth projected to moderate to 6.3 percent in 2018, and The ongoing cyclical recovery in most EMDE regions to 6.1 percent on average in 2019-20. The with a substantial number of commodity exporters is structural slowdown in China will slightly offset a projected to continue in 2018, but mature thereafter as commodity prices level off. Robust growth in EMDE modest further pickup in the rest of the region. regions with large numbers of commodity importers is While upside surprises to global activity could lead projected to continue. Risks to the growth outlook continue to tilt down. to stronger-than-expected regional growth, risks to the regional forecast are tilted to the downside. A. Regional growth, weighted average They include the possibility of an abrupt tightening of global financing conditions and intensified trade restrictions. Highly leveraged economies and countries with large or rapidly rising fiscal deficits are particularly vulnerable to disruptions in real and financial activity. Europe and Central Asia. Regional growth is anticipated to ease to 3.2 percent in 2018, as idiosyncratic factors supporting the recovery in some of the largest regional economies fade. Growth is expected to decline to 3 percent by 2020, as activity moderates in commodity importers amid increasing capacity constraints and less B. Regional growth, unweighted average accommodative fiscal and monetary policies. Downside risks include the possibility of a disorderly tightening of financing conditions, lower- than-projected oil prices, and heightened policy uncertainty. If stronger-than-expected demand from advanced economies were to materialize, it would benefit trading partners in the region. Latin America and the Caribbean. The modest regional recovery is projected to continue, with growth anticipated to rise to 1.7 percent in 2018 and average 2.4 percent in 2019-20. In the near term, the pickup will be supported by a cyclical Source: World Bank. recovery in Brazil and improving conditions in A.B. Averages for 1990-2017 are constructed depending on data availability. For Europe and Central Asia, the long-term average uses data for 1995-2017 Chile, Colombia, Mexico, and Peru. Regional to exclude the immediate aftermath of the collapse of the Soviet Union. A. Bars denote latest forecast; diamonds correspond to January 2018 Global Economic Prospects forecasts. Since the largest economies account for about 50 percent of GDP in some regions, weighted averages predominantly Note: is box was prepared by Carlos Arteta with contributions reflect the development in the largest economies in each region. from Gerard Kambou, Yoki Okawa, Temel Taskin, Ekaterine B. Unweighted average regional growth is used to ensure broad reflection of regional trends across all countries in the region. Vashakmadze, Dana Vorisek, and Lei Ye. Research assistance was Click here to download data and charts. provided by Jinxin Wu. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 31 BOX 1.3 Regional perspectives: Recent developments and outlook (concluded) growth through 2020 will mainly reflect firming Pakistan, and Sri Lanka are expected to be private consumption and investment. Downside risks accompanied by moderating activity in Afghanistan, are significant, however, including negative spillovers Bhutan, and Maldives. Over the medium term, from a possible abrupt tightening of financing growth is expected to remain strong and reach 7.2 conditions or shift in investor sentiment regarding percent by 2020 amid robust domestic demand. EMDEs, a breakdown in NAFTA negotiations or a Downside risks continue to predominate. They rise in U.S. trade protectionism, escalation of include the possibility of fiscal slippages, delays in domestic policy uncertainty, and disruptions from reforms to resolve financial vulnerabilities and natural disasters. Larger-than-expected spillovers improve the health of regional banking systems, and from the U.S. fiscal stimulus could result in stronger a faster-than-expected tightening in global financing regional growth. conditions. Stronger-than-envisioned global growth could result in better regional growth outcomes. Middle East and North Africa. Growth in the region is expected to rebound from last year—when it Sub-Saharan Africa. Regional growth is projected to decelerated to 1.6 percent due to oil production cuts accelerate to 3.1 percent in 2018. This upswing and fiscal adjustments among oil exporters—and reflects rising oil and metals production, encouraged reach 3 percent in 2018. Activity among oil exporters by a recovery in commodity prices, and improving is picking up in response to an easing of fiscal stances agricultural production following droughts. A and momentum from the non-oil sector, while oil rebound in consumer spending amid declining importers continue to benefit from improved inflation and an increase in investment also underpin competitiveness and foreign-investor confidence. the pickup. Growth is expected to firm to an average Regional growth is projected to accelerate to an of 3.6 percent in 2019-20, as the recovery average of 3.3 percent in 2019-20, as domestic strengthens in Angola, Nigeria, and South Africa— demand and exports further improve in both oil the region’s largest economies. However, growth will exporters and importers. The key downside risks are remain below its long-term average and insufficient geopolitical tensions, renewed volatility in oil prices, to substantially reduce poverty. Public debt levels are and slower-than-expected pace of reforms. Rapid high and rising, and debt servicing costs will absorb a reconstruction progress in war-torn areas represents large share of government revenue in some countries. an important upside risk. The main downside risks include a faster tightening South Asia. Growth in the region is projected to of global financing conditions, lower-than-expected accelerate to 6.9 percent in 2018, mainly reflecting commodity prices, heightened conflicts, and weak strengthening domestic demand in India as implementation of reforms. Renewed growth temporary policy-driven disruptions fade. Elsewhere momentum in advanced economies could provide in the region, ongoing recoveries in Bangladesh, positive spillovers to the region. poverty rates. Per capita GDP growth is expected modestly throughout the forecast horizon. to stagnate among many oil and metals exporters Nevertheless, it will remain appreciably below that in the region, where poverty headcounts are that of commodity importers. Per capita income already high. growth will be particularly weak in a number of oil exporters. At the projected pace, growth will be More generally, per capita income growth in insufficient to restart the catch-up of income per commodity-exporting EMDEs, which has been capita with advanced economies in about one- weak in recent years, is expected to recover third of EMDEs. 32 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE 1.15 Per capita growth and poverty in EMDEs Baseline forecasts point to global growth at 3.1 percent this year, helped by still-solid growth in Countries with the largest number of poor are expected to grow at a somewhat faster clip in 2018-20; however, per capita growth in Sub- advanced economies, robust activity in Asia, and a Saharan Africa is projected to remain subdued, despite some recovery. In cyclical recovery in commodity-exporting about one-third of EMDEs, income per capita growth will be insufficient in coming years to restart a catch-up process with advanced economies. EMDEs. However, with growth currently surpassing its estimated potential, world economic A. Per capita growth in EMDEs B. Regional poverty headcounts activity is expected to moderate in 2019 and 2020, as major central banks remove post-crisis accom- modation, global capacity constraints become more binding, China’s structural slowdown continues, and the upturn in commodity exporters levels off. With the rise of global interest rates, debt service costs will increase in both advanced economies and EMDEs. Shifting policies in major economies will have a significant bearing on the outlook and risks for global growth. C. Per capita growth, by region D. Share of EMDEs catching up to advanced-economy GDP per capita levels Risks to the outlook are tilted to the downside, with some becoming more acute (Figure 1.16). Following a prolonged period of exceptionally low interest rates and elevated asset prices, financial market risks have increased. A sudden tightening of global financing conditions could be triggered by a reassessment of inflation risks; by shifting expectations about monetary policies across major advanced economies; or by increased concerns Source: World Bank. about credit risks, including in EMDEs. The A.C.D. Shaded areas indicate forecasts. B.C. EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the impact could be particularly severe in an Caribbean, MNA = Middle East and North Africa, SAR = South Asia, and SSA = Sub-Saharan Africa. A. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. The poverty- environment where debt levels have reached weighted estimate of the per capita GDP growth excludes countries for which poverty head counts were not available. record highs, refinancing needs are mounting, and B. Blue bars indicate the number of people living on or below the international poverty line of $1.90 credit quality has deteriorated in a number of per day, red bars are the number of people living on or below the lower-middle income poverty line of $3.20 per day. Data as of 2016. EMDEs. An escalation of trade restrictions among D. EMDEs with per capita GDP growth of at least 0.1 percentage point higher than advanced- economy per capita GDP growth are those counted as converging. Advanced-economy growth rates major economies is also a major threat to the calculated using constant 2010 U.S. dollar GDP weights. Sample includes 73 EMDE commodity exporters and 44 EMDE commodity importers. outlook, as it could derail the recovery in global Click here to download data and charts. trade and dampen confidence and investment worldwide. Heightened policy uncertainty and rising geopolitical tensions could also buffet Risks to the outlook activity. The materialization of these downside risks could lead to a sharper-than-expected global Risks to the outlook remain tilted to the downside. slowdown. This could represent a significant They include the possibility of disruptive financial hurdle for many countries, especially for those that market developments and escalating trade protec- have not rebuilt fiscal buffers. tionism amid elevated policy uncertainty. If a combination of downside risks were to materialize, it That said, the possibility of a stronger or longer- could trigger a sharper-than-expected slowdown in lasting upturn in major economies cannot be ruled global growth, with particularly negative effects for out. This could lead to larger-than-expected cross- countries with depleted policy buffers and sizable border spillovers in the near term, as well as vulnerabilities. There is also the possibility that improved supply-side conditions over the medium growth in major economies may surprise on the term. upside, with positive spillovers to trading partners. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 33 A quantification of uncertainty around the global FIGURE 1.16 Risks: Tilted to the downside growth outlook suggests a wide range of possible Global growth is expected to remain solid in the near term. However, outcomes, while confirming the predominance of uncertainty is elevated and downside risks have increased. downside risks (Ohnsorge, Stocker, and Some 2016). At current market conditions, the A. Probability distribution around B. Probability of global growth in 2019 global growth forecasts being below/above baseline probability of global growth being more than 1 percentage point below baseline in 2019 is estimated at 21 percent, while that of growth being more than 1 percentage point above baseline is 16 percent. That range has widened from a year ago, reflecting increased uncertainty embedded in the distribution of key risk factors, particularly equity and oil price futures. Disorderly tightening of financing conditions Sources: Bloomberg, World Bank. A.B. The fan chart shows the forecast distribution of global growth using time-varying estimates of the standard deviation and skewness extracted from the forecast distribution of three underlying risk The risk of an abrupt tightening of global factors (oil price futures, the S&P 500 equity price futures, and term spread forecasts). Each of the risk factor’s weight is derived from the model described in Ohnsorge, Stocker, and Some (2016). financing conditions and associated financing Values for 2018 are computed from the forecast distribution of 6-month-ahead oil price futures, S&P 500 equity price futures, and term spread forecasts. Values for 2019 are based on 18-month-ahead stress has increased in 2018, reflecting a possible forecast distributions. Last observation is May 2018. B. Bars show the probability that global growth is 1-percentage-point above or below baseline reassessment of inflation risks amid shifting forecasts 18 months ahead. market expectations of advanced-economy Click here to download data and charts. monetary policy, stretched asset valuations, and the possibility of further U.S. dollar appreciation. Such developments could have particularly severe considerably higher (Figure 1.17). If not matched consequences for more indebted EMDEs facing by similar increases in productivity growth, a substantial refinancing needs in coming years. A faster-than-expected recovery in wage growth sudden rise in borrowing costs could be triggered could lead to an increase in current and future by a convergence of factors. expected inflation. Second, U.S. fiscal stimulus will provide a boost to growth in an economy Inflation risks already operating close to full employment, increasing the risk of overheating. Third, the Market participants currently ascribe a low global output gap is expected to disappear this probability of a rapid acceleration in inflation in year, with potentially far-reaching implications for major advanced economies. This follows a inflation dynamics in traded goods (World Bank prolonged period of undershooting of central 2018a). A reassessment of inflation risks could banks’ inflation targets, and reflects the view that contribute to a sudden rise in term premiums technological changes and globalization could from current exceptionally low levels, which keep inflation persistently low (Autor and Dorn would push up long-term yields and generate 2013; Eickmeier and Kühnlenz 2013; Elsby, substantial volatility in U.S. and global bond Hobijn, and Şahin 2013). However, a number of markets. factors could contribute to a more pronounced increase in inflation than currently predicted. Monetary policy uncertainty First, a period of persistently low unemployment Changes in market expectations about interest rate and increased labor market churning could re- and balance sheet policies of major central banks inforce workers’ bargaining power, potentially could trigger financial stress. Several factors make leading to faster wage growth (Danninger 2016; financial markets particularly vulnerable to such a Davis and Haltiwanger 2014). At comparable reassessment. Policy interest rates in the United unemployment rates, wage growth in advanced States remain well below neutral levels, and economies during the previous business cycle was market and policymaker expectations about their 34 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE 1.17 Downside risks: Financial stress outlook still diverge. In addition, strong foreign demand for U.S. Treasuries has played a major A sudden reassessment of the pace of wage growth in advanced economies could contribute to a jump in long-term yields, particularly in the role compressing U.S. long-term interest rates, United States, where term premiums are negative and policy interest rates partially offsetting the impact of a faster pace of are increasing. EMDEs remain susceptible to such risks, with both private and public debt levels considerably higher than in the pre-crisis period. U.S. interest rate hikes. Unlike the bond market Debt in low-income countries has been trending up, as has the number of “conundrum” in 2005-06, when rising demand countries at risk of debt distress. from foreign official institutions had a similar dampening effect, the recent increase in demand A. G4 wage growth and unemployment B. U.S. term premium and long-term yields was mostly driven by foreign private investors (Cœuré 2018). These inflows have been encouraged by continued aggressive monetary policy easing in the Euro Area and Japan, contributing to a growing gap between U.S. Treasury and comparable sovereign bond yields in those jurisdictions—and, during 2018, to a renewed appreciation of the U.S. dollar. Shifting expectations about advanced-economy monetary policy could lead to sudden portfolio adjustments, C. U.S. policy interest rates, inflation, D. EMDE debt as a share of GDP, by faster-than-expected increases in global interest and growth borrowing sector rates, or disorderly exchange rate developments. Stretched asset price valuations A prolonged period of very low interest rates has encouraged risk-taking in financial markets and rising asset price valuations (Lian, Ma, and Wang 2017). Elevated asset prices make global financial markets more prone to sudden adjustments and bouts of volatility (BIS 2017). The equity price- E. EMDE interest payments on debt as F. Evolution of debt distress in LICs to-earnings ratio is historically high in the United a share of GDP, by borrowing sector States, while corporate bond spreads in both advanced economies and EMDEs remain significantly below pre-crisis averages. A correction in asset valuations could weaken growth prospects through tighter financing conditions, lower confidence, and negative wealth effects (Bluedorn, Decressin, and Terrones 2013). EMDE vulnerabilities Sources: Adrian, Crump, and Moench (2013); Bank for International Settlements; Bloomberg; Federal Reserve Bank of St. Louis; Haver Analytics; International Monetary Fund; World Bank. EMDEs remain vulnerable to risks of sudden A. The G4 includes the Euro Area, Japan, the United Kingdom, and the United States. Last market adjustments and tighter global financing observation is March 2018. B. Term premium estimates from the term structure model of Adrian, Crump, and Moench (2013). conditions, which could be amplified by further Last observation is May 25, 2018. C. Figure shows period averages. Policy rate refers to the effective federal funds rate. Last U.S. dollar appreciation, triggering disorderly observation is April 2018. D. Debt is defined as loans and debt securities. Sample includes 16 EMDEs. exchange rate developments. Credit growth has E. Interest payments include interest paid on loans and debt securities. Sample includes 12 EMDEs. slowed in most countries but corporate sector F. Figure shows the percent of low-income and developing countries eligible to access the IMF's concessional lending facilities that are either at risk of, or in, debt distress. The sample represents a vulnerabilities remain elevated, and both private larger group of countries than that defined in Table 1.2.1 as low-income by the World Bank. Click here to download data and charts. and public debt levels are considerably higher than in the pre-crisis period. Rising borrowing costs could substantially increase the burden of debt G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 35 servicing, which was compressed in recent years by FIGURE 1.18 Downside risks: Trade protectionism low global interest rates and risk premiums. In An escalation of tariffs up to legally-allowed limits could have large turn, rising debt service costs could weaken negative effects on trade, particularly in EMDEs. Even the threat of shifting investment and lower medium-term growth trade policies, particularly in the United States, could have negative effects on EMDE investment. The drive toward trade liberalization has slowed, (Special Focus 2; Borensztein and Ye forthcoming; with the number of new trade agreements falling to an 18-year low in 2017. Drehmann, Juselius, and Korinek 2017; Jordà, Schularick, and Taylor 2013; Lombardi, A. Impact on trade from worldwide B. U.S. trade policy uncertainty Mohanty, and Shim 2017). A reversal in capital increase in tariffs to bound levels by 2020 inflows and sharp currency depreciations could also increase default risks and raise financial stability concerns among economies with external vulnerabilities. EMDE debt denominated in U.S. dollars remains elevated in many countries and increased in 2017 amid favorable borrowing conditions. Large current account deficits, elevated short-term external debt, and reliance on portfolio flows C. Investment impact of 10-percent D. New regional trade agreements render some countries particularly vulnerable to rise in U.S. economic policy uncertainty rollover risk and sudden stops in capital flows. In some oil-importing EMDEs, rising oil prices could further exacerbate current account deficits and associated fragilities. The transmission of global financial shocks can be amplified in EMDEs with pegged exchange rate regimes compared with countries with flexible ones (Obstfeld, Ostry, and Qureshi 2018). Public debt burdens and vulnerabilities continue Sources: Baker, Bloom, and Davis (2016); Bloomberg; Haver Analytics; Kutlina-Dimitrova and Lakatos (2017); World Bank; World Trade Organization. to rise across low-income countries (LICs). More A. Bars denote the percent deviation from baseline in 2020. Data are calculated from simulations using the GDyn computable general equilibrium model (Ianchovichina and McDougall 2000; than 40 percent of LICs are in debt distress or at Ianchovichina and Walmsley 2012). Trade-weighted aggregates include 36 advanced economies and 71 EMDEs. high risk of debt distress—more than twice the B. Dashed horizontal line reflects the historical median from January 1990 to March 2018. Trade policy-related uncertainty in the United States is based on an index presented in Baker, Bloom, and share in 2013 (IMF 2018; World Bank 2018e). In Davis (2016), and computes the frequency of articles in domestic newspapers mentioning terms these countries, the increase in public debt levels related to trade policy (e.g., import tariffs, import barriers, WTO, dumping, etc.). Last observation is March 2018. has been accompanied by a substantial change in C. Figure shows median impact. Cumulative impulse response after 1 year on investment growth in 23 advanced economies and 18 EMDEs to a 10-percent increase in the U.S. economic policy creditor composition and debt instruments. uncertainty (EPU). Vector autoregression estimated for 1998Q1-2016Q2 with two lags. The model for advanced economies includes U.S. EPU, MSCI index for advanced economies (MXGS), U.S. 10-year Increased reliance on commercial loans with bond yields, aggregate real GDP and investment growth in 23 advanced economies. The model for EMDEs includes U.S. EPU, MSCI emerging market equity price index, J.P Morgan’s Emerging shorter maturities has exposed debtor countries to Market Bond Index Global (EMBIG), aggregate real GDP growth, and investment growth in 18 currency, interest rate, and refinancing risks EMDEs. G7 real GDP growth, U.S. 10-year bond yields, and MSCI world equity price index are added as exogenous variables. (Devarajan 2018; Gill and Karakülah 2018). Debt D. Bars denote the number of regional trade agreements in force. Click here to download data and charts. vulnerabilities among LICs could become more acute in the absence of measures to increase domestic revenue mobilization, rationalize public spending, and boost growth. worldwide would have major adverse con- sequences for global trade and activity (Ossa 2014; Escalating trade protectionism Nicita, Olarreaga, and Silva forthcoming). An escalation of tariffs up to legally-allowed bound The risk of escalating trade restrictions has rates could translate into a decline in global trade substantially intensified amid ongoing trade flows amounting to 9 percent, similar to the drop disputes between the United States and major seen during the global financial crisis in trading partners. A broad-based increase in tariffs 2008-09 (Figure 1.18; Kutlina-Dimitrova and 36 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 Lakatos 2017). The impact of increased Policy uncertainty and geopolitical protectionism would be more severe in EMDEs developments than in advanced economies. Highly protected sectors, such as agriculture and food processing, Measures of global policy uncertainty are still would be likely to be among the most negatively above historical norms, albeit below a peak in affected. Non-tariff barriers could also be raised, 2016 (Figure 1.19). The risks of destabilizing adding to the cost of trading across borders. Costs policy and political changes remain elevated, associated with shipping, logistics, legal and reflecting the increased polarization of public regulatory impediments are already far opinion, a backlash against globalization, and outstripping tariff costs, particularly in EMDEs rising support for populist parties across the world (UNESCAP 2017). (Rodrik 2018; Inglehart and Norris 2016). Electoral outcomes in a number of EMDEs and If it were to materialize, a substantial escalation of advanced economies, including in Europe, could trade-restrictive measures between the United lead to renewed uncertainty. Periods of significant States and China could lead to economic losses for government changes and political instability are these two economies and cascading trade costs generally associated with lower growth in the through global value chains (Bown 2017; Erbahar affected economies (Aisen and Veiga 2011; Perotti and Zi 2017; Escaith 2017; Irwin 2017). Sectoral 1996). If the affected economies are sizable and dislocations associated with shifting trade patterns tightly interconnected with trading partners (for could have persistent negative effects on labor example, a large Euro Area member state), the markets (Autor, Dorn, and Hanson 2016). Any resulting negative spillovers could depress activity setbacks to activity in the either country would and investment in other countries, including result in significant negative spillovers for the rest EMDEs (World Bank 2015; World Bank 2017a). of the world through trade, confidence, financial, A lack of trust in governments also increases the and commodity-market channels (Kose et al. risk of instability during economic downturns 2017a; Huidrom, Kose, and Ohnsorge 2017). (Nunn, Qian, and Wen 2018). Even the threat of substantial shifts in trade Geopolitical risks remain elevated amid persistent policies in major economies, and associated tensions on the Korean Peninsula and intensifying uncertainty, could have negative consequences for strains in the Middle East. In that region, financial markets, investment, and activity continued conflict, heightened tensions, and worldwide. The impact of U.S. policy uncertainty renewed uncertainties following the is particularly significant for investment in reintroduction of sanctions on Iran could EMDEs, especially in those with large trade or exacerbate volatility in oil markets, hamper financial market linkages with the United States confidence, and further amplify instability (World Bank 2017a; Bhattarai, Chatterjee, and (Karasapan 2017; Polachek and Sevastianova Park 2018). 2012). Security conditions remain precarious in many Sub-Saharan African countries. In the past, Uncertainty surrounding the outcome of protracted periods of low commodity prices have negotiations for major trade agreements and the tended to increase the probability of civil unrest in non-renewal of preferential schemes could have that region, as well as in others with large numbers adverse consequences for involved countries. of commodity exporters (Bazzi and Blattman Despite the recent ratification of a number of 2014; Ciccone 2018). Heightened diplomatic deeper trade agreements that include comprehend- tensions involving Russia’s relationship with the sive provisions beyond the liberalization of tariff United States and the European Union could also barriers, the appetite for trade liberalization has lead to an escalation of retaliatory measures. generally waned, particularly across major Renewed intensification of geopolitical risks could advanced economies. This is reflected in the severely impact growth and development number of new trade agreements falling to an 18- prospects for the affected regions, and even hinder year low in 2017. activity at the global level. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 37 A combination of global downside risks FIGURE 1.19 Downside risks: Policy and geopolitical uncertainty After a decade of recovery from the global Global policy uncertainty is still above historical norms, but has generally financial crisis, economic activity is still lagging moderated from a peak reached in 2016. The risk of unanticipated political previous expansions and is expected to decelerate swings remains elevated amid rising support for populist parties. In the in coming years (Figure 1.20). Whether the past, periods of low commodity prices were associated with an increased incidence of conflict in commodity exporters. slowdown will be gradual, as currently predicted, or abrupt will depend on a number of factors, A. Global economic policy uncertainty B. Global rise of populism including the materialization of some of the aforementioned downside risks. Currently, the probability of a recession in major economies, such as the United States, is low (Bauer and Mertens 2018). However, the global economy has experienced an abrupt slowdown or recession in every decade, which was invariably preceded by a period when a significant majority of countries were operating above capacity. This proportion is estimated to be around 50 percent in 2018, and is C. Elections in advanced economies D. Conflict in EMDE commodity expected to increase further in 2019. and EMDEs exporters and commodity prices The next global slowdown or recession could be triggered by the combined materialization of several downside risks. For instance, a full-blown escalation of trade-restrictive measures along with a sudden resurgence of global inflation could negatively impact confidence and lead to disruptive financial market developments. Weakening growth and higher borrowing costs could intensify debt and financial stability Sources: Allansson, Melander, and Themnér (2017); Baker, Bloom, and Davis (2016); Election Guide, International Foundation for Electoral Systems; national sources; Rodrik (2018); World Bank. concerns, while rising unemployment could A. Policy uncertainty is the Economic Policy Uncertainty index computed by Baker, Bloom, and Davis (2016), and is based on the frequency of articles in domestic newspapers mentioning economic policy amplify political uncertainties and protectionist uncertainty. The index is normalized to equal 100 at its January 2000-April 2018 median, as indicated by the dashed horizontal line. Last observation is April 2018. tendencies. B. Data measures the vote share, or support, for populist parties, defined as those which pursue an electoral strategy of emphasizing divisions between an in-group and an out-group, over time among countries with at least one populist party, as defined and computed by Rodrik (2018). Sample The capacity of many countries to confront a includes 8 EMDEs and 11 advanced economies. synchronous slowdown has diminished since the C. Bars indicate the number of presidential and parliamentary elections held in EMDEs and advanced economies in each year. The sum excludes local authority elections. global financial crisis. Monetary policy in D. Conflicts are the two-year average of the sum of armed conflicts, or conflicts that involve two armed and opposing actors. Commodity index is the average of energy, non-energy, and precious advanced economies could face renewed metals price indexes, based on nominal U.S. dollar prices. constraints, as policy interest rates are still at Click here to download data and charts. historic lows, and fiscal space has deteriorated in both advanced economies and EMDEs. Moreover, Region-specific downside risks potential growth has deteriorated and long-term investment prospects have continued to worsen, There are various region-specific downside risks despite a tentative stabilization of market that accompany the global risks discussed earlier. expectations about the long-term growth outlook Most regions face domestic policy uncertainties (Box 1.1). These conditions render the global associated with the possibility of fiscal slippages, economy vulnerable to adverse shocks that may reform setbacks, and lingering financial stability lead to a global slowdown or recession. Such an concerns. event could further damage potential growth, particularly if accompanied by financial stress and Renewed geopolitical tensions in Europe and significant deleveraging pressures (World Bank Central Asia, the Middle East and North Africa, 2018a; Kose and Terrones 2015). South Asia, as well as around the South China Sea 38 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE 1.20 Downside risks: History repeating itself? activity in many regions, including in East Asia and Pacific, Latin America and the Caribbean, Activity has recovered but still lags behind previous expansions. While the probability of a recession in major economies, such as the United States, South Asia, and Sub-Saharan Africa. remains low, it may be creeping up. Past global recessions were preceded by a period when most countries operated at or above full capacity. The Stronger and longer-lasting cyclical next episode could be triggered by the materialization of a combination of downside risks, which could further weaken long-term investment recovery prospects. Despite various downside risks, a more sustained A. Global GDP during expansion B. Probability of U.S. recession and longer-lasting recovery in major advanced periods economies and EMDEs remains possible, particularly if policy uncertainty dissipates. This could generate larger-than-expected spillovers through global trade and confidence channels. In particular, positive growth surprises in the United States would be a notable boost for activity among trading partners, including many EMDEs (Figure 1.21; Kose et al. 2017a; Huidrom, Kose, and Ohnsorge 2017). A persistent period of elevated C. Output gaps around global D. Five-year-ahead forecasts of confidence across major economies could further recessions/slowdowns investment growth amplify the recovery, making it more synchronous and self-sustained (Angeletos, Collard, and Dellas 2017; Benhabib, Wang, and Wen 2015; Levchenko and Nayar 2017). Over time, the cyclical recovery could help reverse some of the damage to potential output growth caused by the global financial crisis (World Bank 2018a). In particular, a persistent period of weak aggregate demand since 2008 might have Sources: Consensus Economics, Federal Reserve Bank of New York, National Bureau of Economic Research (NBER), World Bank. contributed to the loss of skills and matching A. Global GDP levels in constant 2010 U.S. dollars, indexed to 100 at start of expansion periods. Cycle dates based on global recessions and slowdowns identified in Kose and Terrones (2015). efficiency on labor markets (Bell and Blanchflower Dashed line corresponds to 2018-20 forecasts. B. Figure shows probability of a recession in 12 months. Probabilities derived from the U.S. yield 2010; Bell and Blanchflower 2011), weak curve model of the Federal Reserve Bank of New York. Shaded areas indicate recessions, as corporate sector performance (Nguyen and Qian identified by the National Bureau of Economic Research (NBER). Last observation is April 2018 (12-month-ahead probability). 2014), financing constraints (Queralto 2013), and C. Output gaps calculated using multivariate filter. Methodology is described in Box 1.1 of the January 2018 edition of the Global Economic Prospects report. Grey bars indicate the two global recessions to slowing total factor productivity growth in 1991 and 2009, and the two global slowdowns in 1998 and 2001. D. Five-year-ahead forecasts of investment growth, where the horizontal axis is the forecast vintage. (Oulton and Sebastiá-Barriel 2017). In the United Figure uses data surveyed for the latest available month in each year. Unweighted averages of 24 States, these factors have accounted for a advanced economies and 21 EMDEs. Last observation is April 2018. Click here to download data and charts. significant share of the slowdown in potential output growth since the crisis (Reifschneider, Wascher, and Wilcox 2015; Summers 2014). and the Korean Peninsula, could weaken There is also evidence of lasting damage from the confidence and disrupt trade, investment, and crisis in other advanced economies and in EMDEs migrant flows in these regions. A worsening of (Ball 2014; World Bank 2018a). political instability or armed conflict could have substantial adverse effects in Sub-Saharan Africa. Absent the build-up of macroeconomic and Lower-than-expected commodity prices could also financial imbalances, a prolonged period of strong derail the recovery in key commodity-exporting aggregate demand could help raise labor partici- economies that are important economic partners pation, investment and productivity growth. A for other countries in their regions. Finally, pickup in productivity in major advanced natural disasters, such as severe storms or economies would allow for additional growth droughts, could become more frequent, buffeting without a rise in inflation, which would help G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 39 sustain favorable financing conditions and FIGURE 1.21 Upside risks: Longer-lasting upturn generate positive cross-border and inter-industry Upside risks stem from the possibility of stronger-than-expected growth in spillovers (Badinger and Egger 2016). An major economies, particularly in the United States. Absent the build-up of investment revival in EMDEs would help macroeconomic and financial imbalances, a longer-lasting recovery could help repair crisis-related damages to potential growth. counterbalance the forces weighing down on potential growth in those countries. A. Impact of a 1-percentage-point B. Actual and potential output growth increase in U.S. growth after 1 year in advanced economies and EMDEs in Policy challenges the post-crisis period Challenges in advanced economies Advanced-economy monetary policy will gradually become less stimulative, as output gaps become positive and inflation picks up. Fiscal policy is expected to be broadly neutral for growth, with the significant exception of the United States. As monetary and fiscal stimuli wane in the medium Source: World Bank. A. Cumulative impulse responses of a 1-percentage-point increase in U.S. growth on growth in other term and potential growth softens in the longer term, advanced economies and in EMDEs. Solid bars represent medians and error bars represent 16-84 the outlook is expected to weaken, highlighting the percent confidence intervals. B. Red dots indicate advanced economies and blue dots are EMDEs. Sample includes 34 advanced need for structural reform to boost productivity and economies and 66 EMDEs. Click here to download data and charts. labor force participation. Monetary and nancial policies the process could lead to sudden financial market As the recovery firms and output gaps become movements, reminiscent of the 2013 Taper positive, inflation should gradually rise toward Tantrum. Careful and transparent communication central bank targets. The pace of this convergence, by central banks about their plans for both policy however, is subject to considerable uncertainty. rates and balance sheets can avoid adverse financial Throughout the recovery, inflation has generally market reactions, particularly in an environment been overestimated (Figure 1.22). Recent inflation where high asset prices are based on assumptions has been less responsive to strengthening activity that monetary policy tightening will proceed in an than might have been expected, perhaps reflecting orderly fashion. hidden slack or structural forces. Inflation expectations may have shifted down following a Fiscal policy period of persistently low and below-target actual inflation (Kiley and Roberts 2017; Hills, Nakata, The fiscal policy stance of advanced economies and Schmidt 2016). Globalization may have turned from contractionary to expansionary, on reduced the sensitivity of inflation to domestic balance, between 2015 and 2017, contributing to pressures (Auer, Levchenko, and Sauré 2017; Ihrig the upturn in growth during this period. In most et al. 2010). Trends in technology and advanced economies, the fiscal stance is expected competition may be suppressing wages and prices to be largely neutral for growth over the forecast (Kurz 2017; Autor et al. 2017). Central banks are horizon. appropriately taking a gradual approach to policy normalization. The major exception is the United States, which is undertaking a substantial, and procyclical, fiscal Major central bank balance sheets remain large by expansion. Fiscal stimulus is an important part of historical standards, but have likely peaked countercyclical policy, especially when monetary globally. The Federal Reserve has started to policy is constrained (Christiano, Eichenbaum, withdraw quantitative easing, while the European and Rebelo 2011). However, for an economy Central Bank is tapering its asset purchases. operating close to full potential, the benefits of Changing market expectations about the speed of stimulating demand are reduced, while the costs 40 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE 1.22 Monetary and fiscal policies in advanced are magnified as interest rates rise and private economies investment is crowded out. The same conditions Inflation has generally come in below forecasts in recent years, suggesting also limit the magnitude of positive spillovers to that central banks should take a gradual approach to raising rates. Major other countries (Blagrave et al. 2017). central bank balance sheets are close to their peak size, and managing the unwinding of unconventional policy will require careful communication. More generally, many advanced economies have Fiscal balances have stabilized in most advanced economies, with the key exception of the United States, where fiscal policy will be highly added significantly to their public debt load, procyclical, with limited growth spillovers. Debt levels in advanced which may hinder their ability to respond to economies have risen significantly in the past decade, which may hinder negative shocks in the future (Romer and Romer their ability to respond to future negative shocks. 2017). Accordingly, they need to take advantage A. Euro Area Consensus inflation B. U.S. Consensus inflation forecasts of the confluence of strong global growth and still forecasts low borrowing costs to rebuild fiscal space (Kose et al. 2017b; IMF 2018). Structural policies Potential output in advanced economies is constrained by aging populations and weak productivity growth (Figure 1.23). As the recovery matures, and policy stimulus is gradually withdrawn, growth will tend to converge toward C. Central bank balance sheets D. Structural fiscal balance its slower pace of potential. Structural reforms can raise this pace by boosting labor participation and productivity growth. A critical challenge is to continue to support an open and fair global trade system and pursue further trade liberalization. One area with untapped potential is trade in services, which comprises a rising share of global trade despite being subject to considerable restrictions. E. Estimates of cross-border F. Public debt Reducing barriers to services trade—for instance, spillovers from fiscal policy by increasing regulatory cooperation and reducing barriers to entry for foreign service providers—has the potential to boost long-term growth prospects while reducing policy uncertainty (Borchert, Gootiiz, and Mattoo 2012; OECD 2017). More generally, increasing trade openness should be accompanied by actions to facilitate re- employment for workers in regions and sectors dislocated by globalization (IMF, World Bank, Sources: Consensus Economics, European Central Bank, Federal Reserve Bank of St. Louis, Haver and WTO 2017). Analytics, International Monetary Fund, World Bank. A.B. Series indicate date at which inflation forecast surveys were taken. C. Annual average of monthly assets of central banks. Data use current U.S. dollar GDP weights. In contrast, actions to protect certain domestic D. Shaded area indicates forecasts. Structural balance is the fiscal balance adjusted for the economic sectors, such as steel or aluminum tariffs, may cycle and for one-off effects. E. Average one-year response of recipient country GDP to a fiscal shock equal to 1 percent of source lead to net domestic job losses. The increase in country GDP, as calculated by Blagrave et al. (2017). F. Net general government debt as a percentage of GDP. For cross-country comparability, the U.S. costs for downstream users can reduce more jobs figure is adjusted to exclude unfunded pension liabilities of government employees’ defined-benefit pension plans. than the protected sector gains (François and Click here to download data and charts. Baughman 2018). Such losses would be multiplied if other countries retaliate in kind (Akcigit, Ates, and Impullitti 2018). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 41 Challenges in emerging and developing FIGURE 1.23 Structural policy in advanced economies economies Potential output in advanced economies is constrained by weak population and productivity growth, suggesting that current levels of growth cannot be EMDE policymakers need to be able to respond to a maintained in the longer term. rise in inflation and cope with advanced-economy monetary policy normalization, as well as manage A. Working-age population growth B. Productivity growth possible bouts of financial market volatility. Deteriorating debt dynamics have reduced fiscal space, underlining the importance of revenue mobilization and medium-term fiscal frameworks to rebuild buffers. EMDEs face various structural challenges to boost longer-term prospects. They include the need to intensify economic diversification in commodity exporters, boost skills and adaptability to confront rapid technological change, and promote Sources: Haver Analytics, World Bank. regional trade integration. China’s key policy A. The series is a year-on-year percentage change in the working-age population, which is defined as challenge is to manage the transition to slower but individuals between ages 15-64 years. B. Productivity measures output per employed person. Last observation is 2018Q1. more balanced and sustainable growth. Click here to download data and charts. Policy challenges in China Authorities in China have implemented a wide to significantly shorten the processing time for range of reforms in recent years (IMF 2017a; starting business and streamline foreign business World Bank 2017c; World Bank 2018a). These registration. include steps to reduce excess capacity in the industrial sector (Figure 1.24; World Bank The key economic policy challenge is to manage 2018b). Notable progress has been made on the transition to slower but more balanced and mixed-ownership reforms aimed at diversifying sustainable growth. This will require continued the ownership structure of state-owned enterprises implementation of reforms to reduce financial (SOEs). Currently, more than two-thirds of vulnerabilities, promote market competition and China's centrally administered SOEs and their private sector development, reallocate capital and subsidiaries have allowed outside investors, labor toward more productive firms and sectors, restructured, or gone public. Following progress in and foster innovation through stronger intellectual opening its equity and bond markets to foreigners, property rights, as well as additional research and China is now taking additional steps to remove development. This will also necessitate further foreign ownership limits in financial institutions actions to bolster household consumption, and some other sectors. including additional reforms to make the fiscal system more progressive and rebalance the Reforms have also included stricter regulatory intergovernmental allocation of revenues and policies for the housing market, as well as expenditures. Reallocation of public spending monetary, financial, and regulatory measures that from investment to education, health, pensions, have contributed to some reduction in corporate and safety nets would increase aggregate debt as a share of GDP, even if household and consumption and boost human capital. Advancing public-sector debt have continued to increase (BIS the reform of the household registration (hukou) 2018a). The authorities have also made progress system, and of rural land transfers, would in fiscal and regulatory reforms. For example, the contribute to a reduction of income inequality. tax burden on consumers and businesses, as well as Encouraging market mechanisms to promote transport logistics costs, are being further lowered green growth and more efficient, sustainable use of through cuts in value-added tax rates, social natural resources would enhance environmental security contributions, tariffs, and road tolls. In sustainability (World Bank 2018a; World Bank addition, recent regulatory measures are expected 2018h). 42 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE 1.24 Policy challenges in China have shown modest upward momentum. However, with oil prices rising and the aggregate China has implemented a wide range of reforms, including significant steps to reduce excess capacity and to diversify the ownership structure of EMDE output gap closing, there may be greater state-owned enterprises. While monetary and prudential policies have upward pressure on inflation going forward. contributed to some reduction of corporate debt, the stock of total debt has continued to increase due to still rising household and public-sector debt. Moreover, a closed global gap could amplify this Progress on fiscal reforms includes the reduction of tax and social security tendency through imported inflation (World Bank burdens on businesses. 2018a). A. Industrial capacity utilization B. Industrial state-owned enterprises The challenges associated with increasing inflation and state-controlled enterprises with mixed ownerships pressures could be compounded if monetary policy normalization in advanced economies, and the associated tightening of international financing conditions, leads to capital outflows and currency depreciation among EMDEs (Chari, Stedman, and Lundblad 2017; Dahlhaus and Vasishtha 2014). Some countries have already had to adjust their monetary policy stance in response to rapid adjustments in exchange rates and capital flows in the first half of 2018. The current policy C. Public, household, and corporate D. Social security contribution, mix in the United States amplifies the challenge of debt highest mandatory tax rates sudden changes in market sentiment. If the Federal Reserve were to hike policy rates more steeply than markets expect to offset overheating and inflationary pressures generated by the large fiscal expansion, there could be additional pressure for rate increases in some EMDEs. At the same time, policymakers in EMDEs need to continue preparing their domestic financial sectors for potentially adverse spillovers from post-crisis Sources: Bank for International Settlements, China National Bureau of Statistics, Haver Analytics, Institute of International Finance, Ministry of Finance of the People’s Republic of China, Ministry of banking regulatory tightening in advanced Human Resources and Social Security of the People’s Republic of China, World Bank. A. Last observation is 2018Q1. economies (Briault et al. 2018). B. Both lines represent industrial enterprises. State-controlled mixed ownership enterprises refer to enterprises of whose total assets the state-owned assets have a majority or dominate share. Last observation is December 2017. How susceptible individual countries may be to C. Total debt comprises of credit to household and non-financial corporations and general government debt (broad definition). The sum of credit to household and non-financial corporations is capital flow reversals depends on their existing consistent with the People’s Bank of China Aggregate Financing to the Real Economy (stock) level. vulnerabilities and other domestic factors, such as Public debt, which is general government debt, includes central and local government debt and social security funds, but excludes public enterprises. Data presented in the chart are broadly consistent their degree of financial openness and institutional with the IMF estimates of total debt. Includes debt swaps and other debt restructuring operations. D. Measures the sum of employer and employee contributions. quality (Byrne and Fiess 2016). In anticipation of Click here to download data and charts. rising borrowing costs and the possibility of renewed, more persistent episodes of market EMDE monetary and financial policies volatility, it is critical for EMDE policymakers to maintain an environment where expectations of Among EMDEs more generally, median inflation longer-term inflation are low and stable. This in commodity exporters has been moderating includes credible commitment to explicit inflation toward that of commodity importers. Policy targets in those countries that have implemented interest rate adjustments this year have consisted such a framework. In some countries, it will also mostly of cuts in commodity exporters, extending be necessary to tackle vulnerabilities, such as easing cycles already underway in some economies sizable current account deficits or high stocks of (e.g., Brazil, Colombia, Kazakhstan, Peru, Russia, corporate debt. Although maintaining an Zambia; Figure 1.25). Thus far, short-term, appropriate level of exchange rate flexibility and survey-based inflation expectations in EMDEs building policy buffers should be first lines of G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 43 defense in confronting sudden financial shocks, FIGURE 1.25 EMDE monetary policy EMDE policymakers also need to be prepared to Policy interest rate actions in commodity exporters in the first half of 2018 use additional tools, such as intervention in consisted mostly of cuts, extending easing cycles already well underway in foreign exchange markets, or even targeted capital some economies. This is consistent with moderating inflation and still negative output gaps. Survey-based inflation expectations are rising in inflow management measures if other options commodity importers, and have stabilized in commodity exporters after an have been exhausted and a financial crisis is extended period of downward adjustment. imminent (IMF 2017b). To reduce financial stability risks associated with elevated corporate A. Policy interest rates B. One-year-ahead inflation debt, prudential policies and bankruptcy expectations protection regimes should be reinforced, while access to equity finance should be further developed (Special Focus 2). EMDE scal policy Public finances are fragile in various EMDEs. Many economies are running sizable government deficits—a trend expected to persist over the next Sources: Consensus Economics, Haver Analytics, World Bank. two years—while adverse debt dynamics will A. The blue bars show the interquartile range of policy rates for each country group. Sample includes 37 commodity exporters and 26 commodity importers. continue to constrain fiscal space across EMDEs B. Figure shows median one-year-ahead inflation expectations based on a quarterly survey conducted by Consensus Economics. Sample includes nine commodity exporters and 11 commodity (Figure 1.26). Limited fiscal buffers leave EMDEs importers. Last observation is April 2018. Click here to download data and charts. short of an effective fiscal instrument should they need to react to a negative economic shock. In LICs, public debt-to-GDP ratios remain below In other commodity exporters, government levels observed prior to the mid-2000s following finances deteriorated following the decline in debt relief initiatives, but have increased rapidly in commodities prices after 2011. Fiscal balances recent years. Debt vulnerabilities are compounded bottomed out in 2015-16 and are envisaged to in those countries by rising exposure to further improve; however, they remain firmly international markets, a lack of transparency, and negative. Although the fiscal sustainability gap in limited debt management capabilities. The commodity exporters is expected to narrow in increased reliance on commercial loans and non- 2018, the improvement is not yet sufficient to traditional sources has created debt-service place debt on a sustainable path. These trends difficulties in some countries. Across EMDEs suggest that there is still significant need for fiscal more generally, the challenges posed by consolidation in commodity exporters. In com- inadequate fiscal buffers are expected to be modity importers, robust growth has supported amplified as global financing conditions tighten, government revenues. However, government especially if procyclical U.S. fiscal measures are expenditure growth is expected to outpace that accompanied by higher-than-expected U.S. and of revenues, contributing to rising gross global interest rates. government debt. In oil exporters, fiscal deficits narrowed in 2017, Going forward, tightening global financing in part aided by recovering energy prices, but are conditions will have substantial implications for projected to remain large (e.g., Algeria, Bahrain, fiscal policy in EMDEs. For sovereign borrowers, Ghana, Nigeria; World Bank 2018a). Govern- public balance sheets could come under stress as ment revenue growth was positive in 2017 and is governments face rising costs in financing deficits set to accelerate in 2018. However, the im- and rolling over maturing debt (IMF 2017b). provement is not enough to bring revenues as a EMDEs with elevated external borrowing— share of GDP back to levels observed before the especially from private creditors—are vulnerable 2014-16 oil price collapse, and government debt to capital flow reversals, which can increase continues to rise. refinancing risks and the burden of servicing debt 44 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE 1.26 EMDE fiscal policy (IMF 2018). Although aggregate corporate debt in Government debt has been rising across EMDEs, further constraining EMDEs has fallen modestly since 2016, it fiscal space. In LICs, external and non-concessional debt have been remains, on average, 27 percentage points of GDP increasing, putting further strain on domestic revenues as interest higher than in 2006 (Special Focus 2; Beltran, payments continue to climb. Fiscal sustainability gaps could deteriorate across all EMDE regions in response to increasing interest rates. Tax Garud, and Rosenblum 2017). Deterioration of policy appears to be procyclical across many EMDEs, which could corporate debt profiles could lead to rising exacerbate fluctuations in their business cycles. contingent liabilities for the public sector, which A. Gross government debt B. External debt in LICs would compound the challenges associated with elevated public debt. Although favorable global growth and recovering revenues are likely to improve fiscal space, EMDE policymakers need to continue to actively address underlying fiscal vulnerabilities. Placing government finances on a more sustainable path could prevent the need for procyclical fiscal consolidation in the presence of negative shocks— C. Non-concessional debt and interest D. Fiscal balances as was the case in commodity exporters in 2016- payments on debt in LICs 17, when sizable negative output gaps were accompanied by contractionary fiscal stances (World Bank 2018a). Realigning government spending with revenues could also help stabilize growing public debt levels, while managing the composition of debt could ease the servicing burden on tax revenues. The urgency to strengthen or rebuild fiscal buffers should be balanced against other pressing considerations. E. Impact of interest-rate shock on F. Share of tax changes during These include protecting social safety nets and fiscal sustainability gaps in EMDEs, contractions, 1981-2017 by region financing growth-enhancing investment, including in infrastructure. Mobilizing fiscal revenues and reallocating spending toward investment and infrastructure projects can prioritize such needs when fiscal space is constrained, which is generally the case in LICs. Across EMDEs, introducing medium-term expenditure frameworks and fiscal rules to contain deficits, as well as improving overall governance, can build credibility to Sources: Haver Analytics, International Monetary Fund, Kose et al. (2017b), Végh and Vuletin (2015), support revenue collection and buck the historical World Bank. A.D. Shaded area indicates forecasts. trend of procyclical fiscal policy. This should be A. Figure shows the constant 2010 U.S. dollar GDP-weighted average for each country group of gross government debt, using an unbalanced sample. The sample in 2018 includes 80 commodity complemented by measures to enhance debt exporters and 60 commodity importers. transparency, improve debt management capacity, B.C. LICs = low-income countries. B. External debt measures debt owed to non-residents. The unbalanced sample includes 21 LICs. and promote sustainable lending practices, C. Figure shows median values for LICs. The unbalanced sample includes 29 LICs for non- concessional debt and up to 15 LICs for interest rate payments, depending on data availability. particularly in LICs. Interest rate payments include those made on government debt to domestic and foreign residents. D. Figure shows median in each country group. Sample includes 36 energy exporters and 54 other commodity exporters (i.e., agricultural and metals exporters), as well as 63 commodity importers. E. EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the EMDE structural policies Caribbean, MNA = Middle East and North Africa, SAR = South Asia, and SSA = Sub-Saharan Africa. Figure shows the estimated deterioration in the fiscal sustainability gap driven by a 1-standard deviation interest rate increase. Sustainability gap is measured as the difference between the primary While EMDE growth is expected to continue to balance and the debt-stabilizing primary balance. A negative bar indicates government debt is rising along an accelerated trajectory. Sample includes 70 EMDEs. accelerate in 2018, potential growth has declined F. A net tax hike occurs when the number of tax hikes exceeds the number of tax cuts, while a net tax cut occurs when the number of tax hikes is less than the number of tax cuts. Tax changes are considerably over the past decade, and structural measured as the change in statutory rates in either the corporate income, personal income, or value- added tax as described in Végh and Vuletin (2015). Output gaps that are more negative than -1 challenges are intensifying. For commodity percent of potential GDP indicate an economic contraction. Unbalanced sample, where data for 2017 includes 16 EMDEs. Click here to download data and charts. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 45 exporters, prospects of a secular slowdown in the fication beyond these sectors. Continued demand for commodities call for accelerated commitment to reforms aimed at improving efforts to diversify their economies (Special Focus governance and the business climate, and 1). For all EMDEs, rapid changes in manufac- reducing regulatory barriers to competition turing and technology imply rising challenges and and to foreign investment, has the potential to opportunities, putting ever-increasing emphasis on diminish reliance on the oil sector (Callen et education, skills, and adaptability to bolster long- al. 2014; Devarajan 2017; Stocker et al. term growth prospects. 2018). Fostering diversification • Similarly, metals and agricultural exporters can benefit from vertical diversification—the Resource-rich countries need to enhance the development of industries closely related to overall competitiveness of their economies. In existing production and export structures— addition to fostering human and physical capital and the expansion of high value-added and improving institutions and governance, they resource-based manufacturing activities. For need to pursue policies that help diversify their instance, mining and forestry have become economies away from natural resources (Gill et al. knowledge-intensive sectors with high 2014). For low- and middle-income countries, technological content in both upstream and increased diversification is generally associated downstream activities. Successful examples of with higher levels of income per capita (Figure vertical diversification include Thailand, 1.27; Cadot, Carrère, and Strauss-Kahn 2011; Chile, and Uganda (Hesse 2008; Gylfason Imbs and Wacziarg 2003). For resource-intensive and Nguessa Nganou 2014; Maloney and countries, low levels of economic diversification Valencia Caicedo 2017). are particularly challenging, as sharp commodity price fluctuations disproportionately impede While incremental diversification around resource investment, growth, and stability in those sectors can help foster learning and the adoption countries (Bahar 2016; Hesse 2008; Lederman of new technologies, proper regulatory and and Maloney 2007; Papageorgiou and Spatafora institutional frameworks need to be in place to 2012; IMF 2016). Furthermore, there appears to attract new investments, help the development of be an inverse relationship between resource higher value-added export sectors, and boost intensity and education outcomes, which could competitiveness and participation in regional and reflect a lower quality of institutions more global value chains. Regulations and institutions generally. This can further hamper the potential that slow the emergence of new sectors should be for development in resource-rich countries (World identified and reformed in order to support Bank 2018i). efficiency-seeking and productivity-enhancing investments, including through improved In the long run, the prospect of persistently competition policies. Rapid technological changes moderate commodity prices intensifies the need also offer new opportunities for private-sector-led for reforms to encourage economic diversification, growth, including in digital services and infor- particularly in less diversified oil producers. Such a mation technologies (World Bank 2018i). process generally occurs with incremental changes Diversification can be hindered by the absence of around existing sectors and comparative advan- local market access, emphasizing the need for tages, leveraging available skills and infrastructure further regional integration, particularly in Sub- (Hausmann, Hwang, and Rodrik 2007). Saharan Africa (Imbs 2018). • The successful diversification experience of Adapting to technological change some energy producers (e.g., Malaysia, Mexico) suggests the need to support both Despite heightened uncertainty about trade vertical diversification in oil, gas, and petro- policies in major economies, the potential for chemical sectors, as well as horizontal diversi- export-led manufacturing growth remains 46 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE 1.27 EMDE structural policy significant in many EMDEs, as their productivity levels, which lag the global technological frontier, Decreasing export concentration is generally associated with rising income per capita. The need for increased diversification is particularly have substantial scope for convergence. A rising acute among oil-exporting EMDEs. Automation creates new challenges for share of manufacturing employment and increased manufacturing-led growth in EMDEs. Regional trade agreements offer vertical specialization have generally been prospects of increased integration, particularly in Sub-Saharan Africa. Improving basic reading and mathematics proficiency remains a major associated with higher productivity and income priority in some regions. per capita levels (Diao, McMillan, and Rodrik 2017; Hallward-Driemeier and Nayyar 2018; A. Export concentration and GDP per B. Export concentration, 2016 capita levels Szirmai and Verspagen 2015). Manufacturing can foster the diffusion of technologies, particularly for countries that are currently less integrated into global value chains, and thus boost long-term growth prospects. Rapid technological changes—including increased digitalization and the use of advanced robotics— may significantly affect countries’ comparative advantages. Increased diffusion and adoption of C. Supply of industrial robots, by D. Size of new regional trade digital technologies in EMDEs are likely to be industries worldwide agreements positive for growth and job creation, particularly in countries with elevated levels of digital literacy. Mobile and internet technologies can lower costs of market access, foster entrepreneurship, and improve labor market efficiency, thereby helping workers and firms match skills to jobs. While evidence of employment-saving industrial automation is limited in EMDEs, task-replacing E. Impact of AfCFTA on employment, F. Students proficient in math and technologies could potentially contribute to labor reading by sector displacement over time, including in more traditional manufacturing activities (Acemoglu and Restrepo 2018; Autor and Salomons 2018; Maloney and Molina 2016). At the same time, the increasing services intensity of manufacturing can create important labor market opportunities and productivity advancement in EMDEs (Enache, Ghani, and O’Connell 2016; Kinfemichael and Morshed 2015; WTO 2017; UNCTAD 2017a). Sources: International Federation for Robotics; Saygili, Peters, and Knebel (2018); United Nations Conference on Trade and Development (UNCTAD); World Bank. A.B. Herfindahl-Hirschmann concentration index measures the degree of product concentration, where values closer to 1 indicate a country’s exports are highly concentrated on a few products. These trends suggest rapid changes in the types of A. GDP per capita measured in Purchasing Power Parity (PPP) terms. Trend computed using a local investments and skills needed for manufacturing- polynomial regression over a sample of 104 countries and over the period 1995 to 2015. Outlier data trimmed at the 10 percent level using a density based clustering algorithm. led growth in EMDEs. Opportunities and risks B. Orange diamonds denote the median and blue bars represent the interquartile range of individual country groups. Sample includes 34 oil-exporting EMDEs (excludes South Sudan), 116 oil-importing will vary across sectors, depending on the extent of EMDEs, and 36 advanced economies. C. Estimated annual supply of industrial robots at year-end. trade in international markets, the degree of D. CPTPP = Comprehensive and Progressive Agreement for Trans-Pacific Partnership, AfCFTA = export concentration, the level of automation, and African Continental Free Trade Area. Data are as of 2017. E. Man. refers to other manufactured goods. Utilities/const. refers to utilities/construction. The the importance of complementary services. Labor- employment effects of the African Continental Free Trade Area (AfCFTA) have been estimated using the Global Trade Analysis Project (GTAP) model. The GTAP model is a static, multi-regional, multi- intensive industries, including commodity-based sectoral general equilibrium model assuming perfect competition, constant returns to scale, and imperfect substitution between foreign and domestic goods and among imports from different and less-automated manufacturing processes, sources. remain important entry points for less- F. SSA = Sub-Saharan Africa, MNA = Middle East and North Africa, LAC = Latin America and Caribbean, EAP = East Asia and Pacific, ECA = Eastern Europe and Central Asia. Data for South industrialized economies. This applies to rapidly Asia are unavailable. Dashed horizontal lines show advanced-economy average. Click here to download data and charts. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 47 expanding urban areas in Sub-Saharan Africa, be the largest free-trade area in terms of where an improved manufacturing base and population and number of countries. The greater openness to regional and international AfCFTA has the potential to substantially foster trade could unlock potential for higher per capita intra-regional trade flows, contribute to greater income growth (Lall, Henderson, and Venables economic diversification, and lead to higher value- 2017). added products and greater innovation in Africa (Saygili, Peters, and Knebel 2018; UNCTAD For manufacturing sectors that are more easily 2017b). automated, and where trade is more concentrated, advanced technology may be more disruptive and Deep regional trade agreements—those that go labor-saving, but necessary to raise efficiency and beyond tariff reductions and that contain wide- maintain competitiveness. Successful industri- ranging commitments in the areas of competition, alization strategies will need to focus on investment, services, and the protection of strengthening international competitiveness, intellectual property rights—are associated with increase skills and adaptability, support firms’ larger trade and income gains (Constantinescu et capacity to absorb new technologies, and foster al. forthcoming; Hofmann, Osnago, and Ruta the development of complementary services. 2017). Promoting such commitments could therefore yield sizable dividends for EMDEs. Promoting trade openness Successful regional trade arrangements also need to be platforms for further integration with the Measures that reduce barriers to trade could rest of the world, as shown by the positive contribute to boosting value chain integration, experiences in Europe and Asia. investment, and productivity. Despite the lack of Improving education and training progress in multilateral trade negotiations, new trade agreements have been concluded or are Policies related to education and training being negotiated, including the Comprehensive programs can be redesigned to adapt available and Progressive Agreement for a Trans- skills to changing development needs and new Pacific Partnership (CPTPP), the European technologies, thereby boosting growth and Union–Mercosur trade agreement, the Regional employment prospects (World Bank 2018j). As Comprehensive Economic Partnership between countries become increasingly engaged in more the Association of Southeast Asian Nations complex production processes, higher levels of (ASEAN) countries and six of their major trad- tertiary school enrollment and investment in skills ing partners, and the African Continental Free related to information and communication Trade Area (AfCFTA). These have the potential technology (ICT) have a bigger payoff. Training to boost not only intra-regional trade and incomes programs that are responsive to changing industry of member countries, but also to provide needs are particularly important (Hallward- a counterbalance against rising protectionist Driemeier and Nayyar 2018). As technologies are sentiments. likely to change more quickly than national education systems are able to adapt to them, Full implementation of the CPTPP, signed by 11 innovative ways of imparting skills will need to be countries, together accounting for 16 percent of developed, including through experimentation global GDP and 14 percent of global trade, is and impact evaluation. The importance of expected to provide a boost to trade flows for its equipping people with the necessary skills to adapt members, even if potential gains have been to new opportunities is emphasized in the G20’s reduced following the withdrawal of the United agenda on the future of work. States from the original TPP (Maliszewska, Olekseyuk, and Osorio-Rodarte 2018). The For many low- and middle-income countries— AfCFTA was launched by countries representing a particularly in Sub-Saharan Africa and in the notably smaller share of global GDP and trade; Middle East and North Africa—improving basic however, once ratified by its 44 members, it would numeracy, literacy, and ICT-related skills remains 48 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 a key priority. Even though school enrollment and 2015; World Bank 2017d). Improving learning average years of schooling have markedly increased outcomes requires better measurement and over the last decade, learning and the acquisition monitoring, improved school practices, and of basic skills remain insufficient in these countries greater accountability. Helping to develop “soft” (Altinok, Angrist, and Patrinos 2018). Early skills that foster adaptability, as well as initiative learning deficits are magnified over time and tend and problem solving, could come at a premium in to accentuate inequality, whereas higher inter- view of the rapid and unforeseen changes in skills generational mobility in education is associated requirements and the increasing automation with higher growth and lower poverty (PASEC of repetitive tasks. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 CHAPTER 1 49 TABLE 1.2 List of emerging market and developing economies1 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 Sri Lanka Benin Myanmar* Bulgaria St. Kitts and Nevis Bolivia* Namibia Cabo Verde St. Lucia Botswana Nicaragua Cambodia St. Vincent and the Grenadines Brazil Niger China Swaziland Burkina Faso Nigeria* Comoros Thailand Burundi Oman* Croatia Tunisia Cameroon* Papua New Guinea Djibouti Turkey Chad* Paraguay Dominica Tuvalu Chile Peru Dominican Republic Vanuatu Colombia* Qatar* Egypt Vietnam 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 Sudan* Hungary Gabon* Suriname India Gambia, The Tajikistan Jamaica Ghana* Tanzania Jordan Guatemala Timor-Leste* Kiribati Guinea Togo Lebanon Guinea-Bissau Tonga Lesotho Guyana Trinidad and Tobago* Macedonia, FYR Honduras Turkmenistan* Maldives Indonesia* Uganda Marshall Islands Iran* Ukraine Mauritius Iraq* United Arab Emirates* Mexico Kazakhstan* Uruguay Micronesia, Fed. Sts. Kenya Uzbekistan Moldova, Rep. Kosovo Venezuela* Montenegro Kuwait* West Bank and Gaza Nepal Kyrgyz Republic Zambia Pakistan Lao PDR Zimbabwe Palau Liberia Panama *Energy exporters. 1 Emerging market and developing economies (EMDEs) include all those that are not classified as advanced economies. Dependent territories are excluded. 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 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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Africa through Innovation, Better Regulation.” Africa’s Pulse. Volume 17. April. Washington, DC: World Bank. 2015. Global Economic Prospects: World Bank. Having Fiscal Space and Using It. January. Washington, DC: World Bank. ———. 2018f. “Economic Transformation.” Middle East and North Africa Economic Monitor. ———. 2016. Poverty and Shared Prosperity 2016: April issue. Washington, DC: World Bank. Taking on Inequality. Washington DC: World Bank. ———. 2018g. “Jobless Growth?” South Asia Economic Focus. Spring. Washington, DC: World ———. 2017a. Global Economic Prospects: Weak Bank. Investment in Uncertain Times. January. Washington, DC: World Bank. ———. 2018h. China—Systematic Country Diagnostic: Towards a More Inclusive and ———. 2017b. “Migration and Remittances: Sustainable Development. Washington, DC: World Recent Developments and Outlook.” Migration Bank. and Development Brief 28. World Bank, Washington, DC. ———. 2018i. “Economic Transformation.” MENA Economic Monitor. Washington, DC: ———. 2017c. “China Economic Update.” World Bank. December. World Bank, Washington, DC. ———. 2018j. World Development Report ———. 2017d. Fair Progress? Educational Mobility 2018: Learning to Realize Education’s Promise. around the World. Washington DC: World Bank. Washington, DC: World Bank. ———. 2018a. Global Economic Prospects: World Bank, WTO, OECD, IDE-JETRO, and Broad-Based Upturn, but for How Long? January. UIBE. 2017. Global Value Chain Development Washington, DC: World Bank. Report: Measuring and Analyzing the Impact of GVCs on Economic Development. Washington DC: ———. 2018b. “Enhancing Potential.” East Asia World Bank. and Pacific Economic Update. April. Washington, DC: World Bank. WTO (World Trade Organization). 2017. World Trade Report 2017 Trade, Technology and Jobs. ———. 2018c. Fiscal Adjustment in Latin America WTO: Geneva. and the Caribbean: Short-Run Pain, Long-Run Yellen, J. L. 2016. “Macroeconomic Research after Gain? April. Washington, DC: World Bank. the Crisis.” Speech at “The Elusive ‘Great’ ———. 2018d. “Cryptocurrencies and Block- Recovery: Causes and Implications for Future chain: Hype or Transformational Technologies.” Business Cycle Dynamics” 60th Annual Economic Europe and Central Asia Economic Update. May. Conference, Federal Reserve Bank of Boston, Washington, DC: World Bank. Boston, Massachusetts, October 14. SPECIAL FOCUS 1 e Role of Major Emerging Markets in Global Commodity Demand G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 S P EC IAL FO CU S 1 61 The Role of Major Emerging Markets in Global Commodity Demand Rapid growth among the major emerging markets over the past 20 years has boosted global demand for commodities. The seven largest emerging markets (EM7) accounted for almost all the increase in global consumption of metals, and two-thirds of the increase in energy consumption over this period. As these economies mature and shift towards less commodity-intensive activities, their demand for most commodities may plateau. While global energy consumption growth may remain broadly steady, growth in global demand for metals and food could slow by one-third over the next decade. This would dampen global commodity prices. China would likely remain the single largest consumer of many commodities, although consumption growth in other EM7 countries might accelerate. For the two-thirds of emerging market and developing economies that depend on raw materials for government and export revenues, these prospects reinforce the need for economic diversification and the strengthening of policy frameworks. FIGURE SF1.1 Developments in commodity markets Introduction Consumption of commodities has surged over the past 20 years. Growth in Global commodity demand surged in 2000-08, consumption of metals, particularly aluminum, has been much faster than driven by rapid growth in large emerging market GDP and population growth, while energy consumption growth has been slower than GDP growth. and developing economies (EMDEs), especially China. Over this period, real energy prices rose A. Real commodity prices B. Cumulative growth in GDP, 154 percent, metals prices increased 107 percent, population, energy and metals and food prices rose 62 percent (Figure SF1.1). consumption, 1996-2016 Commodity prices peaked in 2011, and fell sharply in 2014, driven by the collapse in the price of crude oil. While commodity prices have since recovered as a result of the cyclical global economic recovery, over the longer term, economic developments in major EMDEs will be a critical factor for the path of demand. This Special Focus explores the role of the seven largest EMDEs, the EM7 (Brazil, China, India, C. Average growth in GDP, D. Share of global commodity Indonesia, Mexico, the Russian Federation, and population, energy and metals consumption consumption, 1996-2016 Turkey). Together, these economies account for about 25 percent of global GDP and 50 percent of the world’s population. In commodity markets, this group about for around 60 percent of the consumption of metals and 40 percent of the consumption of energy and food. The EM7 have also driven much of the increase in industrial materials demand over the past two decades, with China alone accounting for 83 percent of the global increase in metals consumption and 48 Sources: BP Statistical Review, U.S. Department of Agriculture, World Bank, World Bureau of Metals Statistics. percent of the increase in energy consumption. A. Deflated using the manufacturing unit value index from the January 2018 edition of the Global Economic Prospects report. B.-D. Metals aggregate includes aluminum, copper, lead, nickel, tin, and zinc. Energy aggregate includes coal, crude oil, natural gas, nuclear, and renewables. Note: This Special Focus was prepared by John Baffes, Alain C. G7 includes Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. EM7 includes Brazil, China, India, Indonesia, Mexico, Russia, and Turkey. Kabundi, Peter Nagle, and Franziska Ohnsorge. Research assistance D. Grains includes maize, rice, and wheat. was provided by Xinghao Gong. Click here to download data and charts. 62 S P EC IAL FO CU S 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE SF1.2 Vulnerabilities to oil price fluctuations commodity consumption growth is a key factor behind the World Bank’s forecast of modest price The oil price collapse in 2014 severely set back economic activity and worsened fiscal positions in oil-exporting countries. Oil-exporting countries growth over the medium-term (World Bank tend to have an above-average export concentration compared with other 2018a). EMDEs. Activity in oil exporters with lower levels of export concentration recovered more quickly than in those with high export concentrations. The deterioration in fiscal deficits was greater in oil-exporting EMDEs with Slowing commodity demand and modest price higher reliance on oil-related revenues. increases will have important consequences for growth and poverty alleviation among other A. Share of oil-exporting EMDEs with B. Export concentration, 2016 EMDEs. Two-thirds of EMDEs depend increasing/decreasing growth significantly on agriculture and mining and quarrying for government and export revenues, and more than half of the world’s poor live in commodity-exporting EMDEs (World Bank 2016a). This exposes these economies to commodity price shocks (Didier et al. 2016; Baffes et al. 2015). For example, the crude oil price collapse in mid-2014 resulted in a growth slowdown in 70 percent of EMDE oil exporters, with the largest impact in countries with higher C. GDP changes since 2014, by export D. Change in fiscal balance since concentration 2014, by reliance on oil revenue levels of export concentration (Figure SF1.2; World Bank 2017a, 2018b). The fall in prices weakened fiscal positions and led to sharp cuts in government spending. The prospect of weaker commodity prices intensifies the need for reforms to encourage economic diversification in commodity exporters, and to strengthen monetary and fiscal policy frameworks (World Bank 2018a). Sources: International Monetary Fund, United Nations Conference on Trade and Development This Special Focus addresses the following (UNCTAD), World Bank. A. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. Increasing/ questions: decreasing growth are changes of at least 0.1 percentage point from the previous year. Countries with a slower pace of contraction from one year to the next are included in the increasing growth category. • What impact have the EM7 had on B.-D. Figure shows average and interquartile range for the separate categories. Sample includes 31 consumption of major commodities? oil-exporting EMDEs as defined in World Bank 2018a. B.C. Export concentration is measured by a Herfindahl-Hirschmann Index, where values closer to 1 indicate a country’s exports are highly concentrated on a few products. • What is the role of per capita income growth C. “Above average” and “below average” groups are defined by countries above or below the sample average for export concentration in 2014. in rising commodity consumption? D. Change in overall fiscal balance is measured from 2014-17. Above average and below average oil revenue groups are defined by countries above or below the sample average of oil revenues as a share of GDP based on 2014 data. • What are the prospects for global commodity Click here to download data and charts. consumption? EMDEs are likely to remain important drivers of • What policy measures can commodity commodity market developments, although the exporters implement to boost resilience? importance of individual countries will change. While China has been the main driver of growth This Special Focus presents a comprehensive and in industrial materials, its expected growth detailed analysis of the role of major emerging slowdown and shift towards less commodity- markets in global consumption of a wide range of intensive activities such as services could herald commodities. It also presents estimates for the softer commodity consumption in the future. income elasticities of consumption for a range of Global growth is expected to be increasingly energy, metals, and food products. In doing so, it driven by economies that are, at present, much less expands on previous research looking at the commodity intensive than China. Weaker impact of China and India on commodity G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 S P EC IAL FO CU S 1 63 consumption (World Bank 2015b; Pesaran et al. FIGURE SF1.3 EM7 in the global economy 1998, 1999; Stuermer 2017). Finally, it develops a The role of the EM7 in the global economy has grown rapidly and they now set of stylized scenarios of consumption growth account for 25 percent of global GDP, although they remain smaller than prospects based on estimated income elasticities, the G7. Since 2010, EM7 have accounted for more than half of global together with long-term population and GDP growth, 19 percent of global trade, and 18 percent of global FDI flows. Shocks to growth in EM7 countries can have sizeable spillovers at the projections. global level, as well as to other EMDEs. The role of the EM7 in A. Contribution to global growth B. Share of global GDP commodity consumption EM7 in the global economy. The share of the EM7 in the global economy has grown rapidly. Since 2010, the EM7 accounted for more than half of global growth, 19 percent of global trade and 18 percent of global FDI flows (Figure SF1.3). They now account for 25 percent of global GDP (at market exchange rates) and 50 C. Share of global trade, remittances, D. Impact of a 1-percentage-point percent of the global population. and FDI increase in EM7 growth on growth in other EMDEs and globally Given their size and international integration, the EM7 economies can produce significant cross- border spillovers: estimates suggest that a 1 percentage point increase in EM7 growth is associated with a 0.9 percentage point increase in growth in other emerging market and developing economies and a 0.6 percentage point increase in global growth at the end of two years (Huidrom, Sources: United Nations Conference on Trade and Development (UNCTAD), World Bank. Kose, and Ohnsorge 2017; World Bank 2016b). A.-C. EM7 includes Brazil, China, India, Indonesia, Mexico, Russia, and Turkey. G7 includes Canada, Individual EM7 countries can also have global and France, Germany, Italy, Japan, the United Kingdom, and the United States. A.B. Aggregate growth rates and GDP shares calculated using constant 2010 U.S. dollar weights. regional impacts: C. World shares of EM7 and G7 countries of trade (exports and imports of goods and services), remittances (both paid and received), and FDI flows (inward plus outward) over respective periods. D. Results are derived from a Bayesian vector autoregression using the methodology outlined in • China plays a uniquely important role among Huidrom, Kose and Ohnsorge (2017). The model includes, in this order, G7 growth, the U.S. interest rate, J.P. Morgan’s Emerging Market Bond Index (EMBI), EM7 growth, oil prices, and growth in other the EM7. Growth spillovers from China have EMDEs. Other EMDEs consists of 15 countries. Cumulative impulse responses of a 1-percentage point increase in EM7 growth on growth in other EMDEs (blue) and global growth (red), at the 1-year a global reach, while those of other EM7 are and 2-year horizons. Solid bars represent medians, and error bars represent 16-84 percent largely regional (World Bank 2016a). China confidence intervals. Click here to download data and charts. has almost as large a share of global GDP (12 percent) as the other EM7 combined (13 EM7 in commodity markets. The EM7 are percent). important participants in commodity markets, • Brazil and Mexico are the largest economies in both as consumers and producers (Box SF1.1, Latin America and the Caribbean (LAC), Annex Tables SF1.1, and SF1.2).1 The group accounting for 60 percent of regional GDP. accounts for a larger share of global consumption Shocks to growth in Brazil, in particular, have than the G7 in coal, all base metals, precious a statistically significant impact on metals, and most foods (rice, wheat, soybeans; neighboring EMDEs (World Bank 2016b). Figure SF1.4). • Russia accounts for 46 percent of GDP in Europe and Central Asia (ECA). It has 1 “Consumption” includes the use of commodities for final consumption, as well as intermediate inputs into the manufacture of important spillovers to Central Asia and other products, including for export. To the extent that these other Eastern Europe through long-established products are exported, the source country of final demand may not trade, investment, and migration links. coincide with the source country of commodity demand. 64 S P EC IAL FO CU S 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 BOX SF1.1 The role of the EM7 in commodity production After decades of rapid growth, the EM7 have become major commodity producers. China is the world’s single-largest producer of coal, several base metals, and fertilizers, while other EM7 are also key suppliers of several commodities. As a result, policies that affect EM7 commodity production—such as recent trade- and security-related measures—can move global markets. Following several decades of rapid growth in • Brazil is the largest producer of coffee and sugar, commodity production, in part in response to rising the second-largest producer of soybeans, and the domestic demand, the EM7 have become major third-largest producer of bauxite. commodity producers. For many commodities, their production exceeds that of the G7 economies by a • Indonesia is the largest producer of tin and palm wide margin. China in particular is now a major oil and the second largest producer of rubber. commodity producer, although its consumption of • Mexico is the largest producer of silver. most commodities has outpaced its production. China’s production of rice and wheat is almost as This box analyzes the following questions: large as that of all other EM7 combined, while its • What is the role of EM7 in today’s commodity production of most base metals (aluminum, copper, production? lead, zinc, and tin) is a multiple of that of all other EM7 combined. • How has this role evolved over time? Evolution of the EM7’s role over time EM7’s current role in commodity production Role of the EM7 in energy and metals markets. Major producers of many commodities. The EM7 Between 1996 and 2016, the EM7 share of global account for more than half of global production in metals production more than doubled to 60 percent coal, rice, and most base metals (aluminum, copper, and their share of global energy production increased lead, tin, and zinc). In some energy commodities (oil to 39 percent (Figure SF1.1.1). Over this period, the and natural gas), they account for more than one- EM7 accounted for almost 90 percent of the increase fifth of global production. EM7 production dwarfs in metals production and over half of the increase in G7 production in coal, metals, rice and maize, while global energy production. it almost matches G7 production in crude oil, natural gas, and wheat. The EM7 produce about 20 times as Role of China in energy and metals markets. The much rice as G7 economies, almost eight times as growing role of the EM7 in global commodity much aluminum, and three to five times as much production largely reflects expansion in China. copper, coal, and zinc. China’s share of global metals production increased to 48 percent between 1996 and 2016 (driven by Individual EM7 countries. Individual EM7 aluminum), and its share of global energy production countries, especially China, dominate global nearly doubled, to 18 percent in 2016. Growing production of several commodities (Table SF1.2): domestic production dampened the impact of the increase in China’s demand on global commodity • China is the world’s largest producer of coal, markets, with domestic supply accounting for nine- several metals (aluminum, refined copper, lead tenths of the increase in China’s metals consumption. and gold), rice, and fertilizers. China’s consumption of copper and nickel was more • India is the largest producer of cotton and the dependent on imports than consumption of other second-largest producer of fertilizers. metals. While production of metals rose in the other EM7, they lost global market share (from 16 percent • Russia is the second-largest producer of to 12 percent) to China. The EM7 share of energy aluminum and natural gas, and third largest production rose slightly, driven by oil in Brazil and producer of oil. Russia, and coal in India and Indonesia. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 S P EC IAL FO CU S 1 65 BOX SF1.1 The role of the EM7 in commodity production (continued) FIGURE SF1.1.1 EM7 in commodity production The EM7 are some of the largest commodity producers in the world. Their share of global production of commodities has increased rapidly over the past 20 years, and they now account for around 60 percent of metals production, and 40 percent of energy and agricultural production. A. Share of energy production, 2016 B. Share of metals production, 2016 C. Share of commodity production Sources: BP Statistical Review, U.S. Department of Agriculture, World Bank, World Bureau of Metals Statistics. A.B. “AEs” stands for advanced economies. “Other EM7” includes Brazil, Indonesia, Mexico, Russia, and Turkey (and excludes China and India). A. Other AEs contains five countries. Other EMDEs is calculated as the residual of the global total. B. Alum. refers to the metal aluminum. Other AEs contains 10 countries. Other EMDEs contains 25 countries. C. Other EM7 includes Brazil, India, Indonesia, Mexico, Russia, and Turkey. Click here to download data and charts. Role of EM7 in agricultural commodities. In earths (Deininger et al. 2011; Dollar 2016). Again, contrast to energy and metals, the role of the EM7 in China has been the most prominent country, agricultural production has been fairly constant over although Russia has also been a key player, the last two decades, similar to the evolution of their particularly in aluminum. consumption. The EM7 share of the three main grains (maize, rice, and wheat) has stayed broadly flat Conclusion at about 44 percent since 1996. The EM7 have become some of the world’s largest Role of the EM7 in other EMDEs. Some of the commodity producers after a period of rapid EM7 are increasingly involved in production in other production growth. As a result, policies that affect EMDEs through investments, or partnerships and their production or ability to export commodities— subsidiaries. Sub-Saharan Africa has been one of the such as environmental policies to reduce pollution, or main beneficiaries of investment, which has been trade-related measures—can move global commodity prevalent in agriculture and metals, notably rare markets and have spillovers to other regions. China and India are particularly prominent tion). India is also the third-largest consumer of consumers. China is the world’s largest consumer crude oil and natural rubber. of coal, several industrial metals (aluminum, refined copper, and lead) and fertilizers. India is Combined, China’s and India’s use of com- the world’s largest consumer of palm oil, and its modities is a multiple of the remaining five EM7. second-largest consumer of coal (about one- For example, consumption in the two countries is quarter of China’s consumption) and gold (for more than ten times the remaining EM7 in coal, fabrication, about two-thirds of Chinese consump- aluminum, and nickel, and more than six times in 66 S P EC IAL FO CU S 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE SF1.4 EM7 in commodity markets five times as high. In turn, the EM7 account for four times the consumption of other EMDEs in China’s share of global metals and coal consumption rose to around 50 percent in 2016, while the share of the other EM7 is smaller, but still coal and metals, and a similar amount of crude oil significant. Over the last 20 years, the EM7 account for the majority of the and grains. increase in metals consumption, two-thirds of the increase in energy consumption, and more than one-third of the increase in agricultural Evolution of the EM7 share in commodity commodity consumption. While the global commodity intensity of GDP has generally declined, it increased from the mid-2000s for metals, mainly due consumption. Over the past two decades, EM7 to growth in consumption in China, and is now back at its 1965 level. countries have driven the growth in global demand, especially for energy and metals. The A. Share of energy and agricultural B. Share of metals consumption, 2016 EM7 accounted for 92 percent of the increase in consumption, 2016 metals consumption, 67 percent of the increase in energy consumption, and 39 percent of the increase in global food consumption between 1996 and 2016. The increase in demand for metals was such that the ratio of global metals consumption to GDP—which had been declining prior to the 1990s—reversed trend and started to rise rapidly by the turn of the century. This reversal largely reflected developments in China, C. Contribution to average annual D. Contribution to average annual which accounted for 83 percent of the increase in growth in energy consumption growth in metals consumption global consumption between 1996 and 2016, and occurred despite rising global demand for services, which are much less materials-intensive than goods (Tilton 1990, Radetzki et al. 2008). In contrast, the energy intensity of global GDP continued to decline, in line with its prior trend, supported by efficiency improvements as well as the shift of global demand toward services. Drivers of commodities E. EM7 share of commodity F. Change in commodity intensity consumption of consumption growth consumption Several factors have supported the growing role of the EM7 in global commodity markets. This section takes a quantitative look at the role of per capita income growth and slowing population growth, as well as prices, in driving global demand for key commodities. The rest of the Special Focus, considers three energy products (crude oil, Sources: BP Statistical Review, U.S. Department of Agriculture, World Bank, World Bureau of Metals coal, and natural gas) and three metals Statistics. A.-D. “AEs” stands for advanced economies. Other EM7 includes Brazil, Indonesia, Mexico, Russia, (aluminum, copper, and zinc). These make up 85 and Turkey. percent of energy and base metals consumption. It A.C. “Other AEs” contains 18 advanced economies. Other EMDEs contains 32 countries. B.D. “Other AEs” contains 17 advanced economies. Other EMDEs contains 31 countries. also considers four foods (rice, wheat, maize, and F. Commodity intensity calculated as global energy and metals use (in volumes) relative to global GDP (in 2010 U.S. dollars), including and excluding China. soybeans), which collectively cover 70 percent of Click here to download data and charts. arable land.2 copper, zinc, lead, and tin. China and India 2 This Special Focus does not consider iron ore or non-food consume 50 percent more crude oil than the other agricultural commodities. The use of iron ore is more complex than the other metals considered here since it is an input into the five EM7, while their maize and wheat consump- production of steel. Competitive price benchmarks for iron ore are tion is twice as high and their rice consumption only available from 2005. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 S P EC IAL FO CU S 1 67 Per capita incomes and consumption. Per capita FIGURE SF1.5 Consumption of industrial commodities consumption of most commodities generally and income plateaus as per capita income rises, and may even The relationship between per capita income and industrial commodity decline at higher levels of income (crude oil, coal, consumption per capita shows signs of plateauing for most commodities copper, zinc, and rice; Figures SF1.5 and SF1.6). as income rises. A notable exception is natural gas, which likely reflects preferences for cleaner fuels over more polluting fuels such as coal. Natural gas shows less sign of plateauing than other commodities, which may reflect a shift in consumer demand to cleaner fuels as incomes rise. A. Oil consumption per capita vs. GDP B. Natural gas consumption per capita per capita vs. GDP per capita China has seen a much faster increase than other countries in its per capita use of aluminum and coal during 1965-2016, with higher consumption for a given level of per capita income. The increase in coal and aluminum consumption relative to per capita income in China over the period 1965-2016 has also been faster than that of the Republic of Korea, a country which underwent rapid industrialization in the 1960s to C. Coal consumption per capita vs. D. Aluminum consumption per capita 80s. Growth in China’s copper and zinc per capita GDP per capita vs. GDP per capita consumption relative to per capita income has been broadly in line with Korea’s, while that of crude oil has been weaker. Per capita commodity consumption remains significantly higher than other EM7 across all categories except natural gas, due to high per capita consumption in Russia. Income elasticity of consumption. The relationship between consumption and income is captured by the income elasticity of demand: the E. Copper consumption per capita vs. F. Zinc consumption per capita vs. percent increase in commodity consumption GDP per capita GDP per capita associated with a 1 percent increase in income. Elasticities vary significantly between the long and short run, but tend to be larger in the long run as adjustment of consumption to higher incomes takes time.3 The long-run elasticity is more relevant to the multi-decade trends described in this Special Focus. Income elasticities can vary as per capita incomes Sources: BP Statistical Review, World Bank, World Bureau of Metal Statistics. A.-F. GDP per capita in constant 2010 U.S. dollars. Lines show the evolution of income and commod- rise and as economies mature. With rising ity consumption per capita over the period 1965-2016. Each data point represents one country or group for one year. Data for other EM7 are available from 1985-2016 for crude oil, natural gas, and incomes, consumer demand tends to shift towards coal, and 1992-2016 for aluminum, copper, and zinc. less resource-intensive goods and services, which Click here to download data and charts. results in a fall in income elasticities (Tilton 1990; Radetzki et al. 2008). Consumer demand also tends to shift toward cleaner forms of energy such Csereklyei 2016). Food consumption also tends to as natural gas, from more polluting and inefficient switch away from grains to products with higher sources such as firewood and coal (Burke and protein and fat content such as meat (Salois et al. 2012). In addition, demand for industrial mate- 3 Dahl and Roman (2004) find a short-run income elasticity for rials slows as economies mature and infrastructure crude oil of 0.47 and a long-run income elasticity of 0.84. needs are increasingly met. 68 S P EC IAL FO CU S 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE SF1.6 Food consumption and income • Metals. For metals, the elasticity of income The relationship between income per capita and food consumption per depends on the availability of substitutes and capita is more varied than that of income per capita and industrial the range of uses. Because of its wide commodities per capita. For rice, the relationship is heterogenous between applicability, demand for aluminum has been countries, which may reflect domestic preferences or availability. Maize and soybeans exhibit a broadly linear relationship, reflecting their use in found to grow more than proportionately animal feed and biofuels, which have a relatively high income elasticity. with rising output, i.e. with an above-unitary elasticity, while tin and lead, because of A. Rice consumption per capita vs. B. Wheat consumption per capita vs. GDP per capita GDP per capita environmental concerns, grow less than proportionately, i.e., with a below-unitary elasticity (Stuermer 2017). • Food commodities. Elasticities of food products vary widely. Elasticities for grains are generally below unity, with demand driven by population, rather than income, beyond a subsistence income threshold (Engel 1857; Baffes and Etienne 2016; World Bank C. Maize consumption per capita vs. D. Soybean consumption per capita 2015b). Valin et al. (2014) find a median GDP per capita vs. GDP per capita income elasticity of demand of close to 0.1 for rice and wheat. Elasticities are generally higher for foods with higher fat and protein contents, such as animal products, suggesting that consumers switch to these types of foods as incomes rise (Salois, Tiffin, and Balcombe 2012; Valin et al. 2014, World Bank 2015b). The use of maize and soybeans as animal feed Sources: U.S. Department of Agriculture, World Bank. means that their elasticities are driven more by A.-D. GDP per capita in constant 2010 U.S. dollars. Lines show the evolution of income and grains consumption per capita over the period 1965-2016. Due to data restrictions “G7” includes the United demand for meat than demand for direct States, Japan, Canada and all EU28 countries. consumption, resulting in higher elasticities.5 Click here to download data and charts. Estimates of price elasticities. Demand for Estimates of long-run income elasticities. commodities tends to be price inelastic. Within Estimates of long-run income elasticities of energy, price elasticities for crude oil range from demand vary by commodity, between countries, zero to -0.4 (Huntington, Barrios, and Arora and over time, as incomes rise (Annex Table 2017; Dahl and Roman 2004). For metals, SF1.3). Stuermer (2017) finds the largest price elasticity • Energy. For energy, most studies have found for aluminum (-0.7), but smaller elasticities for an income elasticity of demand of less than copper (-0.4), tin, and zinc (less than or equal unity (Burke and Csereklyei 2016; Csereklyei to -0.2). As with income elasticities, price and Stern 2015; Jakob et al. 2011). That elasticities of demand tend to be larger in the long- implies per capita energy consumption grows run than the short-run, as consumers have more more slowly than per capita real GDP, consistent with a declining energy intensity of demand. Several papers find that income GDP rises. is finding likely reflects their country sample which elasticities of demand fall as income rises includes a number of low income countries whose long-run income (Dahl 2012; Foquet 2014; Jakob et al. 2012).4 elasticity of demand tends to be very low, as a result of their reliance on non-commercial fuels (i.e., biomass). Elasticities in low income countries may also be kept artificially low by policies such as energy subsidies (Joyeux and Ripple 2011). 4 An exception is Burke and Csereklyei (2016), who find the 5 For example, 70 percent of soybeans in the United States are used long-run income elasticity of demand increases as per capita real for animal feed (USDA 2015). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 S P EC IAL FO CU S 1 69 time to respond to changes in prices by finding at the top quartile of 2017 per capita incomes. substitutes, or efficiency gains.6 Aluminum and copper have the highest long- run income elasticities (0.8 and 0.7, Estimation of long-run income elasticities. The respectively; Figure SF1.7), while zinc is remainder of this section reports estimates for the considerably lower at 0.3.9 long-run income elasticities of the energy, metals, and agricultural commodities shown in Figures • Energy. Long-run income elasticities for crude SF1.5 and SF1.6. oil and coal also decline as per capita incomes rise. At the median per capita income in 2017, An autoregressive distributed lag model is used to the income elasticity of crude oil is 0.5, while estimate the logarithm of per capita commodity that of coal is 0.6.10 The elasticity for coal, consumption (in physical units) as a function of however, drops rapidly with rising per capita per capita real GDP in U.S. dollars (Annex incomes as users switch from biomass, such as SF1.1).7 The sample covers up to 33 countries (21 wood, to more efficient coal at low incomes, advanced economies and 12 EMDEs) for energy and subsequently from coal toward cleaner and metals, with annual data from 1965-2016 energy sources at high incomes. At the highest (Annex Table SF1.4). A different dataset, with quartile of per capita incomes in 2017, the predominantly EMDE representation and fewer estimated income elasticity of coal is negative. advanced economies, is available for food, with 55 For natural gas, in contrast, a significant non- countries for rice, 35 countries for wheat, 47 linear relationship between income and countries for maize, and 32 countries for soybeans. consumption was not found, but rather a A quadratic term for per capita real GDP is linear relationship was noted, with an included to account for non-linearities in the elasticitiy of 0.4. Natural gas’ use as fuel for relationship between per capita commodity electricity generation has grown rapidly, so consumption and per capita income (Meier, few countries have reached the “plateau stage” Jamasb, and Orea 2013). The regression controls within the sample. for real commodity prices.8 • Food commodities. The estimated elasticity of Estimation results. The estimated long-run rice consumption declines sharply as incomes elasticities differ widely across commodities and rise, turning negative at the first income across income levels (Table SF1.1; Figure SF1.7). quartile in 2017. For wheat, the decline in As expected, for most commodities long-run elasticities as incomes rise is less pronounced, elasticities decline with rising per capita income with the elasticity remaining positive, albeit (indicated by a negative coefficient on squared per low, for all income levels.11 In contrast, for capita income in Table SF1.1 and Annex Table maize and soybeans the relationship between SF1.5). In general, long-run income elasticities for income and consumption appears to be linear, metals tend to be above those of energy and food. and elasticities are much higher than rice and • Metals. Elasticities of metals decline with rising incomes, but remain elevated (0.4) even 9 e estimates for the metals commodities are weaker than Stuermer (2017), which found an elasticity of 1.5 for aluminum, 0.9 6For example, Dahl and Roman (2004) find a short-run price for copper, and 0.7 for zinc. e differences likely arise from the use elasticity of crude oil of -0.11, and a long-run price elasticity of -0.43. of manufacturing output, rather than GDP, as the explanatory 7 is methodology allows for cross-country heterogeneity in short- variable. Using manufacturing output controls for changes in the term coefficient estimates but imposes homogeneity in long-term composition of growth in the economy over time, which is caused by coefficient estimates. e Hausman test (Annex Table SF1.5) suggests the share of manufacturing output declining in favor of services over that this assumption is appropriate. time. 8 To account for potential endogeneity, a Generalized Methods of 10 Huntington, Barrios, and Arora (2017) also find an elasticity of Moments (GMM) model is also estimated. e results are robust crude oil of 0.5. (Annex Table SF1.6). ey are also qualitatively robust to including a 11 e elasticity at median incomes in 2017 for wheat was a little time trend to account for potential long-term productivity growth higher, and for rice a little lower, than found by Vanin et al. (2014). (Annex Table SF1.7). 70 S P EC IAL FO CU S 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 TABLE SF1.1 Estimation results generated by the model with actual growth rates over 2010-16 (these years are at the end of the Log per Squared log Income elasticity Commodity capita per capita at 2017 median sample period). The regressions capture well EM7 income income income consumption growth for metals (6.9 percent) and Aluminum 3.50 -0.15 0.8 energy (3.3 percent) during these years. That said, across metals, actual consumption growth of zinc Zinc 2.60 -0.12 0.3 somewhat exceeds the model estimates, while that Copper 2.95 -0.12 0.7 of aluminum falls short (Figure SF1.7). Across Crude oil 2.31 -0.10 0.5 energy, actual growth of crude oil and natural gas was somewhat stronger than the fitted values and Coal 6.04 -0.31 0.6 that of coal much less. The over-prediction of coal Natural gas 1 0.38 ... 0.4 and underprediction of natural gas may reflect Rice 1.39 -0.09 -0.3 active policy measures to rein in pollution in China over this period. The model somewhat Wheat 1.05 -0.04 0.3 over-estimates growth of rice and wheat Maize1 0.85 … 0.8 consumption, and slightly under-estimates growth Soybeans1 0.84 ... 0.8 of maize and soybeans consumption. Note: Results shown are a sub-set of the estimations obtained using the pooled mean group model (see Annex SF1.1). Values for log and log squared The role of structural growth differences. One per capita income are the coefficients for these variables as estimated by the model. Income elasticities are calculated using these coefficients, together with source of a nonlinear relationship between GDP median global per capita income in 2017. Annex Table SF1.5 displays the full set of results from the estimation, including both short-run and long-run coefficients. and commodity use is the changing composition 1 indicates linear regression results for commodities which do not appear to of output. The sectoral components of GDP differ have a non-linear relationship with income. in their use of energy, metals, and agricultural inputs. The GTAP (Global Trade Analysis Project) database allows the intensity of use of wheat at 0.8.12 These commodities are heavily agricultural goods, energy, and metals by different used as animal feed (and also biofuels), so sectors of the economy to be calculated (Figure their use is closely linked to demand for meat SF1.7).14 which tends to have a higher income elasticity of demand than grains. • Metals intensity. The metals intensity of global manufacturing was about twenty times that of For most commodities, the estimated long-run global services in 2011. Similarly, the metals income elasticities for the EM7 countries are intensity of global investment and exports was much higher than for the G7. While the focus about seven times that of household here is on long-run trends, it is worth noting that consumption. consumption adjusts quite slowly: the regressions imply adjustment periods to the long-run • Energy. Differences in energy intensities equilibrium of three to eight years for grains, four between sectors are smaller, but still to seven years for metals, and six to fourteen years pronounced; the energy intensity of for energy.13 manufacturing is two-and-a half times that of services. The energy intensity of global EM7 consumption growth in 2010-16. This investment is much lower than that for section compares in-sample fitted growth rates household consumption and exports. 12 Figure SF1.6 suggests that the relationship for soybeans and maize is linear. e initial regressions for these foods generated significant coefficients for the quadratic term but not for the linear 14 e GTAP Data Base contains complete bilateral trade in goods term. e regression cannot distinguish well between a linear and a and services, intermediate inputs among sectors, as well as taxes and quadratic relationship, so the quadratic term was dropped. subsidies imposed by governments for 140 regions and for 57 sectors. 13 In line with the literature, the model also generates modest price e latest reference year is 2011. See Aguiar, Narayanan, and elasticities, but the emphasis here is on income elasticities. McDougall (2016). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 S P EC IAL FO CU S 1 71 • Agricultural commodities. Agricultural intensi- FIGURE SF1.7 Estimated commodity consumption ties tend to be slightly lower than energy and growth metals intensities across all sectors, with the Income elasticities of consumption decline with rising per capita incomes, but they differ widely across commodities and across income levels. highest intensity in household consumption. Estimated elasticities for EM7 countries were considerably higher than for G7 countries throughout the sample. For 2010-16, the regressions capture This suggests that countries with manufacturing- well EM7 commodities consumption growth at the aggregate level, but driven growth may experience a greater increase in their performance differs for individual metals, energy, and foods. Greater reliance on industrial production instead of services may account for faster energy and metals consumption for a given metals consumption growth in China than in other EM7. increase in output than economies driven more by services. Likewise, countries with investment- A. Income elasticities at 2017 income B. Income elasticities in EM7 and G7 levels countries, 2010-16 driven or exports-driven growth will see a greater increase in metals consumption than economies driven by household consumption. Different engines of growth may have accounted for some of the under-estimation of metals consumption growth in China, and over- estimation in other EM7. For example, investment accounted for half of cumulative growth during 2010-16 in China, compared to C. EM7 consumption growth, 2010-16 D. Commodity consumption growth, one-quarter of cumulative growth in India, the by country and group, 2010-16 second-largest EM7 economy, despite both countries growing at similar average rates (7.5-8 percent) during this period. In addition, manufacturing has been a more important driver of growth in China, growing twice as fast as in India on average over the past 10 years. This also helps explain the higher metals intensity of GDP in China than in its peers (World Bank 2015b). E. Sectoral use of energy, metals, and F. Intensity of metals and energy The role of policies. Policies that favor energy- agricultural inputs consumption intensive and industrial sectors can significantly change the commodity intensity of demand. In the 1980s, in Russia and the former Soviet Union countries, the energy intensity of output (measured as energy use relative to GDP per capita) was much higher than in their free-market peers, particularly for energy. Countries that industrialized under central planning tended to exhibit high energy intensity because resource Sources: Aguiar et al. (2016), BP Statistical Review, U.S. Department of Agriculture, World Bank, World Bureau of Metals Statistics. allocation was not determined by market A.B. Income elasticity is defined as percent change in commodity consumption for each 1 percent increase in commodity prices. Estimated based on regression coefficients in Annex Table SF1.5. mechanisms such as price or competition (Urge- A. Blue bars indicate elasticities at median real global per capita income in 2017; vertical bars indicate elasticities at upper and lower income quartiles. Gas, maize and soybeans have a linear Vorsatz et al. 2006, Ruhl et al. 2012). Following elasticity and therefore do not have vertical bars. B. Elasticities at median incomes over 2010-16, Vertical bars are 95 percent confidence intervals. the collapse of the Soviet Union, and coinciding C.D. Estimated in-sample fitted values based on regression coefficients in Annex Table 1.5. with rapid per capita income growth, the energy E. Use of energy, metals, and agricultural inputs by different sectors of the economy. Calculations show the gross value added of an input (e.g., energy) used by a sector (e.g., manufacturing) as a intensity of GDP in these countries fell steadily, share of total gross value added of that sector. Values capture both direct and indirect use. Of the 57 sectors included in the Global Trade Analysis Project (GTAP) database, manufacturing contains although it remains elevated. China has a similar sectors 19 to 42 and services contains sectors 47 to 57. For the inputs, agriculture includes sectors 1 to 12, energy includes sectors 15 to 17, 32, 43, and 44, and metals includes sectors 18, 35, and 36. profile, with extremely high energy intensity in the The inclusion of sector 32, petroleum and coke, in manufacturing significantly increases its energy use; excluding this sector would reduce the energy use of manufacturing from 16 to 8.7. 1980s, but this has steadily declined as per capita F. Toe stands for tons of oil equivalent. Intensity of consumption calculated as consumption of energy or metals (in volumes) relative to output in constant 2010 U.S. dollars. Other EM7 includes Brazil, incomes rose. India, Indonesia, Mexico, Russia, and Turkey. Click here to download data and charts. 72 S P EC IAL FO CU S 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 Prospects for commodities The assumed scenario for these fundamental drivers would mean slower global and EM7 demand demand growth in 2018-27 relative to the post- global-crisis period 2010-16 for virtually all A hypothetical scenario is developed for the period commodities considered here. The slowdowns 2018-27, and compared to the estimated values would be particularly pronounced for metals, over 2010-16 as calculated by the model. This especially in China. Even so, the country would enables an assessment of the impact of changes in remain the single largest consumer of energy and population and income growth, shifts between metals (Figure SF1.8). While per capita incomes countries with different commodity intensities of in some of the other EMDEs would grow faster demand, and within-country shifts as their than in China, their current levels of commodity incomes rise. The scenario is calculated separately consumption are so much lower that their for all countries in the estimation sample, and contribution to aggregate consumption growth then summed to produce a global estimate. The would remain relatively modest. sample includes advanced economies, the EM7, and other EMDEs. Data limitations exclude many • Metals consumption. Global metals consump- smaller emerging markets and frontier markets, tion growth would slow by 1.4 percentage with sub-Saharan Africa (SSA) and the Middle points to just under 3 percent on average East and North Africa (MENA) particularly during 2018-27. Because of still-high EM7 under-represented in energy and metals. income elasticities and robust growth, the slowdown in EM7 consumption would be Baseline scenario. The baseline assumptions for milder, by 0.4 percentage point to 4.9 2018-27 use existing estimates: percent. Growth in aluminum and copper would remain high, reflecting their high • UN projections for population growth. Slowing income elasticity of demand, while growth in population growth is expected to dampen zinc would remain modest, reflecting a near- commodity consumption growth. The United zero G7 income elasticity. Nations (2017) project that global population growth will slow slightly from 1.2 percent on • Energy consumption. Energy consumption average during 2010-16, to a 1 percent on growth would remain broadly steady at 2.3 average during 2018-27 (Figure SF1.8). The percent globally but would slow by 0.4 slowdown is most pronounced in the EM7. percentage point to 3.1 percent in EM7 economies.15 Rapid output growth in other • Real output growth matches potential growth as EMDEs would shift the composition of global estimated in World Bank (2018a). Real per energy consumption toward more energy- capita income growth is expected to be intensive economies. Global crude oil broadly constant on average but slow by 0.2 consumption growth would remain broadly percentage point in the EM7 countries. steady. • Income elasticities are as in Annex Table SF1.5. • Food commodities. Consumption growth of the With continued per capita income growth, foodstuffs included here would slow by 1 the elasticities of consumption of the EM7 percentage point to 1.8 percent over 2018- economies are expected to decline (except for 27.16 Rice and wheat would drive the natural gas, maize and soybeans), by as much slowdown because of their low-income as one-third for coal. • Real commodity prices are assumed to be constant at current levels. This assumption 15 BP (2018) expects energy growth to remain broadly steady between 2010-16 and 2017-25, while EIA (2017) expects growth to mitigates concerns about potential slow over this period. endogeneity arising from using World Bank 16 OECD (2017) expect a slowing in growth of consumption of price forecasts. cereals of about 1 percentage point. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 S P EC IAL FO CU S 1 73 elasticities and slowing population growth. In FIGURE SF1.8 Commodity consumption scenarios contrast, consumption growth of maize and The baseline scenario suggests that fundamental drivers would slow global soybeans would strengthen slightly. and EM7 commodity consumption growth between 2010-16 and 2018-27. The deepest slowdowns would occur in metals consumption. Despite Alternative growth paths. The baseline scenario China’s expected output and commodity consumption growth slowdown, it would remain the largest consumer of energy and metal commodities described in the previous section depends critically among the EM7. on per capita income growth. The implications of upside and downside risks to the income growth A. Population growth B. Per capita output growth path are discussed in two alternative model-based scenarios. Finally, policy measures—including those unrelated to commodity demand—could also lead to different paths of commodity consumption (Box SF1.2). The first is a faster-growth scenario. Kilic Celik, Kose, and Ohnsorge (forthcoming) estimate the impact on potential growth if countries implemented reforms to fill investment gaps, expand labor force participation by women and C. Income elasticities of EM7 D. Scenario forecasts of global commodity consumption commodity demand growth older workers, and improve life expectancy and educational outcomes. Each country is assumed to repeat its best ten-year improvement on record in each of these dimensions over the next decade. For EMDEs, this would imply raising investment by almost 3 percent of GDP, life expectancy by 2.5 years, enrolment and secondary school completion rates by 5-7 percentage points, and female labor force participation by 10 percentage points. Such a concerted reform push could lift average annual E. EM7 commodity demand in F. Scenario forecasts of EM7 global potential growth by 0.7 percentage point physical units commodity demand growth for the next ten years. The second is a slower-growth scenario. This could, for example, be triggered by a financial crisis that is followed by a deep recession. Deep recessions leave lasting damage to output, as a result of hysteresis effects. The latter include the loss of human capital (job skills) associated with long-term unemployment, and the loss of embodied technical progress implied by lower Sources: BP Statistical Review, United Nations, U.S. Department of Agriculture, World Bank, World Bureau of Metals Statistics. investment. World Bank (2018b) estimates that Note: All growth rates are averaged over the period. A. 2018-27 are based on UN Population Projections (2017). deep recessions have, on average, reduced potential B. 2018-27 data are forecasts of per capita potential growth based on World Bank (2018b) and UN growth in the following five years by 1 percentage Population Projections (2017). C. Predicted values based on regression coefficients in Annex Table SF1.5. Vertical lines are 95 points. percent confidence intervals. D.-F. To ensure comparability, 2010-16 is model-predicted commodity demand growth. The faster growth “reform” scenario assumes 0.7 percentage point higher output growth through 2018-27, while These alternative growth paths make a significant the slower growth “recession” scenario assumes 1 percentage point lower output growth for the first five years of 2018-27, based on World Bank (2018b). difference to the projections, especially for the E. Toe stands for tonnes of oil equivalent. Projected average annual commodity demand in billion tons of oil equivalent for energy and in millions of tonnes for metals. most income-elastic products (Figure SF1.8). Click here to download data and charts. • Faster-growth scenario. In a faster-growth scenario, global metals consumption growth 74 S P EC IAL FO CU S 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 BOX SF1.2 Commodity consumption: Implications of government policies Government policies—with respect to infrastructure investment, pollution control, energy use, and international trade—can have a major impact on commodity consumption. Infrastructure investment. Significant infrastructure 2015 Paris Agreement, could accelerate the use of investment gaps exist at the global level, and closing policy tools, such as carbon pricing, which favor the these would provide both direct and indirect boosts use of renewable energy and discourage the use of to commodities consumption (World Bank 2016b, highly polluting fossil fuels (World Bank 2018a). 2017a). The difference between expected investment During the past five years, global consumption of needs and current actual investment in EMDEs is natural gas has increased nearly 10 percent while coal estimated at $1–$2 trillion per year (1.25 to 2.5 consumption has declined 2 percent. percent of global GDP).1 By sector, the investment requirements are largest in electricity generation, Subsidies. Although aimed at protecting consumers, followed by construction and transportation. Fiscal the use of energy subsidies can encourage energy and structural policies such as increased public consumption, discourage investment in energy investment, structural governance reforms, and efficiency and renewables, and impose large fiscal improved access to finance could boost investment costs. The use of energy subsidies globally was equal directly and through the crowding-in of comple- to around 6.5 percent of global GDP in 2013. They mentary private sector investment (World Bank are particularly prevalent in EMDEs (13-18 percent 2017a). of GDP; IMF 2015; Rentschler 2018). The use of energy subsidies is high in the Middle East and China’s Belt and Road Initiative (BRI) aims to North Africa (MENA), which accounts for half of all promote economic development and integration energy subsidies (World Bank 2014). The energy across countries in Asia, Europe and Africa (State price collapse in 2014 provided impetus for subsidy Council 2015). Outward foreign direct investment reform, with more than half of commodity-exporting (FDI) from China increased substantially after the EMDEs doing so during 2014-2016 (World Bank launch of the BRI from $28.6 billion in 2003 to 2018b). Additional subsidy reforms could further $183 billion in 2016, with most of the increase going reduce energy consumption. to countries on the BRI. The majority of FDI deals have been in manufacturing, while the construction Biofuels. The diversion of food commodities to the and infrastructure sector has seen more rapid growth production of biofuels will also affect demand for (Figure SF1.2.1). food commodities. Biofuels currently account for just over 1.5mb/d, or 1.6 percent, of global liquid energy Because of the high metal-intensity of investment, consumption. Most biofuel production is not such policies could boost metals consumption. In profitable at current energy and agricultural prices addition, investment in electricity generation in but is supported through various forms of mandates EMDEs could result in energy demand shifting away and trade measures (De Gorter, Drabik, and Just from the decentralized use of biomass, toward 2015). Biofuels come principally in the form of centralized generation of electricity from fossil fuels maize-based ethanol from the United States, sugar- and renewable sources of energy. based ethanol from Brazil, and plant oil-based biodiesel from Europe. Other smaller producers Pollution control. Environmental concerns are also include China, Indonesia, and Thailand. The policy- likely to shape consumption patterns in commodity driven diversion of food commodities to biofuels was markets. For example, in energy markets, pollution motivated by energy security concerns and, or climate-change considerations, as embodied by the especially, environmental benefits (Hill et al. 2006). However, interest has waned recently and biofuel 1 Bhattacharya et al. (2012); McKinsey Global Institute (2013). production growth has slowed amid evidence of the G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 S P EC IAL FO CU S 1 75 BOX SF1.2 Commodity consumption: Implications of government policies (continued) FIGURE SF1.2.1 Developments in commodity markets A number of policy actions could have unintended spillovers to commodity consumption. A renewed infrastructure push, for example to fill infrastructure investment gaps or in the context of China’s “Belt and Road Initiative” could raise manufacturing and construction activity and, hence, metal demand. Environmental policies to control pollution could reduce and shift energy demand towards cleaner fuels, including natural gas and renewables. Biofuel production is likely to slow, however, as policy makers gradually acknowledge the limited environmental benefits of biofuel policies. A. Change in sectoral distribution of B. CO2 emissions from different fuels C. Global biofuels production outward FDI deals before and after the BRI Sources: BP Statistical Review, Energy Information Administration, International Energy Agency, Organisation for Economic Co-operation and Development, Ministry of Commerce People’s Republic of China, World Bank. A. BRI stands for Belt and Road Initiative. Change in the average annual number of outward foreign direct investment (FDI) deals received by EMDEs before and after 2013. The sample covers EMDEs. B. CO2 emissions in kilograms (kg) per million British thermal units (mmbtu) of fuel consumed. C. Shaded area represents OECD (2017) projections. Units are million barrels of oil equivalent per day. Click here to download data and charts. limited environmental and energy independence Trade policies and sanctions. Trade-restricting benefits of biofuel policies (Searchinger et al. measures could have direct and indirect effects on 2008; German et al. 2010). For example, biofuel commodity consumption and prices. A broad-based production growth exceeded 20 percent per annum increase in tariffs would have major adverse during 2001-10 but slipped to about 4 percent consequences for global trade and activity (Ossa during the past five years. Current projections by the 2014; Nicita, Olarreaga, and Silva, forthcoming). An Organisation for Economic Cooperation and escalation of tariffs up to legally allowed bound rates Development and the Food and Agriculture could translate into a decline in global trade flows Organization of the United Nations (OECD/FAO) amounting to 9 percent (Kutlina-Dimitorva and point to even lower biofuels production growth in Lakatos 2017). Such a fall in trade volumes would the next decade (Figure SF1.2.1). have a direct negative impact on oil consumption, given its use in transport fuel. A 5 percent drop in Food wastage. Although difficult to measure, by global trade could reduce international fuel oil some accounts food waste may account for a quarter bunker demand by at least 180 kb/d, or roughly 5 of global food production, amounting to roughly percent (IEA 2018). A reduction in global activity $680 billion in high income countries and $310 arising from trade-restricting measures would also billion in developing countries, according to the reduce commodity demand. Finally, the imposition Food and Agriculture Organization of the United of sanctions could affect prices if they disrupt Nations (FAO 2018). Policy interventions and operations by major commodity-producing nations technological improvements could significantly or companies (Box SF1.1). reduce food waste, which in turn would reduce demand for food commodities (Bellemare et al 2017; Delgado, Schuster, and Torero, 2017). 76 S P EC IAL FO CU S 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 could be one-third higher than under the Pande 2017; International Energy Agency 2017). baseline scenario and remain virtually at its The uptake of more climate-friendly technologies post-crisis rates. Global and EM7 energy will also lead to shifts in demand for the metals consumption growth might also be 0.6-0.7 and minerals that are required to manufacture new percentage point stronger than under the technologies. Countries that are key suppliers of baseline scenario and could rise above post- these elements could benefit from these crisis rates. Aggregate food consumption developments. Low-carbon energy systems are would be little changed from baseline, but likely to be more metal intensive than high-carbon there would be further substitution away from systems, although the use of commodities varies rice and wheat (with low income elasticities) greatly between different low-carbon technologies toward maize and soybeans (with higher (World Bank 2017b). elasticities). Policy implications • Slower-growth scenario. A slower-growth scenario would set back global metals The baseline scenario outlined above suggests consumption growth, relative to baseline, by consumption growth of metals and staple foods one-third (1 percentage point) and global will likely slow over the next decade, and that of energy consumption growth by almost one- energy will remain well below pre-crisis rates. half (0.9 percentage point). Food consump- More modest commodity consumption growth, tion growth would, again, weaken only all else equal, would dampen pressures on prices. marginally with offsetting changes to rice and wheat compared to maize and soybeans. Many EMDEs, especially smaller ones, are heavily exposed to commodity markets. In four-fifths of The scenarios described above are stylized, and EMDEs, commodities account for 30 percent of only show the impact of the baseline projections goods exports or more, or an individual for income and population changes in the sample commodity accounts for 20 percent of goods of countries. Prospects may differ considerably exports. On average, export concentrations are from these projections, depending on trajectories largest among crude oil exporters. Oil exporters for variables not included in the model. For also tend to be heavily reliant on fiscal revenues example, population growth in SSA is expected to from the sector. For example, prior to the oil price be much higher than for advanced economies and collapse in 2014, hydrocarbon revenues accounted the EM7, although it is not captured in this for more than half of fiscal revenues in eight scenario. As such, these estimates could be biased EMDEs, including Nigeria and Saudi Arabia, and downwards. The estimates also do not allow for more than one-quarter of revenues in four the endogeneity of prices. Endogenous relative EMDEs, including Mexico and Russia (World price changes would moderate the changes, in Bank 2017a). either direction, from the baseline paths. The prospect of persistently lower demand Despite implying a slowdown in growth, all the heightens the need for commodity exporters to model-based projections show that consumption diversify. Over the medium term, diversification of energy and other commodities expands away from resource-based production would help significantly from current levels. This, however, raise GDP per capita and improve growth would in itself likely stimulate innovation and the prospects for commodity-exporting EMDEs. adoption of new technologies, including efficiency Cross-country studies underscore that greater improvements that further reduce consumption diversification of exports and government revenues (Arezki and Matsumoto 2017). An accelerated bolsters long-term growth prospects and resilience uptake of more fuel-efficient technologies (e.g., to external shocks (Lederman and Maloney 2007; electric vehicles and natural gas-powered com- Hesse 2008; IMF 2016a). The successful mercial trucks) could also reduce crude oil diversification experience of some energy consumption prospects (Cherif, Hasanov, and producers (e.g., Malaysia, Mexico) highlights the G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 S P EC IAL FO CU S 1 77 benefits of both vertical diversification (e.g., in would result in a shift to foods such as meat, crude oil, natural gas, and petrochemical sectors) which require growing inputs of maize and as well as horizontal diversification. These involve soybeans. Slowing GDP growth and industrial reforms to improve the business environment, rebalancing notwithstanding, China will remain education, and skills acquisition (Callen et al. the single largest source of EM7 commodity 2014). consumption growth. In a majority of commodity-exporting EMDEs Advances in global technology, shifts in consumer fiscal reforms are necessary to establish a firmer preferences, and policies to encourage cleaner fuels foundation for long-term fiscal sustainability could trigger much steeper slowdowns in global (Mendes and Pennings 2017). The establishment use of some commodities than current trends of well-managed strategic investment funds with indicate. A rapid shift away from investment- resource revenues can help in this regard (e.g. driven and industrial production-driven growth in Chile, Norway). These funds can create opportu- China could sharply lower its demand for metals. nities for attracting private investment, deepening Similarly, a tightening of environmental regula- domestic capital markets, and building the tions could reduce coal use more than in the capacity of governments to act as professional baseline. Improved technologies (such as electric long-term investors (Halland et al. 2016). cars), lower costs of alternative fuels, and policies Reforms to fiscal and monetary policy frameworks favoring cleaner fuels, could reduce the use of could also help reduce procyclicality and foster petroleum in transportation. However, they could resilience to commodity price fluctuations also increase demand for raw materials used in the (Frankel 2017). However, such policies are in- production of these technologies, such as rare sufficient to mitigate the challenge of weaker earths. commodity consumption discussed here. Demand for most commodities may decelerate Conclusion over the next decade as economies mature, infrastructure needs are met, and GDP and Based on current trends, metals and foods population growth slows. Much of future GDP consumption growth could slow by one-third over growth will come in the services sector, which is the next decade. Energy consumption growth not materials-intensive, while environmental and would remain broadly constant at post-crisis rates, resource concerns and new technologies will and shift towards faster-growing EMDEs. reduce demand for traditional raw materials, as Aluminum and copper consumption would well as encouraging substitutions between them. continue to grow steadily. Rice and wheat These trends have already become evident in consumption growth is expected to slow as advanced economies, and a similar path could be population growth slows, while rising incomes expected for the major EMDEs. * * * * *   n p  k 1 ij , n , *   q n  l 1ij , n , n  l 1ij , n , *   q cij ,t   p k 1  ij ,k cij ,t  k   q l 0 ij ,l yij ,t l  q l 0 ij ,l y 2 ij ,t l  r m 0 γ ij ,m pij ,t  m   ij  ij ,t γ*   r n  m 1 γ ij , n Ѳi,1 Ѳi,2 cij ,t Ѳ i  (1   k p 1 ij , k ) yij , t pij , t  ij ij ,t 2 yij ,t , ct t   1  2 2 yt yt cij ,t  i (ci ,t 1  i ,1 yt  i ,2 yt2  i ,3 pt ) 1 * q 1 *  kp1  ij , k cij ,t  k   l  0 ij ,l yij ,t l lq0 ij ,l yij 1 * 2 r 1 * ,t l   m  0 γ ij , m pij ,t  m  ij  ij ,t Ѳi,1 Ѳi,2 Ѳi,3 i ,1  lq0 ij ,l / (1   k p 1 ij , k ), i ,2  lq 0ij , l / (1   k p 1 ij , k ) i ,3   m r  0 γ ij , m / (1   k 1 ij , k ) p I C( i ,WORLD ,t )   c ˆ i , j ,t  popi ,t i 1 ˆi , j .t c popi , t 80 S P EC IAL FO CU S 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 ANNEX TABLE SF1.1.A Top 10 commodity consumers, 2016 Aluminum Copper Zinc Oil Natural Gas 1 China 54.4 China 49.7 China 48.2 United States 20.3 United States 22.0 2 United States 8.8 United States 7.7 United States 5.7 China 12.8 Russia 11.0 3 Germany 3.8 Germany 5.3 India 4.8 India 4.6 China 5.9 4 Japan 3.0 Japan 4.2 Korea, Rep. 4.5 Japan 4.2 Iran 5.7 5 Korea, Rep. 2.5 Korea, Rep. 3.2 Germany 3.5 Saudi Arabia 4.0 Japan 3.1 6 India 2.4 Italy 2.5 Japan 3.4 Russia 3.3 Saudi Arabia 3.1 7 Turkey 1.6 Brazil 2.2 Belgium 2.6 Brazil 3.1 Canada 2.8 8 Italy 1.6 Taiwan, China 2.2 Spain 1.9 Korea, Rep. 2.9 Mexico 2.5 United Arab 9 1.4 India 2.1 Italy 1.9 Germany 2.5 Germany 2.3 Emirates 10 Brazil 1.3 Turkey 2.0 Turkey 1.7 Canada 2.4 United Kingdom 2.2 Others 19.2 Others 18.9 Others 21.8 Others 39.8 Others 39.4 ANNEX TABLE SF1.1.B Top 10 commodity consumers, 2016 Coal Maize Rice Wheat 1 China 50.6 United States 30.0 China 29.8 European Union 17.6 2 India 11.0 China 22.7 India 20.3 China 15.7 3 United States 9.6 European Union 7.1 Indonesia 7.8 India 13.1 4 Japan 3.2 Brazil 5.9 Bangladesh 7.3 Russia 6.1 5 Russia 2.3 Mexico 4.0 Vietnam 4.6 United States 4.0 6 South Africa 2.3 India 2.5 Philippines 2.7 Pakistan 3.4 7 Korea, Rep. 2.2 Egypt 1.5 Thailand 2.3 Egypt 2.7 8 Germany 2.0 Japan 1.4 Myanmar 2.1 Turkey 2.4 9 Indonesia 1.7 Canada 1.3 Japan 1.8 Iran 2.4 10 Poland 1.3 Vietnam 1.3 Brazil 1.7 Indonesia 1.6 Others 13.8 Others 22.4 Others 19.6 Others 31.1 Sources: BP Statistical Review, Food and Agriculture Organization, U.S. Department of Agriculture, World Bureau of Metal Statistics. Notes: Numbers indicate shares of global consumption. Refined consumption for aluminum, copper, and zinc. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 S P EC IAL FO CU S 1 81 ANNEX TABLE SF1.2.A Top 10 commodity producers, 2016 Aluminum Copper Zinc Oil Natural Gas 1 China 55.0 China 36.2 China 45.8 United States 13.4 United States 21.1 2 Russia 6.1 Chile 11.2 Korea, Rep. 7.4 Saudi Arabia 13.4 Russia 16.3 3 Canada 5.5 Japan 6.7 Canada 5.1 Russia 12.2 Iran 5.7 United Arab 4 4.3 United States 5.2 India 4.5 Iran 5.0 Qatar 5.1 Emirates 5 India 3.3 Russia 3.7 Japan 3.9 Iraq 4.8 Canada 4.3 6 Australia 2.8 India 3.3 Spain 3.7 Canada 4.8 China 3.9 United Arab 7 Norway 2.3 Congo, Dem. Rep. 3.0 Peru 2.5 4.4 Norway 3.3 Emirates 8 Bahrain 1.7 Germany 2.9 Kazakhstan 2.4 China 4.3 Saudi Arabia 3.1 9 Saudi Arabia 1.5 Korea, Rep. 2.6 Mexico 2.3 Kuwait 3.4 Algeria 2.6 10 United States 1.4 Poland 2.3 Finland 2.1 Brazil 2.8 Australia 2.6 Others 16.0 Others 22.9 Others 20.3 Others 31.3 Others 32.1 ANNEX TABLE SF1.2.B Top 10 commodity producers, 2016 Coal Maize Rice Wheat 1 China 46.1 United States 35.8 China 29.9 European Union 20.0 2 United States 10.0 China 20.8 India 22.6 China 17.1 3 Australia 8.2 Brazil 8.9 Indonesia 7.6 India 13.0 4 India 7.9 European Union 5.9 Bangladesh 6.7 Russia 11.2 5 Indonesia 7.0 Argentina 3.2 Vietnam 5.8 United States 6.2 6 Russia 5.3 India 2.6 Thailand 4.2 Canada 3.9 7 South Africa 3.9 Mexico 2.6 Myanmar 2.7 Ukraine 3.6 8 Colombia 1.7 Ukraine 2.3 Philippines 2.5 Pakistan 3.5 9 Poland 1.4 Canada 1.4 Brazil 1.7 Australia 2.8 10 Kazakhstan 1.2 Russia 1.3 Japan 1.6 Turkey 2.8 Others 7.3 Others 15.2 Others 14.7 Others 16.0 Sources: BP Statistical Review, Food and Agriculture Organization, U.S. Department of Agriculture, World Bureau of Metal Statistics. Notes: Numbers indicate shares of global production. Refined production for aluminum, copper, and zinc. 82 S P EC IAL FO CU S 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 ANNEX TABLE SF1.3 Literature review of long-run income elasticities of demand for commodities Authors and Publication Year Data/sample Methodology Results 12 advanced economies Income elasticity of demand is estimated to be 1.5 for Auto-regressive Stuermer (2017) and 3 EMDEs, annual aluminum, 0.9 for copper, 0.7 for zinc, 0.6 for tin, and 0.4 distributive lag data, 1840-2010 for lead. Aggregate income elasticity of energy demand is estimated to be 0.7. Income elasticity is found to rise with Ordinary least higher incomes, in contrast to other studies. This results 132 countries, annual squares (OLS) with from the inclusion of low income countries, which typically Burke and Csereklyei (2016) data, 1960-2010. panel data, in levels have a much lower income elasticity of demand for energy and growth rates. as they rely on non-commercial fuels (biomass). Controlling for this results in constant elasticities across income groups. Average income elasticity of energy demand is estimated 93 countries, annual data, Csereklyei and Stern (2015) OLS in growth rates. to be between 0.6 to 0.8. As income rises, the rate of 1971-2010. growth of energy use per capita declines. Review of 38 papers providing 258 estimates of Huntington, Barrios, and Arora Review of existing Income elasticity of oil demand is found to be 0.5 on price and income (2017) studies. average, and 0.9 for natural gas. elasticities of energy demand. Long run income elasticity for energy demand for UK energy use, annual Vector error correction Fouquet (2014) transport peaks at 3 before declining to around 0.3 as data, 1700-2000. model income rises. 30 OECD and 26 non- Error correction model For OECD countries, income elasticity estimated to be Joyeux and Ripple (2011) OECD countries, annual with pooled mean 1.1, for non-OECD countries, income elasticity of energy data, 1973-2007 group estimators. demand estimated to be 0.9. 30 EMDEs and 21 Difference-in- Find income elasticity of primary energy demand of 0.63 Jakob, Haller and Marschinski advanced economies, differences estimator for EMDEs and 0.18 for advanced economies (although (2011) annual data, 1971-2005. on panel data. statistically insignificant). Review of 10 global Find median income elasticities for rice and wheat close Review of different Vanin et al. (2014) economic models for to 0.1. First and third quartile range of estimates range modeling approaches agricultural commodities from 0 to 0.2. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 S P EC IAL FO CU S 1 83 ANNEX TABLE SF.1.4 Economy samples, by commodity modeled Aluminum, zinc, Copper Coal Rice Wheat Maize Soybeans oil, gas Australia Australia Australia Argentina Algeria Algeria Argentina Austria Austria Austria Australia Argentina Argentina Australia Belgium Belgium Belgium Bangladesh Australia Australia Bolivia Brazil Brazil Brazil Benin Bangladesh Bolivia Brazil Canada Canada Canada Bolivia Bolivia Brazil Canada China China Denmark Brazil Brazil Cameroon Chile Hong Kong SAR, Finland Finland Burkina Faso Canada Canada China China Denmark France France Cameroon Chile Chile Colombia Finland Germany Germany Chad China China Ecuador France Greece Greece Chile Colombia Colombia Egypt Germany India India China Ecuador Côte d’Ivoire Guatemala Greece Italy Ireland Colombia Egypt. Cuba India India Japan Italy Congo, Rep. Guatemala Ecuador Indonesia Indonesia Mexico Japan Costa Rica India Egypt Iran Ireland Netherlands Mexico Côte d'Ivoire Iran Ghana Japan Italy Portugal Netherlands Cuba Japan Guatemala Korea, Rep. Japan South Africa New Zealand Dominican Republic Kenya Honduras Mexico Mexico Korea, Rep. Norway Ecuador Lesotho India Morocco Netherlands Spain Portugal Egypt Mexico Indonesia Myanmar New Zealand Sweden South Africa El Salvador Morocco Iran Nigeria Norway Switzerland Korea, Rep. Gambia, The Nepal Japan Pakistan Portugal Taiwan, China Spain Ghana New Zealand Kenya Paraguay Singapore Turkey Sweden Guatemala Nigeria Korea, Rep. Peru South Africa United Kingdom Switzerland Guyana Norway Lesotho South Africa Korea, Rep. United States Taiwan, China Honduras Pakistan Madagascar Switzerland Spain Turkey India Paraguay Malawi Taiwan, China Sweden United Kingdom Indonesia Peru Mexico Thailand Switzerland United States Iran South Africa Morocco Turkey Taiwan, China Japan Sudan Nepal United States Thailand Kenya Taiwan, China Nicaragua Uruguay Turkey Korea, Rep. Tunisia Nigeria Venezuela United Kingdom Liberia Turkey Pakistan Zambia United States Madagascar Uruguay Panama Zimbabwe Malawi Zambia Paraguay Malaysia Zimbabwe Peru Mali Philippines Mexico Senegal Morocco South Africa Nepal Taiwan, China Nigeria Thailand Pakistan Turkey Panama United States Paraguay Uruguay Peru Venezuela Philippines Vietnam Senegal Zambia Sierra Leone Zimbabwe Sri Lanka Taiwan, China Thailand Togo Turkey United States Uruguay Venezuela Source: World Bank. Note: 1 indicates metals exporter; 2 indicates energy exporter, 3 indicates agricultural exporter. An economy is defined as an exporter if exports of the commodity account for 20 percent or more of their total exports. Greece, Portugal, and South Africa are not included in the estimation of gas consumption due to missing observations (for 17, 32, and 27 years, respectively). 84 S P EC IAL FO CU S 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 ANNEX TABLE SF.1.5 Estimation results for pooled mean group estimation Aluminum Zinc Copper Oil Coal Gas 1/ Gas Rice Wheat Maize 1/ Maize Soybeans 1/ Soybeans Long run Log per capita 3.50*** 2.60*** 2.95*** 2.31*** 6.04*** 0.30 0.38*** 1.39*** 1.05*** 0.28 0.85*** -0.65 0.84*** income (0.40) (0.23) (0.71) (0.46) (1.28) (1.04) (0.57) (0.12) (0.20) (0.24) (0.02) (0.50) (0.04) Squared log -0.15*** -0.12*** -0.12*** -0.10*** -0.31*** 0.01 -0.09*** -0.04*** 0.05*** 0.10*** per capita income (0.02) (0.01) (0.04) (0.02) (0.06) (0.05) (0.01) (0.01) (0.02) (0.03) -0.31*** -0.17*** -0.36*** -0.47*** 0.15** -0.27*** -0.29*** 0.03 0.01 -0.22*** -0.19*** -0.48*** -0.68*** Log real price (0.04) (0.03) (0.06) (0.05) (0.07) (0.03) (0.03) (0.02) (0.02) (0.03) (0.03) (0.11) (0.09) Short run Adjustment -0.26*** -0.28*** -0.14*** -0.07*** -0.10*** -0.17*** -0.17*** -0.22*** -0.33*** -0.19*** -0.15*** -0.14*** -0.13*** coefficient (0.03) (0.03) (0.03) (0.01) (0.01) (0.03) (0.03) (0.03) (0.04) (0.03) (0.03) (0.02) (0.02) Log change in -19.06** 2.90 1.04 4.28* -13.41*** 31.60 0.63*** -2.28 -2.44 -1.61 0.49*** -13.54 0.89** per capita income (9.43) (13.55) (7.20) (2.34) (3.78) (21.43) (0.20) (6.58) (6.88) (4.95) (0.14) (21.28) (0.42) Squared log 1.07** -0.01 0.07 -0.17 0.70*** -1.51 0.08 0.07 0.15 1.33 change in per (0.47) (0.67) (0.36) (0.11) (0.18) (1.06) (0.46) (0.38) (0.32) (1.33) capita income Log change in 0.09** 0.05 -0.03 -0.01* -0.01 0.03* 0.03* -0.02** -0.01 0.02 0.01 -0.03 -0.02 real price (0.04) (0.03) (0.03) (0.01) (0.02) (0.02) (0.02) (0.01) (0.02) (0.15) (0.02) (0.10) (0.10) -4.56*** -3.50*** -2.10*** -0.90*** -2.85*** -0.86*** -0.78*** -0.40*** -0.53*** 0.61*** 0.29*** 0.93*** 0.36*** Constant (0.54) (0.42) (0.36) (0.08) (0.44) (0.17) (0.17) (0.07) (0.08) (0.15) (0.11) (0.18) (0.09) Joint Hausman 5.25 7.72 3.26 3.66 4.53 3.02 5.80 2.52 1.45 1.62 5.43 5.86 2.31 test-statistic p-value 0.15 0.05 0.35 0.30 0.21 0.39 0.06 0.47 0.69 0.66 0.07 0.12 0.32 log likelihood 886.27 711.20 743.02 3065.46 1557.88 1134.57 1141.82 1647.65 1141.82 1534.65 1462.82 85.70 47.73 Observations 1,668 1,658 1,275 1,683 1,366 1,366 1,443 2,692 1,781 2,372 2,372 1,500 1,500 Number of 33 33 25 33 28 30 30 55 35 47 47 32 32 countries Memorandum item: Income elasticity at 0.8 0.3 0.7 0.5 0.6 ... 0.4 -0.3 0.3 ... 0.8 ... 0.8 2017 median income Note: *** p<0.01, ** p<0.05, * p<0.1. Standard errors in parentheses. 1/ Indicates robustness check but not baseline regression. All other regressions are baseline regressions. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 S P EC IAL FO CU S 1 85 ANNEX TABLE SF.1.6 Estimation results under generalized method of moments Aluminum Zinc Copper Oil Coal Gas Rice Wheat Maize Soybeans Log per capita 3.99*** 3.81*** 2.57*** 2.41*** 4.19*** 0.27*** 1.49*** 0.70*** 0.47*** 0.48*** income (0.21) (0.18) (0.36) (0.12) (0.25) (0.09) (0.13) (0.12) (0.03) (0.05) Squared log per -0.17*** -0.19*** -0.06*** -0.10*** -0.19*** -0.09*** -0.04*** capita income (0.02) (0.01) (0.02) (0.01) (0.02) (0.00) (0.01) -0.45*** -0.18*** 0.00 -0.05*** 0.07 -0.47*** -0.33 -0.04 -0.48*** -1.33*** Log real price (0.05) (0.04) (0.12) (0.01) (0.08) (0.13) (0.02) (0.03) (0.09) (0.15) -19.51*** -18.16*** -17.67*** -13.60*** -23.64*** -4.16*** -1.83*** -1.46*** 6.29*** 10.01*** Constant (0.83) (0.77) (0.73) (0.63) (1.13) (0.87) (0.50) (0.47) (0.51) (0.97) Adj. R2 0.86 0.81 0.80 0.96 0.90 0.84 0.91 0.91 0.12 0.11 J-statistic 0 0 0 0 0 0 0 0 0 0 Observations 1,608 1,583 1,275 1,617 1,428 1,583 2,776 1,730 2,372 1,501 Number of countries 33 33 25 33 28 33 55 35 47 32 Note: *** p<0.01, ** p<0.05, * p<0.1. Standard errors in parentheses. One lag of independent variables is used as instruments. The J-statistics confirm their validity. 86 S P EC IAL FO CU S 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 ANNEX TABLE SF.1.7 Estimation results including trend Aluminum Zinc Copper Oil Coal Gas Rice Wheat Maize Soybeans Long run Log per 4.23*** 2.20*** 11.06*** 1.90*** 4.16*** 0.71*** 0.52*** 3.42*** 1.37*** 1.03*** capita income (0.45) (0.22) (0.95) (0.47) (0.99) (0.09) (0.14) (0.24) (0.24) (0.21) Squared log -0.19*** -0.08*** -0.57*** -0.06** -0.23** -0.21*** -0.03*** per capita income (0.03) (0.02) (0.05) (0.03) (0.05) (0.01) (0.01) Log real -0.21*** -0.16*** -0.26*** -0.01*** -0.02 -0.25*** 0.00 -0.04 -0.03 -0.02 price (0.04) (0.03) (0.04) (0.00) (0.06) (0.03) (0.02) (0.03) (0.06) (0.02) Short run Adjustment -0.27*** -0.28*** -0.16*** -0.07*** -0.06*** -0.17*** -0.24*** -0.27*** -0.12*** -0.33*** coefficient (0.03) (0.03) (0.03) (0.07) (0.02) (0.03) (0.03) (0.03) (0.02) (0.04) Log change -18.98* 11.17 2.13 3.69** -1.78 0.60** 0.19*** 11.32** 0.80* -2.56 in per capita income (9.81) (14.16) (8.04) (2.23) (3.22) (0.21) (0.03) (5.73) (0.43) (6.79) Squared log 1.06** -0.45 -0.04 -0.14 0.13 -0.76* 0.08 change in per capita (0.49) (0.71) (0.42) (0.11) (0.16) (0.41) (0.37) income Log change 0.08* 0.05* -0.03 -0.01* 0.00 0.03 -0.09 -0.02 -0.07 0.00 in real price (0.04) (0.03) (0.03) (0.06) (0.02) (0.02) (0.02) (0.01) (0.10) (0.02) -5.40*** -3.39*** -8.00*** -0.92*** -1.34*** -1.29*** 1.41*** -2.94*** -0.71*** -0.55*** Constant (0.64) (0.41) (1.32) (0.08) (0.37) (0.27) (0.19) (0.37) (0.15) (0.08) Joint Hausman 4.46 5.45 5.01 2.99 11.07 0.82 1.21 1.20 6.34 6.27 test-statistic p-value 0.22 0.14 0.17 0.39 0.01 0.66 0.55 0.75 0.10 0.10 Log 889.59 694.75 755.16 3067.80 1546.83 1146.19 1529.00 1978.46 47.31 1696.66 likelihood Observations 1,668 1,680 1,275 1,683 1,428 2692 2,372 2,775 1,500 1,781 Number of 33 33 25 33 28 33 47 55 32 35 countries Note: *** p<0.01, ** p<0.05, * p<0.1. 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Washington, to the European Union.” Energy Policy 34 (15), DC: World Bank. 2279–2297. ———. 2016a. Global Economic Prospects: UN (United Nations). 2017. Department of Divergences and Risks. June. Washington, DC: Economic and Social Affairs, Population Division. World Bank World Population Prospects: The 2017 Revision. DVD Edition. ———. 2016b. Global Economic Prospects: USDA (United States Department of Agriculture). Spillovers amid Weak Growth. January. 2015. USDA Coexistence Fact Sheets: Soybeans. Washington, DC: World Bank. Washington, DC: USDA. ———. 2017a. Global Economic Prospects: Weak Valin, H., R. Sands, D. van der Mensbrugghe, G. Investment in Uncertain Times. January. Nelson, H. Ahammad, E. Blanc, B. Bodirsky, et Washington, DC: World Bank. al. 2014. “The Future of Food Demand: Understanding Differences in Global Economic ———. 2017b. The Growing Role of Minerals and Models.” Agricultural Economics 45 (1): 51-67. Metals for a Low Carbon Future. Washington, DC: World Bank. World Bank. 2009. Global Economic Prospects: Commodities at the Crossroads. Washington, DC: ———. 2018a. Commodity Markets Outlook. World Bank. April. Washington, DC: World Bank. ———. 2014. “Corrosive Subsidies.” World Bank ———. 2018b. Global Economic Prospects: Broad- Middle East and North Africa Region Economic Based Upturn, for How Long? January. Monitor. Washington, DC: World Bank. Washington, DC: World Bank. SPECIAL FOCUS 2 Corporate Debt: Financial Stability and Investment Implications G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 S P EC IAL FO CU S 2 93 Corporate Debt: Financial Stability and Investment Implications Average corporate debt in emerging market and developing economies (EMDEs) has risen over the past decade. This trend raises concerns for their financial stability and growth prospects. Debt service costs of EMDE firms are expected to rise as advanced economies normalize monetary policy, and debt is increasingly held by firms with riskier balance sheets. Firm-level empirical analysis also suggests that debt overhang may be associated with weak investment, especially in large or highly leveraged firms. Countercyclical and macroprudential policies can address financial stability concerns. Structural policies, including the strengthening of bankruptcy regimes, are appropriate tools to address the investment implications of elevated corporate debt. Introduction Second, elevated corporate debt may have implications for longer-term growth if it coincides By 2017, corporate debt in emerging market and with a period of subdued post-crisis private developing economies (EMDEs) had reached investment growth (World Bank 2017; Kose et al. levels that significantly exceeded its average prior 2017). Excessive corporate debt could dampen to the global financial crisis as well as its longer- investment and the expansion of productive term average (1995-2007; Figure SF2.1). EMDE capacity necessary for healthy growth, as a corporate debt now also rivals the size of disproportionate amount of corporate earnings government debt. While the increase in corporate would need to be paid to creditors rather than indebtedness among EMDEs partly reflects equity investors. This channel can adversely improved and deeper access to capital markets, it impact the growth prospects of EMDEs, and is raises two concerns. the primary topic addressed in this Special Focus. First, excessive corporate debt can threaten The Special Focus first discusses trends in EMDE financial stability, leading to distress in the non- corporate debt and associated financial stability financial corporate sector and systematic balance risks. It subsequently assesses empirical linkages sheet difficulties in the banking sector. Most between corporate debt and investment activity directly, as policy interest rates rise and the cost of based on firm-level data, with a focus on the “debt debt service increases, incidence of corporate overhang” channel. The analysis focuses on distress tends to intensify. Firms may also become nonfinancial corporations, as they are foremost in more vulnerable to balance sheet shocks, such as private capital investment activity and thus are through currency mismatches associated with U.S. most germane to the linkage between corporate dollar appreciation.1 Deterioration in nonfinancial debt and investment. corporate balance sheets may transmit to the banking sector as well. Previous episodes of rapid Four questions are addressed: corporate debt buildup have at times coincided with episodes of financial stress, which can have • How has corporate debt evolved in EMDEs? adverse macroeconomic consequences.2 • What are the financial stability risks associated with elevated corporate debt? Note: This Special Focus was prepared by Eduardo Borensztein and Lei Sandy Ye. Research assistance was provided by Miyoko Asai, • Does a “debt overhang” dampen capital Julia Roseman, and Heqing Zhao. investment in the EMDE corporate sector? 1 Large unhedged exposure in foreign exchange combined with depreciation of currency may raise this vulnerability (Acharya et al. 2015). 2 Debt overhangs were found to have impacted investment on the Republic of Korea’s Chaebol debt-driven expansion abruptly European economies after the global financial crisis, and leverage was ended and required massive corporate restructuring during the Asian found to have an impact on U.S. firms during the crisis (Kalemli- Financial Crisis. These issues were compounded by an insolvency Ozcan, Laeven, and Moreno 2015; Giroud and Mueller 2017). Also, system that was unable to effectively resolve corporate distress. 94 S P EC IAL FO CU S 2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 • What are the main policy implications promotion—are warranted. Policies to associated with elevated corporate debt? encourage equity financing and promote debt/ equity balance are especially relevant for small This Special Focus documents the rise in firms. Similarly, policies to strengthen corporate debt over the past decade in EMDEs, bankruptcy regimes may both improve and finds that an increasing share of debt is held investment activity by increasing investor con- by firms with higher financial risk (e.g., lower fidence and by mitigating the macroeconomic interest coverage ratios). Moreover, high corporate costs of bankruptcies when they occur. debt has been associated with weaker investment growth. At both the country and firm level, Corporate debt landscape private investment growth has been correlated with corporate debt service capacity. Moreover, in EMDEs the adverse effect of debt overhangs on investment is more pronounced among large and highly Corporate debt in EMDEs has, on average, risen leveraged firms. This investigation studies this from about 60 percent of GDP in 2006 to 86 medium-term channel that may impact percent of GDP in 2017 (Figure SF2.1). This investment for an extended period of time even increase has been especially pronounced in China, absent the occurrence of a crisis. where corporate debt reached more than 160 percent of GDP by 2017. In other EMDEs, This analysis contributes to the literature on corporate debt has risen by more than 10 corporate debt overhangs by analyzing the reaction percentage points of GDP over 2006-2017.3 of investment to debt overhang by large and small private firms for a diverse sample of large EMDEs. Trends in EMDE corporate debt are quite It subsequently explores cross-sectional dimen- heterogeneous across countries, and their rise has sions, such as firm size, that may affect the been concentrated in larger EMDEs. In 2016-17, sensitivity of investment to debt overhang across a number of large emerging economies—especially firms. The literature on this linkage has thus far in Latin America and the Caribbean (LAC) and focused on stock exchange listed firms, which may Europe and Central Asia (ECA)—experienced not fully reflect the state of the corporate sector in lower credit growth, partly due to higher EMDEs. credit risks associated with higher debt built-up in earlier years. The analysis points to both cyclical and structural policy priorities: A number of other features characterize recent developments in corporate debt among EMDEs: • From a cyclical perspective, the financial stability risks highlight the need for the build- • EMDEs versus advanced economies. By up of fiscal buffers to prevent a corporate 2017, China’s corporate debt-to-GDP ratio default surge from having systemic far exceeded the average of advanced consequences. Prudential regulations that economies. For other EMDEs, corporate debt monitor liquidity and currency risks in large levels are still substantially below that of firms’ debt would also be appropriate, advanced economies.4 especially since the boom in corporate debt has been concentrated among large (and likely systemically important) firms. 3 In China, the decline in the corporate debt-to-GDP ratio over the past two years was primarily driven by slowing credit growth. In • From a structural policy perspective, in cases other EMDEs, while credit growth slowed as well, faster nominal where debt overhangs are slowing private GDP growth in 2017 also contributed to the decline in corporate investment over an extended period, policy debt-to-GDP ratios. 4 The benchmark sample of 16 EMDEs with Bank for measures to curb debt bias—such as thin International Settlements (BIS) data consists of mostly large EMDEs capitalization rules or equity market that comprise four-fifth of EMDE GDP. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 S P EC IAL FO CU S 2 95 • Regional dimensions. The increase in FIGURE SF2.1 Corporate debt in EMDEs: General trends corporate debt ratios over the past decade was Corporate debt in EMDEs has risen over the past decade and is now most pronounced in East Asia and Pacific substantially above long-term averages. The increase in corporate debt (EAP) and ECA.5 Corporate debt ratios also has occurred in both commodity exporters and importers. Credit growth rose in most other regions of the world over has slowed in recent years, especially in a few large commodity exporters. The increase in corporate debt has been especially pronounced among the past decade, and tend to range between 30 several large EMDEs across regions. to 40 percent of GDP. A. Corporate debt B. Corporate debt: EMDEs ex. China • Corporate versus other sectors. Corporate debt is, on average, substantially higher than household and financial sector debt in EMDEs. By 2017, corporate debt is now comparable in magnitude to sovereign debt (Figure SF2.2). • Domestic versus foreign currency. The rise in corporate debt has been supported by both borrowing in local and foreign currency.6 C. Corporate debt: EMDE commodity D. Corporate credit growth Outside of China, the contribution of foreign importers vs. exporters currency debt has been substantial, constituting nearly half of the growth in corporate debt over 2010-2017. • External versus domestic sources. More than one-tenth of outstanding corporate debt in EMDEs is financed by cross-border sources.7 Outside of China, about one-third of corporate debt is financed by cross-border sources, consistent with the trends for E. Corporate debt: Pre- and F. Corporate debt in EMDE regions post-crisis currency composition of corporate debt. • Bond versus bank debt. Bond debt remains a modest but increasing fraction of total corporate debt, as corporates have shifted from bank loans to bond issuances over the past decade (Ohnsorge and Yu 2017; Feyen et al. 2015; Ayala, Nedeljkovic, and Saborowski 2017; World Bank 2016). As of 2017, debt securities are estimated to be about one-fifth Sources: Bank for International Settlements, Institute for International Finance (IIF). A-D. Figures show GDP-weighted averages for 16 EMDEs (seven commodity importers and nine of EMDE corporate debt. Bond issuances in commodity exporters) and 27 advanced economies (AEs). E. Average annual corporate debt-to-GDP ratio. Each blue dot denotes an economy. Excludes outliers. Pre-crisis and post-crisis denote 2003-07 and 2010-17, respectively. Dotted line denotes 45 degree line. F. EAP ex. China = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and 5 In the Sub-Saharan Africa (SSA) region, growing public debt the Caribbean, MNA = Middle East and North Africa, SAR = South Asia, and SSA = Sub-Saharan burdens of low-income countries are of particular concern. Please see Africa. Figure shows GDP-weighted averages that include 4 EAPs, 8 ECAs, 11 LACs, 8 MNAs, 4 SARs, and 7 SSAs (includes expanded sample with IIF data). Chapter 2 for more details. Click here to download data and charts. 6 The increase in foreign currency debt is not driven by nominal exchange rate valuation. Over the period 2006-2017, the average real effective exchange rate in the sample EMDE economies depreciated by about 5 percent. EMDEs tend to be fixed rate, as opposed to 7 Based on data from the BIS, external sources of corporate floating rate bonds (Gozzi et al. 2015). funding can be proxied by the sum of the stock of outstanding cross-border bank claims and amount of outstanding international debt securities in each country. The residual would be domestic • Maturity. Maturity of bonds and syndicated funding. loans in EMDEs have remained stable over 96 S P EC IAL FO CU S 2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE SF2.2 Corporate debt in EMDEs: Composition over most of the post-crisis period, and has contributed to overcapacity in some industries Corporate debt in EMDEs has reached levels comparable to, if not exceeding, that of government debt. Outside of China, foreign currency (Maliszewski et al. 2016). debt has contributed substantially to the rise in EMDE corporate debt in recent years. Corporate investment growth has slowed sharply since 2012, both in state-owned enterprises and A. Debt across sectors, inc. China B. Debt across sectors, ex. China private enterprises. The slowdown in the former group has partly reflected policy-driven capacity cuts in highly indebted industrial sectors (World Bank 2017). High corporate leverage in China has been associated with a deterioration of corporate financial performance. Policies that were adopted to address the associated vulnerabilities include macroprudential measures to tighten lending C. Corporate debt: Domestic vs. D. Corporate debt: Domestic vs. conditions for real estate, capacity reduction foreign currency contribution, foreign currency contribution, inc. China ex. China targets for heavy industries, and restructuring for weak state-owned enterprises. Use of bankruptcy procedures has also increased (IMF 2017a; Maliszewski et al. 2016). Corporate debt and financial stability Sources: Bank for International Settlements, Institute for International Finance. Over the past decade, increased access to debt, A.B. GDP-weighted averages for 16 EMDEs in A and 15 EMDEs in B. C.D. Percentage point contribution of foreign and local currency-denominated corporate debt growth especially non-bank credit, has partly reflected over the period denoted. GDP-weighted annual averages for 16 EMDEs in A and 15 EMDEs in B. development of EMDE financial markets.8 Click here to download data and charts. However, as EMDE corporate debt has risen, risks to financial stability have grown in several the past decade (averaging about 7 years). dimensions, both external and domestic. Large firms were able to issue longer-term bonds, especially in the international capital External dimensions. During most of the post- markets (Cortina, Didier, and Schmukler, crisis period, debt service and financing costs were forthcoming). For smaller firms, the use of contained by low global interest rates and long-term finance remains limited compared compressed risk premiums. Global, rather than to advanced economies (World Bank 2015). firm- and country-specific factors, have been more important drivers of the increase in corporate debt Corporate debt in China has risen sharply, from (IMF 2015; Feyen et al. 2015; Ayala, Nedeljkovic, 107 to 163 percent of GDP from 2006-2017 and Saborowski 2017). Countries that had (Figure SF2.3). Although the stock of corporate experienced a higher rise in corporate debt also debt has declined in the past two years, it remains elevated by international standards. The rise has been concentrated in the real estate, mining and construction sectors, and in state-owned 8 For example, credit registry coverage has increased in EMDEs from an average of 4 percent of adults to 13 percent from 2006-2017, enterprises. This was mostly financed domestically and has helped expand financial access (Love, Martínez Pería, and through the banking system as well as nonbank Singh 2013). These economies were also increasingly able to issue financial intermediaries. The increase in the debt in the home currency (Hale, Jones, and Spiegel 2016). Other capital market developments in EMDEs are highlighted in Cortina, corporate debt-to-GDP ratio was spurred by the Didier, and Schmukler (forthcoming); Didier and Schmukler (2014); economy’s investment-intensive growth model and Didier, Llovet Montanes, and Schmukler (2017). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 S P EC IAL FO CU S 2 97 tended to have more open capital accounts. FIGURE SF2.3 Corporate debt in China Higher debt is also associated with riskier Corporate debt in China has risen sharply over the past decade, although corporate balance sheets (Figure SF2.4). it has stabilized in the past two years. Leverage has been particularly pronounced in heavy-industry sectors, such as mining and utilities. The There is a risk of a disorderly tightening of global increase in corporate debt coincided with a deceleration in investment growth and business conditions. financing conditions as monetary policy normalizes among advanced economies (Chapter A. Corporate debt B. Firm leverage across industries 1, Arteta et al. 2015). Funding conditions for EMDE corporates could significantly worsen, due to higher interest rates and risk premiums, and also the potential reversal of capital flows. Debt service cost may be especially sensitive to interest rates for floating rate bonds. A sharp appreciation of the U.S. dollar may also weaken balance sheets to the extent that foreign currency liabilities are not matched by assets. Many EMDE multinationals have issued bonds for intra- C. Investment growth D. Business conditions company financial intermediation across subsidiaries, channeling external financial conditions into the domestic financial system (Bruno and Shin 2017; Shin 2013). Domestic dimensions. Although moderate levels of corporate debt can be benign, excessive levels of debt for individual corporations may affect bank balance sheets and banks’ ability to extend credit, given bank debt still constitutes about four-fifth of Sources: Bank for International Settlements, Haver Analytics, Orbis. B. Agr. = Agriculture, Cons. = Construction, Man. = Manufacturing, and ICT = Information and outstanding EMDE corporate debt. The potential communications technology. Figure shows medians across firms in 2015. Based on Orbis data sample for mostly non-state-owned private firms. impact on loan supply could subsequently lower C. Figure shows period average annual nominal growth in fixed asset investment. “SOE” stands for state-owned enterprises. “Private” stands for private enterprises. aggregate demand and collateral values. Higher D. Figure shows period averages of quarterly data. China industrial enterprise survey of 5,000 corporate debt also has implications for the public leading enterprises to rate their perception on selected topics. An index reading higher than 50 indicates improvement. sector balance sheet, given the contingent liability Click here to download data and charts. it may pose, especially during periods of crisis (World Bank 2016). This is especially relevant in nature of bond investors, allowing more firms developing economies, where implicit liabilities with weaker fundamentals to issue during benign associated with state-owned enterprises are often financing conditions but raising vulnerabilities in not consolidated in official government debt a downturn. In the next three years, a rising statistics. In the majority of EMDEs that amount of bonds maturing within one year also experienced sharp increases in corporate debt, entails rollover risk if financial conditions tighten public debt also rose sizably, as common factors abruptly (Figure SF2.4). like low global interest rates supported the expansion of both types of debt. Not only have corporate debt levels risen, evidence suggests that this debt has been disproportionately Largely accommodative financial conditions have raised by firms that are risky, as measured by their supported a rapid rise in bond issuances in recent low interest coverage ratios and other balance years. Although bond financing is less vulnerable sheet distress indicators (Figure SF2.5; Feyen et al. than bank financing on some grounds, such as 2017). Moreover, procyclical retrenchment by longer average maturity, it bears other such firms can harm macroeconomic conditions, vulnerabilities. These include weaker monitoring affect lenders (via reduced borrowing demand, and standards associated with the more dispersed higher losses and non-performing loans) and 98 S P EC IAL FO CU S 2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE SF2.4 Corporate debt in EMDEs: risky debt from 25 to 31 percent (Chow 2015; Macroeconomic vulnerabilities Beltran, Garud, and Rosenblum 2017). These In the majority of EMDEs, the corporate debt ratio has risen in tandem with vulnerabilities may be mitigated to some extent, an increase in foreign currency debt. The increase in the corporate debt however, by improvement in corporate profita- ratio has been more pronounced in economies that had more open capital bility in 2017 (IMF 2018). account and are associated with higher corporate vulnerability. Given a growing amount of international bonds is expected to mature in EMDEs over the next three years, rollover risks may rise if financial conditions Leverage in the EMDE corporate sector is highly tighten abruptly. heterogeneous and has been concentrated in a number of industrial sectors, such as construction A. Change in corporate debt: Total vs. B. Change in corporate debt: Finan- foreign, 2006-post-crisis peak cial openness and utilities. Domestically-owned firms exhibit higher leverage than multinationals, which can access funds via intra-company borrowing across affiliates within the conglomerate (e.g., Desai, Foley, and Forbes 2008). Large firms account for nearly four-fifth of corporate debt.9 Exchange- listed firms account for about one-quarter of debt. High concentrations of debt in large and interconnected firms can amplify systemic risks, even if corporate debt were moderate in aggregate. C. Corporate Vulnerability Index: High D. International corporate bonds and low debt maturing in one year: EMDEs Corporate debt and economic growth Analytical linkages Elevated corporate debt in EMDEs not only poses risks for financial stability, it also poses the risk of dampening investment and long-term growth.10 Sources: Bank for International Settlements, Chinn-Ito Index, Feyen et al. (2017), Haver Analytics, The increase in China’s corporate debt has raised Institute for International Finance, World Bank. A. Post-crisis peak is country- and indicator-specific and denotes the highest corporate/foreign cur- concerns regarding investment efficiency, espe- rency corporate debt-to-GDP ratio in each country over 2010-17. Each dot refers to an economy. Excludes outliers. cially among state-owned enterprises (Maliszewski B. Median corporate debt change from 2006-post-crisis peak year, which is country-specific. High/low et al. 2016). In India, high corporate leverage has financial openness cutoff is based on the median capital account restrictiveness index of Chinn and Ito (2006, updated to 2015), and for each country is measured over the average of 2010-15. Includes been concentrated in a number of industries (e.g., 16 EMDEs. C. The corporate vulnerability index (CVI) tracks financial conditions of the non-financial corporate mining, transportation, construction), and may sector. The CVI uses firms' balance sheet information covering seven indicators: interest coverage ratio, leverage ratio, net debt-to-EBIT ratio, current-to-long term liabilities ratio, quick ratio, return to have been a significant factor behind weak private assets, and market-to-book ratio. The CVI ranges from 0 (i.e., firms in a particular country are not investment growth (Das and Tulin 2017). In financially vulnerable in any of the seven indicators) to 1 (i.e., all firms in a particular country are financially vulnerable in all seven indicators). For more details, see Feyen et al. (2017). Y-axis de- Brazil, high corporate leverage also contributed to notes medians. Includes 16 EMDEs for 2010-17. High/low debt cutoff is based on medians. D. Denotes amount of international bonds outstanding with remaining maturity of 12 months in each year denoted (data as of 2018Q1). Includes 54 EMDEs. Click here to download data and charts. 9 Large firms are defined as those with assets greater than $50 million, similar to the criteria used by the European Union. Results impact government finances via cyclical revenue are not sensitive to alternative measures of large firms, such as those defined by the International Finance Corporation (IFC) (larger than weakness. This suggests that higher corporate $15 million). In robustness checks of the empirical analysis, the leverage can make the corporate sector more sample was broken into small, medium, and large firms based on the vulnerable to weaker growth or higher debt service IFC criteria, but there is no significant differences between small and medium-sized firms. costs. Stress tests on EMDE corporates have 10 See Acharya et al. (2015); World Bank (2016); IMF (2015); shown that a combination of exchange rate shocks Feyen et al. (2017); de Mooij and Hebous (2017); Demirgüç-Kunt, and weaker-than-expected growth could Martinez-Peria, and Tressel (2015); Alter and Elekdag (2016); Brown and Lane (2011); Beltran, Garud, and Rosenblum (2017); Corsetti et significantly erode firms’ interest coverage ratios al. (2015); Alfaro, Asis, Chari, and Panizza (2017); and Occhino and and an interest rate shock may boost the share of Pescatori (2015). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 S P EC IAL FO CU S 2 99 weak investment during 2014-early 2017 (IMF FIGURE SF2.5 Corporate debt riskiness in EMDEs 2017b). Not only has corporate debt become more elevated, but the share of debt held by high-risk firms has also increased. Corporate leverage is Indeed, since 2011, EMDEs in general have particularly high in industrial sectors, such as utilities and mining. Leverage is also significantly higher in domestic firms as compared to multinationals, experienced weak private investment growth. which have greater access to internal capital markets via affiliates. Further, countries that had more elevated corporate debt in the 2011-17 period showed A. Corporate Vulnerability Index B. Share of debt held by high risk lower average private investment growth (Figure firms (ICR < 2) SF2.6).11 Although debt flows may help finance investment, an excessively large stock of debt may eventually constrain investment by creating conflicts of interest between equity and debt holders (Myers 1977). This conflict arises because the larger a firm’s debt, the greater the extent to which equity holders need to share the fruits of that investment with debt holders. This reduces the attractiveness C. Industry leverage (ex. China) D. Leverage: Domestic vs. foreign ownership of investment from the perspective of the equity holders, possibly leading to underinvestment even in value-enhancing investment projects. In the subsequent firm-level analysis, the measure of debt overhang is defined as the ratio of total debt to earnings before interest and taxes (EBIT), where total debt is the sum of current liabilities and long-term debt. This measure includes both bonded and bank debt, and conforms to the basic insight that a firm is more likely to experience E. Debt-to-sales ratio F. Net investment rate debt overhang when its debt relative to earnings is high (Myers 1977). The measure of debt overhang used here more closely accounts for a firm’s debt relative to earnings capacity than a simple measure of leverage.12 The analysis confirms that firms with high debt overhang tend to have lower net investment rates (Figure SF2.6). While the theory that corporate debt overhang dampens investment dates back several decades, Sources: Feyen et al. (2017), Haver Analytics, Orbis, World Bank. A. The corporate vulnerability index (CVI) tracks financial conditions of the non-financial corporate the empirical literature on the linkage in EMDEs sector. The CVI uses firms' balance sheet information covering seven indicators: interest coverage ratio, leverage ratio, net debt-to-EBIT ratio, current-to-long term liabilities ratio, quick ratio, return to assets, and market-to-book ratio. The CVI ranges from 0 (i.e., firms in a particular country are not financially vulnerable in any of the seven indicators) to 1 (i.e., all firms in a particular country are financially vulnerable in all seven indicators). For more details, see Feyen et al. (2017). Includes 47 11 This relationship does not appear to have been driven by EMDEs. Medians. Vertical lines indicate interquartile range. differences in cross-country growth, as countries with a higher B. Denotes share of total debt held by firms with interest coverage ratio (ICR) less than 2 (threshold for “risky” firms). Based on a balanced sample of firms for 13 EMDEs. corporate debt-to-real-GDP growth ratio, a proxy for “corporate debt C.D. Firm total debt scaled by sales. Median across firms in 2015. Based on all available firm-level efficiency,” also experienced lower private investment growth. A data in Orbis for 13 EMDEs. similar metric was used to assess investment efficiency for China by C. Agr. = Agriculture, Cons. = Construction, ICT = Information and communications technology, and Maliszewski et al. (2016). Man. = Manufacturing. E.F. Sales-weighted averages of debt-to-sales ratio and net investment rate based on a fully 12 This analysis draws on Borensztein and Ye (forthcoming). Other balanced sample of firms over 2008-15. works that have used this measure to proxy for debt overhang include Click here to download data and charts. IMF (2018); Chen and Lu (2016); and Kalemli-Ozcan, Laeven, and Moreno (2015). In the baseline specification, results on leverage are consistent with literature that uses leverage as a proxy for a debt constraint and finds a negative relationship between leverage and investment (Das and Tulin 2017; Magud and Sosa 2015). 100 S P EC IAL FO CU S 2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE SF2.6 Correlates of corporate debt and private broad sample of European firms in the aftermath investment growth in EMDEs of the financial crisis.13 Increased corporate debt in EMDEs has coincided with a period of weak This analysis attempts to expand upon this private investment growth after 2011. Elevated corporate debt has been associated with weaker private investment growth, both at the literature by studying the reaction of investment macroeconomic and microeconomic levels. This relationship is not driven to debt overhangs by both large and small private by differences in country-level growth performance or firm-level earnings. firms for a diverse sample of large emerging and developing economies, and subsequently exploring A. Private investment growth: EMDEs B. Private investment growth: High and low corporate debt, 2011-17 two cross-sectional dimensions that may affect the sensitivity of investment to debt overhangs: size and leverage. Building on the macroeconomic trends and correlates highlighted earlier, the next section will analyze the extent to which future profits are put at risk by high levels of debt and may discourage investment at the micro-level. The analysis employs data covering a large sample of companies C. Private investment growth: High D. Debt to earnings in low and high that include both large, publicly-traded and and low corporate-debt-to-real-GDP investment firms growth ratio, 2011-17 smaller, privately-owned firms for a diverse group of EMDEs. Empirical findings Firm-level fixed effects panel estimation is conducted to estimate the relationship between debt service capacity (inverse of “debt overhang”) and investment activity. Net investment for a broad cross-section of private and public firms in Sources: Bank for International Settlements, Haver Analytics, International Monetary Fund, Institute for International Finance, Orbis, Oxford Economics, World Bank. 13 EMDEs is modelled as a function of the ratio A. GDP-weighted average of 12 EMDEs (available data among BIS corporate debt sample countries). Data are estimates for some EMDEs. Long-term average refers to 1995-2008. Period of EBIT to total debt, in addition to a number of average of annual growth rates. B. High-low denotes country-year observations of corporate debt-to-GDP ratio above/below the standard correlates that are associated with median. Includes 16 EMDEs. Data are not available for 2016-17 for some economies. Y-axis denotes investment (e.g., sales growth, cash flows), based median private investment growth. C. High-low denotes country-year observations of corporate debt-to-GDP ratio to real GDP growth on 2007-2015 data. The analysis includes fixed above/below the median. Includes 16 EMDEs. Data are not available for 2016-17 for some economies. Y-axis denotes median private investment growth. effects at the firm- and country-industry-year D. Low and high investment rates denote the bottom and top one-thirds, respectively, of the investment rate distribution. Inverse of median EBIT (3-year smoothed average) to debt ratio in 2015. levels, which further control for other observed Investment denotes net investment. Based on all available data in Orbis for 13 EMDEs. and unobserved factors that may impact Click here to download data and charts. investment activity, such as macroeconomic shocks (See Annex SF2.1 for more details on the data and empirical methodology). In the baseline is more recent. A few papers report that leverage specification, the analysis examines the contributes to weak investment growth in EMDEs relationship between debt service capacity and (e.g., World Bank 2017; IFC 2016; Magud and investment, conditional upon leverage. Sosa 2015; Das and Tulin 2017). At the firm level, Magud and Sosa (2015) and IFC (2016) Linkage between corporate debt and investment. The introduce a debt variable for a cross section of results suggest that debt overhangs are negatively listed firms in various EMDEs, and found a associated with investment across EMDE firms. In negative relationship between leverage and investment. Kalemli-Ozcan, Laeven, and Moreno (2015) test the effect on fixed investment of 13 Kalemli-Ozcan, Laeven, and Moreno (2015) is grounded on a corporate debt (relative to current earnings) for a similar framework but focuses on European firms in a crisis setting. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 S P EC IAL FO CU S 2 101 other words, debt service capacity is positively FIGURE SF2.7 Linkage between debt overhang and (and significantly) associated with net investment investment across firms (Table SF2.1). This relationship is robust for Investment is more sensitive to corporate debt service capacity among samples that include and exclude China, although large firms and firms that are highly indebted. the sensitivity is smaller for the China sample.14 Furthermore, the relationship is not sensitive to A. Small and large firms B. High and low leverage firms the inclusion of cash flow or leverage as explanatory variables in the regression equation, although the magnitude decreases slightly once controlling for these two variables. The result is not driven by volatility in earnings over time (see Annex SF2.1). In the full sample, the magnitude of the coefficient implies that an increase in debt service Sources: Orbis, World Bank. capacity from the 10th percentile to the 90th A. Denotes sensitivity of net investment to debt service capacity (in response to one percentage point percentile is associated with about 1.4 percentage increase in debt service capacity), based on the specification in eq. (1) in Annex for small and large firms. Large firms are defined as firms with assets greater than $50 million and include one fifth of the point higher net investment to sales ratios. In the sample. See text for more details. B. Denotes sensitivity of net investment on debt service capacity (in response from one percentage China and non-China samples, this interquartile point change in debt service capacity) based on the specification in eq. (1) in Annex, under low and high leverage. High-low leverage cutoff is based on the median within a country-industry pair, and increase is associated with about 1 percentage thus the share of highly leveraged firms is 50 percent. See text for more details. point and 2 percentage points higher investment Click here to download data and charts. rates, respectively. These sensitivities amount to about one-third of the average level of net increase their liabilities and run into a debt investment-to-sales ratio in both the China and overhang when a serious shock hits. This is non-China sample. evident by the disproportionate amount of debt they hold. Large firms may also be more exposed In aggregate, debt overhang is associated with 16 to international financial and goods markets, and percent of the decline in the net investment-to- thus be more sensitive to debt service costs sales ratio in the sample from 2011-2015. This associated with fluctuations in global financing effect was concentrated in the China sample, conditions. Focusing on large firms is also however, where deterioration in debt service warranted for policy implications, as a growing capacity is higher than the non-China sample and literature has shown that large firms’ performance is associated with about one-fifth of the decline in can have a systemic impact and is more correlated investment from 2011-15. with aggregate growth of an economy (Gabaix 2011), can be more sensitive to macroeconomic Small and large firms. The analysis also examines shocks (Alfaro et al. 2017), and serve as a key whether the debt overhang-investment sensitivity channel for foreign shocks transmission (di varies across small and large firms, as a large Giovanni, Levchenko, and Mejean 2014, 2018). literature in macroeconomics and finance has established the importance of size for determining By estimating the baseline equation for small and a firm’s access to credit (e.g., Chodorow-Reich large firms separately, the analysis finds that the 2014; Gertler and Gilchrist 1994). Large firms, debt overhang effect is present among both groups defined as firms with assets above $50 million, (Figure SF2.7). The coefficients for large firms in tend to enjoy wider access to both bank credit and both the overall and non-China sample are larger bond markets, and thus may be more likely to than those of smaller firms, although the coefficient is not significant for China’s large firms. Estimates of the full regression show that 14 The firm-level data for China contained only a limited number the debt overhang impact on investment among of state-owned enterprises. Thus, the data are more reflective of the debt service capacity to investment sensitivity among firms in the large firms is twice that of small firms. This non-state-owned private sector. suggests that larger firms are more sensitive to debt 102 S P EC IAL FO CU S 2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 overhang, and that the consequences from their stability risks associated with elevated corporate disproportionate undertaking of leverage may debt, cyclical and prudential policies need to be outweigh the advantage they have in terms of the primary lever. To lift investment activity and better access to finance. mitigate the medium-term consequences of corporate debt overhang, structural policies geared Low and highly indebted firms. Since the effect of toward promoting financial development are debt overhangs may be nonlinear, the analysis appropriate. examines whether the sensitivity varies across high and low-leverage firms. The threshold for high Cyclical policies and low levels of debt is defined as the median within a country-industry pair, given that leverage Fiscal policy. Corporate distress, such as defaults levels may be to some extent driven by the arising from debt overhang, can provoke the business structure and operational needs of an government to provide sizable financial support industry. The debt overhang sensitivity is found to and contribute to larger public debt burdens be larger for firms with high debt levels, and (World Bank 2016). This can cause public moreover, the effect of debt overhang is nearly borrowing costs to rise and fiscal space to shrink, three times higher in high-debt firms than low- and can force governments to tighten fiscal policy debt firms (Figure SF2.7). These results suggest during times of weak growth. Fiscal space in that the sensitivity of investment to debt overhang EMDEs has deteriorated during the post-crisis can vary significantly, conditional upon pre- period, even as corporate debt ratios have risen existing leverage levels. At high levels of debt, the (Figure SF2.8). This suggests that the risk of debtor-equity holder conflict becomes more corporate debt distress is an additional argument prominent, as a greater proportion of positive net for boosting or at least maintaining fiscal buffers present value (NPV) projects needs to be paid in the present environment as insurance against back to creditors. This means that debt service corporate distress. capacity becomes more binding, and causes higher cutbacks in investment when debt is high.15 Prudential policy. The analysis suggests that large Overall, the results suggest that the debt overhang firms have taken on a disproportionate share of channel is a vulnerability for investment across aggregate debt stock, raising the possibility that EMDE firms. This linkage is especially pro- there could be financial stability implications if nounced in large firms and highly leveraged these firms faced balance sheet distress. This firms.16 argues for increased stress testing of corporate balance sheets and greater monitoring of the largest firms, especially their foreign exchange Policy implications hedging and liquidity management. These types of This Special Focus points to both financial policies can increase the scope for adequate stability and growth-related challenges facing preparation for possible corporate distress. They policymakers in countries where corporations can help to reduce the potential disruptions that exhibit high debt levels. To reduce financial could result from tightening advanced-economy financial conditions and increased volatility of international financial flows. Preemptive policies that improve bank risk management and lending 15 An alternative to exogenously-specified debt thresholds is to allow for endogenous thresholds in the relationship between debt practices, such as liquidity requirements in the service capacity and investment. Threshold regressions following Basel III accord or caps on foreign currency Hansen (1999) based on a balanced sample also suggests a similar exposure on bank balance sheets, would help nonlinear relationship between debt service capacity and investment under low and high levels of debt to sales ratio. constrain bank risky borrowing (BIS 2013). These 16 The analysis also experiments with sensitivity of debt service policies help prevent EMDE corporates from capacity to investment across countries of varying financial taking on excessive debt under benign financing development, creditor rights protection, and public debt levels. The analysis does not find consistent evidence that this sensitivity varies conditions and periods of high corporate significantly along these lines. profitability. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 S P EC IAL FO CU S 2 103 Structural policies FIGURE SF2.8 Policy implications The foregoing analysis illustrates the potential for Fiscal space has deteriorated in EMDEs since the crisis, which may increase the costs of financial support in cases of systemic corporate excessive corporate debt to dampen private distress. Policies to promote equity market development in EMDEs, investment. There are a number of structural including strengthening corporate shareholder rights, can help achieve a more balanced debt/equity mix. Strengthening bankruptcy protection, policy options that can help reduce this risk: which lags behind global best practices in EMDEs, may help contain corporate distress costs from debt overhang. • Most tax systems favor the use of debt over equity by providing tax deductibility for A. Fiscal sustainability gap: EMDEs B. Equity market concentration interest payments. Policies such as “thin capitalization rules,” which limit the amount of debt companies can issue relative to equity, have been found to be effective in lowering debt ratios and reducing financial distress under certain conditions (de Mooij and Hebous 2017). • The quality of debt could be increased by improving credit information and collateral C. Bankruptcy rights protection: D. Corporate shareholder rights: registries to shorten collateral recovery times EMDEs EMDEs and reduce default losses. These policies help improve credit-relevant information flows and break down information asymmetries, and thereby help channel more credit to those firms that lack access to credit, especially among small- and medium-sized enterprises (SMEs). • Many EMDEs have not developed their Sources: International Monetary Fund, World Bank. A. Simple averages. A sustainability gap is defined as the difference between the actual fiscal equity markets to full potential in part because balance and the debt-stabilizing balance (Kose et al. 2017). Sustainability gaps are measured under of regulatory burdens that discourage new current conditions. The year of global recession (2009) is shaded in gray. B. Number of listed companies per 1,000,000 people. listings and weaknesses in corporate govern- C.D. AE = Advanced Economies, EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the Caribbean, SAR = South Asia, and SSA = Sub-Saharan Africa. ance and shareholder rights that undermine Denotes year 2017. Distance to frontier score based on World Bank Doing Business report. the integrity and liquidity of stock markets. C. Distance to frontier score for strength of insolvency resolution. AE, EAP, ECA, LAC, MNA, SAR, SSA include 37, 20, 19, 28, 16, 8, and 44 economies, respectively. Addressing these shortcomings would D. Distance to frontier score for strength of shareholder rights protection. AE, EAP, ECA, LAC, MNA, SAR, SSA include 37, 20, 21, 29, 16, 8, and 44 economies, respectively. strengthen equity markets and mitigate debt Click here to download data and charts. biases. Equity financing helps increase firms’ resilience, improves their creditworthiness, and lessens the risk of large-scale, broad-based, and correlated corporate retrenchments. EMDE bankruptcy protection law lags Promoting a more balanced debt/equity mix international best practices, implying scope and incentivizing equity financing may be for policy reforms in this area. Historical particularly relevant for small firms, which experience suggests strengthening bankruptcy tend to rely mostly on bank and internal protection can boost investment activity and financing. facilitate responsible corporate risk-taking, helping to relieve the costs of debt overhang • An excessive accumulation of corporate debt (e.g., Gopalan, Mukherjee, and Singh 2016; can occur when explicit or implicit state World Bank 2014). For small firms, these guarantees are too generous, and when policies should also promote long-term bankruptcy regimes do not allow quick and financing, which has been limited in EMDEs fair debt workouts for companies. Overall, (World Bank 2015). Recent reforms in 104 S P EC IAL FO CU S 2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 bankruptcy procedures have occurred in of secured creditors’ rights in India, and several EMDEs, including the introduction of setting up new restructuring mechanisms in a new bankruptcy law in Egypt, strengthening Poland (IMF 2017c; World Bank 2018b). TABLE SF2.1 Debt overhang and investment: Baseline specification (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) VARIABLES all all all all ex China ex China ex China ex China China China China China Debt overhang 0.020*** 0.018*** 0.017*** 0.017*** 0.033*** 0.028*** 0.030*** 0.027*** 0.009*** 0.009*** 0.007*** 0.007*** (inverse) (0.002) (0.002) (0.003) (0.003) (0.006) (0.005) (0.006) (0.006) (0.002) (0.002) (0.002) (0.002) 0.068*** 0.034 0.045 0.013 0.126*** 0.105** Cash flows (0.026) (0.027) (0.031) (0.032) (0.043) (0.042) -0.013*** -0.013*** -0.013*** -0.013*** -0.017*** -0.016*** Leverage (0.002) (0.002) (0.002) (0.002) (0.005) (0.005) -0.081*** -0.068*** -0.083*** -0.068*** -0.106*** -0.088*** -0.108*** -0.089*** -0.045*** -0.039*** -0.047*** -0.040*** Maturity (0.013) (0.013) (0.013) (0.013) (0.020) (0.020) (0.020) (0.020) (0.012) (0.012) (0.012) (0.012) 0.013*** 0.013*** 0.014*** 0.013*** -0.001 -0.002 -0.001 -0.002 0.024*** 0.024*** 0.024*** 0.024*** Sales growth (0.001) (0.001) (0.002) (0.002) (0.003) (0.003) (0.003) (0.003) (0.001) (0.001) (0.001) (0.001) -0.057*** -0.083*** -0.059*** -0.083*** -0.050*** -0.082*** -0.052*** -0.083*** -0.057*** -0.076*** -0.054*** -0.073*** Size (0.005) (0.005) (0.005) (0.005) (0.007) (0.008) (0.007) (0.008) (0.005) (0.006) (0.006) (0.006) Observations 453,793 453,793 453,793 453,793 241,173 241,173 241,173 241,173 212,620 212,620 212,620 212,620 R-squared 0.361 0.362 0.361 0.362 0.353 0.354 0.353 0.354 0.388 0.389 0.388 0.389 All right hand side variables are lagged by one year. Clustered standard errors by firm in parentheses. *** p<0.01, ** p<0.05, * p<0.1 Notes: Dependent variable is net investment to sales ratio. Debt overhang (inverse) denotes the ratio of earnings before interest and taxes (EBIT) to total debt. Cash flows is EBIT-to-sales ratio, Leverage is total debt-to-sales ratio, Maturity is the ratio of long-term debt to total debt, Size is log of sales. EBIT is three-year smoothed average. Regressions include firm and country- sector-year fixed effects. Regression sample includes 129,687 firms. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 S P EC IAL FO CU S 2 105 Annex SF2.1 Data and methodology: Firm-level analysis Data long-term corporate debt, earnings before interest and taxes (EBIT), and total assets (above $5 The firm-level analysis is based on data from million) in at least one year over the sample ORBIS, produced by Bureau van Dijk Electronic period. A cleaning procedure similar to Kalemli- Publishing (BvD). The sample contains firm-level Ozcan, Laeven, and Moreno (2015) is conducted balance sheet information in 13 large EMDEs to generate a usable dataset, including the across Africa, Asia, Europe, and Latin following: America. The countries include Brazil, China, Colombia, Hungary, India, Malaysia, Mexico, the 1. drop company-years that simultaneously lack Philippines, Poland, the Russian Federation, data on total assets, sales, and employment. South Africa, Thailand, and Turkey. The balance 2. drop entire company for all years if total sheet information comes from regulatory and assets, employment, sales, tangible fixed assets, other sources (e.g., local chambers of commerce). or fixed assets is negative in any given year. The sample is an unbalanced panel based on data 3. drop companies denoted as non-profit for 2007-2015. In contrast to most other major organizations firm-level databases (e.g., Worldscope), most firms in the sample are non-publicly-listed firms (more 4. change value to “missing” if long-term debt or than 95 percent). About 90 percent of firms in the current liabilities are negative. sample have an asset size below $50 million (the cutoff for “large firm”). Industry-level information This yields an unbalanced sample of 434,256 is available based on the NACE Rev. 2 classifi- firms. In the non-China sample, the number of cation. firms in each country is not dominated by any particularly country.18 All observations are A limitation of the Orbis dataset is that it does not winsorized (transformed by limiting extreme comprise the full universe of firms in the EMDE values) at the 1 percent level to prevent the impact sample considered, and hence may not necessarily of extreme outliers. reflect the entire corporate sector in these economies. Nevertheless, compared to other Methodology standard firm-level datasets, it covers a much Investment is measured from data on the stock of larger sample of private firms, which are important fixed assets. Thus, investment is measured on a net drivers of economic activity in the EMDE basis, calculated as the annual difference in fixed corporate sector.17 assets (deflated in real terms, scaled by real sales). The primary aim of the firm-level analysis is to Total debt is defined as the sum of long-term debt take advantage of the dataset’s highly granular plus current liabilities. The primary debt overhang cross-sectional structure and employ a rich set of variable is measured as the ratio of a rolling three- interactive fixed effects. It also aims to control for year average of earnings before interest and taxes factors that are intrinsic to industry operations or (EBIT) to current total debt, which is an indicator demand, as well as to explore heterogeneity in of the size of accumulated debt relative to expected corporate debt behavior across firms. The dataset comprises those firms in the ORBIS 18 The sample comprises 6,758 firms in Brazil, 225,699 firms in database that have available data on fixed assets, China, 11,245 firms in Colombia, 6,677 firms in Hungary, 19,886 firms in India, 21,268 firms in Malaysia, 1,246 firms in Mexico, 5,345 firms in the Philippines, 19,487 firms in Poland, 87,402 firms 17 Based on a balanced sample for the sample as a whole, however, in Russia, 228 firms in South Africa, 19,711 firms in Thailand, and their trends in debt and net investment broadly reflect that of the 9,304 firms in Turkey. In the full baseline regression, constraints on aggregate (Figure SF2.5). The empirical results are also robust to data availability across all variables yields a firm sample of about estimation based on a balanced sample. 130,000 firms. 106 S P EC IAL FO CU S 2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 profits (Myers 1977). In the regression framework, variables in the corporate finance literature. cijt is this variable is expressed as the ratio of EBIT to the error term. e standard errors in the total debt rather than its reciprocal to avoid benchmark specification are clustered at the firm problems in cases where EBIT may be equal to or level, but the results are robust to clustering at the close to zero. country-industry level. Given that the debt overhang measure includes EBIT as well as total To examine the sensitivity of investment to debt debt, it may be correlated to some extent with cash overhang, the baseline estimating equation is as flow and leverage. us, these two variables are follows: included sequentially to check the robustness of = cijt + + 0 1Overhangcij,t-1 Xcij,t-1´ + i + cjt + cijt (1) the debt overhang sensitivity. where cijt denotes the net investment rate of firm i, Given the well-known volatility of EBIT, a three- industry j, country c, and year t. Overhangcijt year rolling average is used in calculating this denotes the benchmark measure of firm debt variable. e result is also robust to a measure of overhang as described earlier. In other words, debt overhang where each firm’s sample average Overhangcijt measures the debt-service capacity of a EBIT is used for all years. All variables on the firm. A higher value of 1 thus implies a higher right-hand side are lagged by one period. e sensitivity of investment to debt-service capacity. specification also includes firm fixed effects, i, Xcij,t-1 denotes a vector of control variables, which and country-industry-year fixed effects, cjt , to include firm size (log of total sales in U.S. dollars), control for firm-level time invariant heterogeneity sales growth, cash flows (EBIT-to-sales ratio), and a rich set of unobserved and observed time- leverage (debt-to-sales ratio), and debt maturity varying factors at the country-industry level, (ratio of long-term debt to total debt). Long-term respectively. ese factors may include, for debt is defined in the dataset as debt held by each example, industry demand effects or macro- firm with residual maturity greater than one year. economic shocks. e estimations are also ese variables are considered standard control conducted for China and non-China separately. 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Problem.” IMF Working Paper 16/203, International Monetary Fund, Washington, DC. CHAPTER 2 REGIONAL OUTLOOKS Growth in the East Asia and Pacific region is expected to remain solid, slowing marginally to 6.3 percent in 2018 and to an average of 6.1 percent in 2019-20, broadly as previously projected. This modest easing reflects a structural slowdown in China that is only partly offset by a maturing cyclical pickup in the rest of the region. While upside surprises to global activity could lead to stronger-than-expected regional growth, risks to the forecast remain tilted to the downside and include intensified trade restrictions and an abrupt tightening of global financing conditions. Recent developments Growth across the region remains solid. Exports continue to increase both in volume and value terms, benefiting from the recovery in global Growth in the East Asia and Pacific region investment and trade, as well as stronger trade and accelerated slightly to 6.6 percent in 2017, investment integration within Asia and between reflecting solid exports and strong domestic Asia and Eurasia (Chapter 1). Private con- demand (World Bank 2018a; Figure 2.1.1). sumption continues to be supported by solid Conditions are mostly favorable for the region in consumer confidence and rising household wealth, 2018, including robust global trade, moderate amid moderate inflation. borrowing costs, and sustained capital inflows. While inflation has generally picked up among Regional financial markets have generally commodity importers, it has been on a downward remained buoyant, despite volatility in early and trend in commodity exporters as the impact of mid-2018 related to the prospects of faster past currency depreciations wane. Output gaps monetary policy tightening in advanced have generally closed, but economic slack remains economies and escalating trade tensions. Bond in several commodity exporters (e.g., Mongolia, spreads in some countries have increased, Papua New Guinea). With the exception of following bouts of volatility in stock markets, but China, where investment continues its policy- remain close to the low levels that prevailed in guided deceleration, investment spending in the 2017. region has remained strong, partly reflecting improved business confidence, continued capital Domestic monetary conditions have tightened inflows, and higher earnings (e.g., Cambodia, Lao somewhat and tighter prudential policies have PDR, Vietnam). kept credit growth in check. Several major economies have renewed their fiscal consolidation In China, a solid rebound of exports amid robust efforts in 2018 (e.g., China, Indonesia, the Lao consumption growth helped output to expand in People’s Democratic Republic, Malaysia, 2017 at a slightly faster-than-expected pace Vietnam). (Figure 2.1.2; World Bank 2017a). Domestic demand has remained solid in 2018, reflecting robust consumption growth and recovering Note: The author of this section is Ekaterine Vashakmadze. Research assistance was provided by Brent Michael Harrison and private fixed asset investment. Tighter regulations, Jinxin Wu. especially of the shadow banking sector, have 114 CHAPTER 2.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE 2.1.1 EAP: Recent developments continued to reduce housing price growth and Growth in the region accelerated in 2017, reflecting solid exports and stabilize credit growth in the first half of 2018. domestic demand, and has continued to be solid this year. Regional The stock of corporate debt, which peaked in financial markets have generally remained buoyant despite volatility in 2016 at 167 percent of GDP, has continued to early and mid-2018. With the exception of China, where investment continues its policy-guided deceleration, investment spending in the region decline as percent of GDP in the first half of has remained strong. Inflation is generally in line with targets. 2018, but remains high by international standards (BIS 2018). Tighter enforcement of capital flows A. Growth B. Export growth helped ease capital outflows and exchange rate pressures. The renminbi appreciation has extended into 2018. China recorded its first current account deficit since 2001 in the first quarter of 2018, consistent with external rebalancing. In commodity-exporting economies, the invest- ment-led cyclical recovery has continued in response to higher commodity prices and low financing costs. That said, the pace of growth is C. Emerging market bond spreads D. Equity prices increasingly reflecting country-specific factors. In Indonesia, the strength observed last year has continued into 2018, led by rising investment on the back of higher commodity prices and accelerated infrastructure spending (World Bank 2017b). Growth continues to recover in Mongolia, supported by strong coal production and vigorous private investment. In Malaysia, growth is moderating after a strong rebound last E. Investment F. Inflation year. However, it remains robust and exports have continued to increase in the first half of 2018 (World Bank 2017c). Activity in commodity-importing economies excluding China remains strong, broadly in line with its underlying potential rate. In Thailand, activity remained solid in the first half of the year, following a sharp cyclical recovery in 2017, supported by firming exports (World Bank Sources: Haver Analytics, International Monetary Fund, World Bank. Note: EAP stands for East Asia and Pacific. Commodity importers ex. China include Cambodia, 2018b). Growth in the Philippines and Vietnam Fiji, Philippines, Solomon Islands, Thailand, Vietnam, and Vanuatu. Commodity exporters include remains robust, but capacity constraints (e.g., high Indonesia, Lao PDR, Mongolia, Malaysia, Myanmar, Papua New Guinea, and Timor-Leste. 1990- 2017 average for commodity exporters excludes Myanmar and Timor-Leste due to data limitations. capacity utilization rates) limit further acceler- Aggregate growth rates are calculated using constant 2010 U.S. dollar GDP-weights. A.E. Data in shaded area are forecasts. ation, especially in the Philippines (World Bank B. Data include only goods and reflect contributions to year-on-year 12-month moving average 2017d). growth. Aggregate growth rate for EAP excluding China excludes Cambodia, Fiji, Lao PDR, Mongolia, Myanmar, Solomon Islands, Papua New Guinea, Timor-Leste, Vanuatu, and Vietnam due to data limitations. Last observation is February for China and March 2018 for EAP excluding China. C. Measures the average spread of a country’s sovereign debt (as measured by J.P. Morgan’s Overall, the region benefits from solid Emerging Markets Bond Index) over their equivalent maturity U.S. Treasury bond. Last observation is May 24, 2018. fundamentals, including moderate domestic and D. Last observation is May 25, 2018. external imbalances and significant policy buffers E. Investment refers to total fixed investment. Aggregate growth rate for EAP excluding China excludes Fiji, Myanmar, Solomon Islands, Papua New Guinea, and Timor-Leste due to data (World Bank 2018a). However, some countries in limitations. F. Average year-on-year growth. The figure shows the midpoints of targeted ranges in 2018 in the region continue to face financial sector Indonesia (2.4-4.5 percent), the Philippines (2-4 percent), Vietnam (4 percent), China (3 percent), and Thailand (1-4 percent). For Malaysia, the midpoint of Bank Negara’s 2018 forecast of 2-3 percent is vulnerabilities, with elevated levels of debt (e.g., used. Last observation is April 2018. Click here to download data and charts. China, Lao PDR, Malaysia, Mongolia, Papua New Guinea, Thailand), still-fast credit growth G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 EAST ASIA AND PACIFIC 115 (e.g., China, the Philippines, Vietnam), high FIGURE 2.1.2 China foreign participation in local-currency sovereign In China, a strong rebound of exports amid robust consumption growth bond markets (e.g., Indonesia, Malaysia), and helped output to expand in 2017 at a slightly faster-than-expected pace. sizable fiscal deficits (e.g., Cambodia, Lao PDR, Tighter macroprudential policies have continued to reduce housing price growth and moderate credit growth in 2018. China recorded its first current Mongolia, Vietnam). account deficit since 2001 in the first quarter of 2018, consistent with ongoing external rebalancing. Outlook A. Contributions to growth B. Credit growth Regional growth is expected to gradually moderate from 6.3 percent in 2018 to 6.1 percent on average in 2019-2020, broadly unchanged from January forecasts (Tables 2.1.1 and 2.1.2; Figure 2.1.3). The slowdown in regional growth is largely due to the gradual structural slowdown in China, the region’s largest economy. Activity in the rest of the region is expected to peak in 2018 and remain steady around its potential rate in 2019 and 2020. C. Housing prices D. Balance of payments The outlook is predicated on broadly stable commodity prices in the next two years, solid but moderating global demand, and a gradual tightening of global financing conditions. Growth in China is projected to slow from 6.5 percent in 2018 to 6.3 percent on average in 2019-20. Policy support is expected to ease, led by regulatory and macroprudential tightening. Fiscal policies are expected to become less Sources: Haver Analytics, The People’s Bank of China, World Bank. A. Investment refers to gross capital formation, which includes change in inventories. Data in shaded accommodative to contain financial risks and area are forecasts. encourage a continued rebalancing of the B. Total social financing by uses. Last observation is 2018Q1. C. The National Bureau of Statistics of China surveys house prices in 70 cities and divides them into economy from investment to consumption and three tiers. The first tier includes Shanghai, Beijing, Guangzhou, and Shenzhen. The second tier includes 31 provincial capital and sub-provincial capital cities. The third tier includes 35 other cities. from industry to services. Growth in the rest of Lines indicate February 2011-April 2018 averages. Last observation is April 2018. D. Current account balance is based on seasonally adjusted data. Last observation is 2018Q1. the region is projected to reach 5.4 percent in Net capital flows and change in reserves are estimates. 2018 and remain broadly unchanged at 5.3 Click here to download data and charts. percent in both 2019 and 2020, as the cyclical recovery in these economies matures. economies are expected to close over the forecast horizon, as the adjustment to low commodity Growth in commodity exporters is expected to prices runs its course and investment growth remain broadly stable at about 5.3 percent in stabilizes. 2019, in line with its potential, with significant cross-country divergence. This forecast is slightly Growth in commodity importers is projected to above that of January, reflecting an upward moderate and converge with its potential rate of revision to a number of commodity exporters about 5.3 percent in 2019 and 2020. In (e.g., Malaysia, Mongolia), which more than offset commodity importers excluding China, an a downgrade in some other economies (e.g., Papua upgrade to growth projections in 2018 reflects an New Guinea, Timor-Leste). The downgrade in upward revision to Thailand due to stronger growth projections for Papua New Guinea is due exports, which are nevertheless projected to to a massive earthquake that hit the country in remain below the regional average. February and led to the temporary suspension of production of natural gas at the Hides gas field. For both commodity exporters and importers, Output gaps in most commodity exporting capacity constraints and price pressures are 116 CHAPTER 2.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE 2.1.3 EAP: Outlook and risks Risks Regional growth is expected to moderate from 6.3 percent in 2018 to 6.1 percent on average in 2019-20, largely due to the gradual structural slowdown in China. Activity in the rest of the region is projected to stabilize While upside surprises to global activity could lead as the cyclical rebound matures. Growth in commodity importers is to stronger-than-expected regional growth, risks to projected to converge with its potential rate of about 5.2 percent and the outlook remain tilted to the downside. remain around this level in 2019-20. Domestic vulnerabilities, related to elevated domestic debt and external financing needs in some countries, Increased protectionist tendencies in some large would amplify the impact of external shocks, especially where policy economies continue to create uncertainty about buffers are limited. the future of established trading relationships. The imposition of trade restrictions by advanced A. Growth B. Growth by groups economies would disproportionately affect the more open economies in the region. The economic impact of tariffs on imports to China, that have been discussed by the U.S. administration would likely be manageable provided they do not lead to escalation (Chapter 1; World Bank 2018a). However, there is a risk that such measures, may trigger retaliatory action and lead to broader trade restrictions. A significant C. Total debt D. Fiscal balances of 2018 disruption to activity in China would have large regional effects (World Bank 2016, 2018c). Rising geopolitical tensions, including in the Korean Peninsula and the South China Sea, could weigh on investor sentiment, leading to financial market volatility and softer regional investment (World Bank 2018a). In addition, a faster-than-expected tightening of Sources: Bank of International Settlements, Haver Analytics, International Monetary Fund, World Bank. global financing conditions and associated fi- Note: EAP stands for East Asia and Pacific. A.B. Commodity importers ex. China include Cambodia, Fiji, Philippines, Solomon Islands, Thailand, nancing stress—triggered, for instance, by changes Vietnam, and Vanuatu. Commodity exporters include Indonesia, Lao PDR, Malaysia, Mongolia, Myanmar, Papua New Guinea, and Timor-Leste. Shaded areas are forecasts. 1990-2017 average for in market expectations of advanced-economy commodity exporters excludes Myanmar and Timor-Leste due to data limitations. Aggregates are monetary policy—could reduce capital inflows, calculated using 2010 U.S. dollar GDP-weights. C. The highest debt-to-GDP ratio since 1995Q1. The peak occurred in 1997Q4 in Thailand, 1998Q4 heighten financial market volatility, and place in Malaysia, 2001Q4 in Indonesia, and 2016Q4 in China. Last observation is 2017Q3. D. Data reflect World Bank staff forecasts. pressure on regional exchange rates and asset Click here to download data and charts. prices. Rising borrowing costs could substantially increase the burden of debt servicing, which was expected to intensify over the forecast horizon, in contained in recent years by low global interest part reflecting higher oil prices, leading to further rates and risk premiums. tightening of monetary policy in the region. If a combination of downside risks were to Despite the projected robust activity in the region materialize, it could trigger a sharper-than- in the near term, underlying potential growth— expected slowdown in regional growth. Domestic which has fallen considerably over the past vulnerabilities—elevated domestic debt and large decade—is likely to decline further over the long external financing needs in some countries— term, reflecting increasingly adverse demographic would amplify the impact of external shocks, patterns and a projected slowing pace of capital especially where policy buffers are limited, and accumulation, which is needed to rein in credit dampen growth. growth (World Bank 2018a, 2018b). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 EAST ASIA AND PACIFIC 117 TABLE 2.1.1 East Asia and Pacific forecast summary Percentage point differences (Real GDP growth at market prices in percent, unless indicated otherwise) from January 2018 projections 2015 2016 2017e 2018f 2019f 2020f 2018f 2019f 2020f EMDE EAP, GDP1 6.5 6.3 6.6 6.3 6.1 6.0 0.1 0.0 0.0 (Average including countries with full national accounts and balance of payments data only)2 EMDE EAP, GDP2 6.5 6.3 6.6 6.3 6.1 6.0 0.1 0.0 0.0 GDP per capita (U.S. dollars) 5.8 5.6 5.9 5.7 5.5 5.5 0.1 0.0 0.1 PPP GDP 6.4 6.3 6.5 6.2 6.1 6.0 0.1 0.1 0.1 Private consumption 6.7 6.8 6.9 7.0 6.8 7.0 -0.1 -0.2 0.1 Public consumption 8.9 9.3 7.5 7.6 7.5 7.4 -0.2 0.9 0.9 Fixed investment 6.5 6.6 5.8 5.5 5.3 5.5 -0.3 -0.5 -0.2 Exports, GNFS3 0.5 3.2 7.3 5.7 6.0 5.8 1.6 1.5 1.1 Imports, GNFS3 0.8 5.4 5.7 5.8 6.1 6.4 0.6 0.8 1.1 Net exports, contribution to growth -0.1 -0.6 0.5 0.0 0.0 -0.2 0.2 0.2 -0.1 Memo items: GDP East Asia excluding China 4.9 4.9 5.3 5.4 5.3 5.3 0.1 0.0 0.1 China 6.9 6.7 6.9 6.5 6.3 6.2 0.1 0.0 0.0 Indonesia 4.9 5.0 5.1 5.2 5.3 5.4 -0.1 0.0 0.1 Thailand 3.0 3.3 3.9 4.1 3.8 3.8 0.5 0.3 0.4 Source: World Bank. Note: e = estimate; f = forecast. EMDE = emerging market and developing economy. 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. 1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Democratic People’s Republic of Korea and dependent territories. 2. Sub-region aggregate excludes Democratic People’s Republic of Korea, dependent territories, Fiji, Kiribati, the Marshall Islands, the Federated States of Micronesia, Myanmar, Nauru, Palau, Papua New Guinea, Samoa, Timor-Leste, Tonga, and Tuvalu, for which data limitations prevent the forecasting of GDP components. 3. Exports and imports of goods and non-factor services (GNFS). For additional information, please see www.worldbank.org/gep. TABLE 2.1.2 East Asia and Pacific country forecasts1 Percentage point differences (Real GDP growth at market prices in percent, unless indicated otherwise) from January 2018 projections 2015 2016 2017e 2018f 2019f 2020f 2018f 2019f 2020f Cambodia 7.0 7.0 6.8 6.9 6.7 6.6 0.0 0.0 -0.1 China 6.9 6.7 6.9 6.5 6.3 6.2 0.1 0.0 0.0 Fiji 3.6 0.4 3.8 3.5 3.4 3.3 0.0 0.1 0.1 Indonesia 4.9 5.0 5.1 5.2 5.3 5.4 -0.1 0.0 0.1 Lao PDR 7.3 7.0 6.7 6.6 6.9 6.9 0.0 0.0 0.0 Malaysia 5.0 4.2 5.9 5.4 5.1 4.8 0.2 0.1 0.1 Mongolia 2.4 1.5 5.1 5.3 6.4 6.5 2.2 -0.9 1.0 Myanmar 7.0 5.9 6.4 6.7 6.9 7.1 0.0 0.0 0.2 Papua New Guinea 5.3 1.9 2.2 -1.7 4.0 3.0 -4.2 1.6 -0.4 Philippines 6.1 6.9 6.7 6.7 6.7 6.6 0.0 0.0 0.1 Solomon Islands 3.7 3.5 3.2 3.0 2.9 2.8 0.0 0.1 0.1 Thailand 3.0 3.3 3.9 4.1 3.8 3.8 0.5 0.3 0.4 Timor-Leste 2 4.0 5.3 -1.8 2.2 4.2 4.0 -2.0 -0.8 -1.0 Vietnam 6.7 6.2 6.8 6.8 6.6 6.5 0.3 0.1 0.0 Source: World Bank. Notes: e = estimate; f = forecast. 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. 1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. 2. Non-oil GDP. Timor-Leste’s total GDP, including the oil economy, is roughly four times its non-oil economy and is highly volatile as a result of sensitivity to changes in global oil prices and local production levels. For additional information, please see www.worldbank.org/gep. Growth in the Europe and Central Asia region is anticipated to ease to 3.2 percent in 2018, down from 4.0 percent in 2017, as one-off supporting factors wane in some of the region’s largest economies. By 2020, growth is expected to gradually moderate to 3.0 percent due to less supportive external conditions, intensifying capacity constraints, and less accommodative fiscal and monetary policy in commodity importers. Growth in commodity exporters is expected to continue strengthening amid higher commodity prices. Regional risks remain tilted to the downside, reflecting the possibility of a disorderly tightening of financing conditions, renewed policy uncertainty, and rising trade protectionism. Recent developments 2018d). The effect of supportive fiscal measures in Romania, which fueled a strong pickup in Regional growth was strong in 2017, reaching 4.0 growth in 2017, have gradually faded in 2018. percent, with broad-based recoveries across both Meanwhile, activity is improving in commodity commodity importers and commodity exporters importers which experienced weak growth in 2017 (Figure 2.2.1).1 Despite robust activity in late due to domestic issues, such as rising political 2017 and early 2018, momentum has eased amid tensions (e.g., FYR Macedonia) and weaker public moderating export growth and less accommo- investment (e.g., Serbia). dative policies. Commodity exporters in the region continue to For commodity importers, the significant pickup experience a cyclical upturn, supported by higher in activity in 2017 was driven by strengthening oil prices, a pickup of domestic demand, and demand from the Euro Area and disbursements of strengthening export growth. In Russia, growth EU structural funds in Central Europe, but these turned positive in 2017 after two years of factors have started to wane gradually.2 In Turkey, contraction, reaching 1.5 percent. The improve- growth sharply accelerated to 7.4 percent in 2017 ment was marked by robust real wage gains, which from 3.2 percent in 2016, as it rebounded from supported a recovery in private consumption amid the 2016 failed coup attempt and benefited from declining inflation and stabilizing labor markets. supportive policy measures including tax cuts, Rising confidence encouraged a significant public transfers, and credit support measures for rebound in investment growth—especially in the small and medium-sized enterprises (World Bank mining, transport, and manufacturing sectors— following four years of contraction. The recovery in Russia generated positive spillovers to neighboring economies in Central Asia, South Note: The author of this section is Yoki Okawa. Research assistance was provided by Ishita Dugar. Caucasus, and Eastern Europe.3 New U.S. 1 Commodity importers are Bulgaria, Belarus, Bosnia and sanctions announced in April against Russian Herzegovina, Croatia, Georgia, Hungary, Kosovo, Former Yugoslav Republic of Macedonia, Moldova, Montenegro, Poland, Romania, and Serbia. Commodity exporters are Albania, Azerbaijan, Armenia, Kazakhstan, Kyrgyz Republic, Russian Federation, Tajikistan, 3 Eastern Europe countries are Belarus, Moldova, and Ukraine. Turkmenistan, Uzbekistan, and Ukraine. South Caucasus countries are Armenia, Azerbaijan and Georgia. 2 Central European countries are Bulgaria, Croatia, Hungary, Central Asia countries are Kazakhstan, Kyrgyz Republic, Tajikistan, Poland and Romania. Turkmenistan, and Uzbekistan. 120 CHAPTER 2.2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE 2.2.1 ECA: Recent developments organizations and individuals led to a depreciation of the Russian ruble and to increasing bond Growth in the region strengthened in 2017, but high-frequency indicators suggest slowing momentum in 2018. Economic sanctions on Russia led to spreads. some increase in bond spreads, as in the previous episode in 2014. Investment in commodity-importing economies was particularly strong in In Kazakhstan, activity also rebounded in 2017, 2017, but is expected to moderate in 2018. Fiscal policy is loosening and inflation expectations have risen in many commodity importers. Current supported by expanding oil production and account positions have deteriorated in some cases. recovering activity in the non-oil sector (World Bank 2018e). Growth in Kazakhstan was further A. Contribution to regional growth B. Bond spread for Russia after boosted by rising output from the new Kashagan sanction oil field, which is exempt from the production cuts agreed to by some OPEC and non-OPEC countries. In Azerbaijan, curbs on oil production were offset by stronger non-oil sector activity and fiscal stimulus measures. While slow progress with structural reforms and lingering geopolitical uncertainty dampened confidence and growth in Ukraine in 2017, conditions have started to improve in 2018. C. Investment D. Structural fiscal balance Inflation, current account, and public finances The recovery in some commodity importers has been associated with persistent or widening imbalances. Inflation rates are above or close to target in some countries, and closing output gaps are contributing to rising domestic inflation pressures (e.g., Romania, Turkey). Inflation E. Inflation expectations F. Current account balances expectations are trending upward in the largest countries in Central Europe (e.g., Bulgaria, Croatia, Hungary, Poland, Romania), as well as in Turkey. Current account deficits have either worsened or remain persistently large amid rising oil prices and robust imports, while fiscal policy continues to be procyclical in some commodity importers (e.g., Romania, Turkey). Among commodity exporters, inflation has Sources: Consensus Economics, International Monetary Fund, J. P. Morgan, World Bank. A. Aggregate growth rates calculated using 2010 U.S. dollar GDP weights. generally moderated, reflecting the unwinding B. Index value of Emerging Market Bond Index (EMBI) spread for Russia. EMBI spread is a measure of sovereign bond risk premiums. Index values are normalized to 100 (as reflected by the horizontal effects of past exchange rate depreciations or line) for the official date of the announcement of sanctions from the United States. Official dates are March 6 for 2014 sanctions and April 6 for 2018 sanctions. Last observation for the 2018 sanction is persistent economic slack (e.g., Azerbaijan, May 23, 2018. Kazakhstan, Russia). Current account positions C. Total investment growth for each group. Shaded area indicates forecasts. D. Values are general government structural balance as a percent of potential GDP. Median for have improved, supported by a rebound in oil each group. E. Average one-year-ahead inflation forecasts for given time from Consensus forecasts. prices, and the stabilization of inflation have F. Current account balance as a percent of GDP for selected countries. allowed monetary policy to ease in some countries. Click here to download data and charts. In contrast, Uzbekistan, which devalued its currency in September 2017, subsequently tight- ened its monetary policy. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 E URO PE AND CE NTRAL AS IA 121 FIGURE 2.2.2 ECA: Outlook and risks Outlook Growth is expected to moderate towards potential over the projection Growth in the region is projected to moderate period. Extensive trade openness, large current account deficit and from 4.0 percent in 2017—which was signifi- elevated corporate debt levels leave the region vulnerable to external shocks. cantly above potential—to 3.2 percent in 2018 and 3.0 percent in 2020 (Figure 2.2.2). The A. Actual and potential growth B. Growth forecast modest recovery continues among commodity exporters, supported by a further recovery in oil prices, but only partially offsets a slowdown in commodity importers. Despite the moderation, growth is expected to remain slightly above potential over the forecast horizon. The outlook for the region is predicated on stabilizing oil prices; more moderate, yet still-robust, growth in the Euro Area; an orderly tightening of global financing conditions; and an absence of rising C. Output gap D. Working-age population growth geopolitical tensions. Growth for commodity importers is expected to moderate from 5.9 percent in 2017 to 4.3 percent in 2018. Monetary and fiscal policies are expected to tighten as economies operate above capacity. Tighter labor market conditions and higher oil prices are expected to lead to rising inflation and tighter monetary policy, while past fiscal stimulus measures are expected to gradually unwind. E. Trade openness F. Corporate debt External conditions are expected to become less supportive as well. Euro Area imports are projected to decelerate gradually, leading to more modest export growth in Central Europe, the Western Balkans, and Turkey. Global interest rates are expected to rise, increasing borrowing costs and affecting net capital inflows to the region, while rising oil prices could exacerbate current account vulnerabilities in some countries. Sources: Bank for International Settlements, International Monetary Fund, Institute of International In Turkey, delays in fiscal consolidation and the Finance (IIF), United Nations, World Bank. A. Blue bars refer to GDP weighted average actual growth and vertical orange line show minimum- extension of the credit support program is maximum range of potential growth estimates based of five different methodologies (production function approach, multivariate filter, IMF World Economic Outlook five-year-ahead forecast, Consen- expected to temper the expected slowdown in sus Forecasts, and potential growth estimates in OECD Economic Outlook and OECD Long-Term Baseline Projections). 2018, amid tightening financing conditions and A.B. Shaded areas indicate forecasts. currency pressures. Inflation continues to be above B.C. Aggregate growth rates calculated using 2010 U.S. dollar GDP weights. D.E. Bars indicate 25th and 75th percentiles. target. In Central Europe, the positive effects D. Annual population growth for age 15-64 given period. Forecasts are taken from the medium forecast by the United Nations. from the accelerated disbursement in 2017 of E. Value of trade over GDP in 2016 for each region. EAP = East Asia and Pacific, ECA = Europe EU structural funds—which are equivalent to and Central Asia, LAC = Latin America and the Caribbean, MNA = Middle East and North Africa, SAR = South Asia, and SSA = Sub-Saharan Africa. more than 4 percent of GDP for some countries— F. The data used are IIF end-of-period estimates of non-financial corporate debt as a percentage of GDP. are expected to wane in 2018. Procyclical fiscal Click here to download data and charts. measures in Romania are projected to continue in 2018. 122 CHAPTER 2.2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 Among commodity exporters, the recovery from These include a disorderly tightening of financing weak or negative growth in 2014-16 is expected to conditions, heightened currency pressures, and continue in 2018-20. In Russia, growth is renewed geo-political tensions and policy projected to remain unchanged in 2018 at 1.5 uncertainty. percent as the effects of rising oil prices and monetary policy easing are offset by oil production A disorderly tightening of global financial cuts and heightened uncertainty associated with conditions combined with a further appreciation the latest sanctions. As dampening factors wane, of the U.S. dollar could trigger a sharp growth in Russia is anticipated to strengthen to deterioration of external financing conditions and 1.8 percent in 2019-20, providing some support lead to a reversal of capital flows and weakening to activity in Central Asia, the South Caucasus activity, particularly in countries with growing region, and Eastern Europe (World Bank 2018f). vulnerabilities. Current account deficits remain substantial in a number of countries (e.g., Assuming an easing of geopolitical tensions and Georgia, Kazakhstan, Kyrgyz Republic, Romania, progress in structural reforms, growth is projected Turkey, Ukraine), and are financed by volatile to pick up in Ukraine. Azerbaijan is projected to portfolio investment flows in some cases (World emerge from two years of disappointing growth, Bank 2018g, 2018h). Filling external financing mainly in response to fiscal stimulus measures needs could become challenging, while currency supported by higher oil prices and expanded pressures could intensify. Despite recent progresses natural gas production. However, in Kazakhstan, in reforms, banking sectors remain vulnerable to growth is expected to slow in 2018, as the effect of external shocks (e.g., Azerbaijan, Kazakhstan, the opening of the Kashagan oil field fades. Moldova, Tajikistan). Over the long term, potential growth in the region An escalation of policy uncertainty and is expected to decline further. Slower growth in geopolitical tensions could also negatively affect the working-age population is expected to weigh activity in the region. Moreover, intensification of on potential growth across the region. Delays or policy disagreements between some EU members reversals to needed structural reforms have affected and EU institutions—including in areas such as long-term growth prospects in a number of immigration policy and constitutional issues— countries (e.g., Azerbaijan, Croatia, Russia, could deter international investors. The region is Ukraine). In Uzbekistan, far-reaching structural also vulnerable to a rise in global protectionism, reforms—including exchange rate liberalization, given its openness to trade and integration in tax reform, privatization of state owned global supply chains (World Bank 2018i). enterprises, and banking sector reform—are expected to improve long-term growth prospects. Over the medium term, a weaker-than-expected energy price outlook would undermine the Risks recovery in large energy-exporting countries, including Kazakhstan, Russia, and Uzbekistan. The outlook continues to be subject to e slowdown could generate negative spillovers considerable risks. While stronger-than-expected to neighboring countries, such as Armenia, growth among major trading partners remains a Belarus, Georgia, Kyrgyz Republic, Moldova, and possibility, risks remain tilted to the downside. Tajikistan. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 E URO PE AND CE NTRAL AS IA 123 TABLE 2.2.1 Europe and Central Asia forecast summary (Real GDP growth at market prices in percent, unless indicated otherwise) Percentage point differences from January 2018 projections 2015 2016 2017e 2018f 2019f 2020f 2018f 2019f 2020f EMDE ECA, GDP1 1.1 1.7 4.0 3.2 3.1 3.0 0.3 0.1 0.0 EMDE ECA, GDP excl. Russia 3.6 2.9 5.5 4.2 3.9 3.8 0.6 0.1 0.1 (Average including countries with full national accounts and balance of payments data only)2 EMDE ECA, GDP2 1.0 1.6 4.0 3.2 3.1 3.0 0.3 0.1 0.1 GDP per capita (U.S. dollars) 0.6 1.2 3.6 2.8 2.8 2.7 0.3 0.1 0.0 PPP GDP 0.8 1.6 3.9 3.2 3.1 3.0 0.3 0.1 0.1 Private consumption -2.4 1.1 4.4 3.1 3.2 3.1 -0.2 -0.1 -0.2 Public consumption 0.1 3.1 1.5 1.5 1.4 1.3 0.2 -0.2 -0.3 Fixed investment 0.4 -0.2 6.8 5.2 4.8 4.7 1.5 0.9 0.9 Exports, GNFS3 3.9 3.6 6.5 4.8 4.7 4.7 0.1 0.0 0.1 Imports, GNFS3 -5.5 3.4 9.0 5.5 5.5 5.2 0.0 0.1 0.0 Net exports, contribution to growth 3.0 0.2 -0.4 0.0 0.0 0.0 0.0 0.0 0.0 Memo items: GDP Commodity exporters4 -2.0 0.3 2.0 2.0 2.3 2.3 -0.1 0.0 0.0 Commodity importers5 4.5 3.0 5.9 4.3 3.8 3.7 0.6 0.1 0.1 Central Europe6 3.7 3.2 4.8 4.2 3.7 3.5 0.2 0.2 0.3 Western Balkans7 2.1 3.1 2.5 3.2 3.4 3.8 -0.1 -0.2 0.0 Eastern Europe8 -7.6 0.8 2.5 3.3 3.6 3.5 0.2 0.1 0.0 South Caucasus9 1.7 -1.6 2.0 2.6 4.0 3.7 0.7 1.5 0.4 Central Asia 10 3.3 3.3 4.7 4.4 4.2 4.0 0.6 0.1 -0.3 Russia -2.5 -0.2 1.5 1.5 1.8 1.8 -0.2 0.0 0.0 Turkey 6.1 3.2 7.4 4.5 4.0 4.0 1.0 0.0 0.0 Poland 3.8 2.9 4.6 4.2 3.7 3.5 0.2 0.2 0.4 Source: World Bank. Notes: e = estimate; f = forecast. EMDE = emerging market and developing economy. 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. 1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. 2. Sub-region aggregate excludes Bosnia and Herzegovina, Kosovo, Montenegro, Serbia, Tajikistan, and Turkmenistan, for which data limitations prevent the forecasting of GDP components. 3. Exports and imports of goods and non-factor services (GNFS). 4. Includes Albania, Armenia, Azerbaijan, Kazakhstan, the Kyrgyz Republic, Kosovo, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. 5. Includes Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Georgia, Hungary, FYR Macedonia, Moldova, Montenegro, Poland, Romania, Serbia, and Turkey. 6. Includes Bulgaria, Croatia, Hungary, Poland, and Romania. 7. Includes Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro, and Serbia. 8. Includes Belarus, Moldova, and Ukraine. 9. Includes Armenia, Azerbaijan, and Georgia. 10. Includes Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. For additional information, please see www.worldbank.org/gep. 124 CHAPTER 2.2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 TABLE 2.2.2 Europe and Central Asia country forecasts1 (Real GDP growth at market prices in percent, unless indicated otherwise) Percentage point differences from January 2018 projections 2015 2016 2017e 2018f 2019f 2020f 2018f 2019f 2020f Albania 2.2 3.4 3.8 3.6 3.5 3.5 0.0 0.0 0.0 Armenia 3.2 0.2 7.5 4.1 4.0 4.0 0.3 0.0 0.0 Azerbaijan 1.1 -3.1 0.1 1.8 3.8 3.2 0.9 2.3 0.6 Belarus -3.8 -2.5 2.4 2.9 2.7 2.5 0.8 0.3 0.1 Bosnia and Herzegovina 2 3.1 3.1 3.0 3.2 3.4 4.0 0.0 0.0 0.5 Bulgaria 3.6 3.9 3.6 3.8 3.6 3.6 -0.1 -0.4 -0.3 Croatia 2.3 3.2 2.8 2.6 2.7 2.8 0.0 -0.1 -0.2 Georgia 2.9 2.8 5.0 4.5 4.8 5.0 0.3 0.1 0.0 Hungary 3.1 2.0 4.0 4.1 3.2 3.0 0.3 0.1 0.1 Kazakhstan 1.2 1.1 4.0 3.7 3.3 2.8 1.1 0.5 -0.2 Kosovo 4.1 4.1 4.4 4.8 4.8 4.8 0.0 0.0 0.1 Kyrgyz Republic 3.9 4.3 4.6 4.2 4.8 5.0 0.0 0.0 0.4 Macedonia, FYR 3.9 2.9 0.0 2.3 2.7 3.0 -0.9 -1.2 -1.0 Moldova -0.4 4.5 4.5 3.8 3.7 3.5 0.0 0.1 0.2 Montenegro 3.4 2.9 4.4 2.8 2.5 2.1 0.0 0.0 0.0 Poland 3.8 2.9 4.6 4.2 3.7 3.5 0.2 0.2 0.4 Romania 3.9 4.8 7.0 5.1 4.5 4.1 0.6 0.4 0.6 Russia -2.5 -0.2 1.5 1.5 1.8 1.8 -0.2 0.0 0.0 Serbia 0.8 2.8 1.9 3.0 3.5 4.0 0.0 0.0 0.0 Tajikistan 6.0 6.9 7.1 6.1 6.0 6.0 1.1 0.5 0.3 Turkey 6.1 3.2 7.4 4.5 4.0 4.0 1.0 0.0 0.0 Turkmenistan 6.5 6.2 6.5 6.3 6.3 6.3 0.0 0.0 0.0 Ukraine -9.8 2.3 2.5 3.5 4.0 4.0 0.0 0.0 0.0 Uzbekistan 7.9 7.8 5.3 5.0 5.1 5.5 -0.6 -1.2 -1.0 Source: World Bank. Notes: e = estimate; f = forecast. 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. 1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars, unless indicated otherwise. 2. GDP growth rate at constant prices is based on production approach. For additional information, please see www.worldbank.org/gep. Growth in Latin America and the Caribbean is projected accelerate moderately, from 0.8 percent in 2017 to 1.7 percent in 2018 and 2.3 percent in 2019, largely reflecting accelerating growth in commodity exporters. A cyclical recovery is underway in Brazil, and conditions are improving in Chile, Colombia, Mexico, and Peru. Downside risks to the growth outlook are significant, however. External risks include an abrupt tightening of financing conditions and an escalation of trade protectionism. Domestic risks, including policy uncertainty and disruptions from natural disasters, also stand to inhibit growth. Recent developments In Brazil, Argentina, and Chile—three of the largest commodity-exporting economies—indus- Growth in Latin America and the Caribbean has trial production growth was considerably higher in been accelerating, driven by generally favorable the first quarter of 2018 than a year before, and domestic and external financing conditions, retail sales growth was higher in Brazil and Chile, strengthening growth in the United States, and supporting activity. However, a drought is higher prices of key commodities relative to a year disrupting agricultural production in Argentina, ago. Except in Brazil and, to a lesser degree, and the recent market volatility may have Colombia, negative output gaps are nearly closed.1 inhibited activity in the second quarter. In República Bolivariana de Venezuela, an economic Private consumption was the main contributor to and humanitarian crisis continues, and an regional growth of 0.8 percent in 2017, and is increasing number of Venezuelans are migrating estimated to have strengthened further in early to neighboring countries. 2018 amid supportive confidence and the effect of previous interest rate cuts. Regional investment In Mexico, the largest commodity-importing has been recovering after a deep, prolonged economy in the region, high-frequency indicators contraction, supported by a strong recovery in have been mixed. Trade is becoming more commodity prices last year (Figure 2.3.1). supportive of growth, and the contraction in investment in 2017 is fading, but sluggish retail Robust global demand has boosted exports and sales point to slightly moderating private helped narrow current account deficits as a share consumption growth. of GDP in some countries (e.g., Brazil, Mexico). At the regional level, however, import growth is In the Caribbean, strong external demand is outpacing export growth, owing to the recovery of benefiting most services-exporting economies (e.g., domestic demand in commodity exporters, and as the Dominican Republic, Jamaica, St. Lucia, a result net exports still contribute slightly Grenada). Despite the hurricanes in the autumn of negatively to regional growth. 2017, tourist arrivals to the Caribbean reached an all-time high last year. Note: This section was prepared by Dana Vorisek. Brent Harrison Inflation is decelerating in most LAC economies, provided research assistance. with the key exceptions of Argentina and the 1 Output gaps are calculated, using a multivariate filter, for seven LAC economies: Argentina, Bolivia, Brazil, Chile, Colombia, extreme case of Venezuela. Median inflation in Mexico, and Peru. commodity exporters is well below its historical 126 CHAPTER 2.3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE 2.3.1 LAC: Recent developments average. Policy interest rates in almost all commodity exporters have been cut during the Growth in LAC is accelerating, driven in large part by a cyclical recovery in Brazil and improving conditions in other large commodity-exporting first half of 2018. Brazil, Colombia, and Peru have economies. Investment is picking up after an extended period of cut rates repeatedly. Recent monetary policy contraction, while private consumption is strengthening amid supportive confidence and the effect of previous interest rate cuts, despite an uptick in statements, however, suggest that the easing cycle unemployment. Net exports in the region are still contributing negatively to may be coming to an end. Among commodity growth, in part due to rapid import growth as domestic demand rises. importers, inflation has eased somewhat since early 2018 (e.g., in Mexico, El Salvador, Jamaica), A. GDP growth B. Investment growth after accelerating rapidly in 2017 on fuel and food price increases. Although external financing conditions remain supportive, sovereign bond yields have risen modestly in the large economies in the region since the start of 2018, consistent with the trend across emerging markets. Yields have risen by a larger amount in Argentina, where the central bank hiked interest rates sharply in April and May C. Confidence D. Unemployment rate in response to currency pressures. Fiscal deficits in the region have narrowed slightly relative to levels seen during the commodity price plunge, yet are still high. There is significant need for fiscal consolidation, especially in light of high debt levels in many countries (Végh et al. 2018). Brazil’s government debt, for instance, recently reached record levels, and critical pension reform legislation has been delayed until after the new E. Inflation F. Export and import volume growth administration takes office in early 2019. Government debt is also high in El Salvador, Uruguay, Venezuela, and most Caribbean countries. In Grenada and Jamaica, however, fiscal rules have provided the discipline needed to begin reducing debt. Outlook Regional growth is projected to accelerate during Sources: CPB Netherlands Bureau for Economic Policy Analysis, Haver Analytics, International Labor Organization, Oxford Economics, World Bank. the forecast horizon, to 1.7 percent in 2018 and to A. 2010 GDP-weighted averages. Sample includes 13 commodity exporters and three commodity importers. Last observation is 2017Q4. 2.5 percent by 2020, still below the long-term B. Investment is gross fixed capital formation. Aggregate investment rates calculated using constant 2010 investment-weighted averages. Last observation is 2017Q4. (1990–2017) average of 2.7 percent. This outlook C. Last observation is May 2018 for Brazil and April 2018 for Mexico. is lower than that produced in January, mostly due D. Regional average weighted by size of labor force in 2014. Sample includes Argentina, Belize, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Mexico, Peru, and Uruguay. Last to large downward revisions to projections for observation is 2018Q1. E. Lines show medians of 14 commodity exporters and eight commodity importers, and horizontal Venezuela, but also to downgrades for Argentina lines the averages from January 2000 to present. Last observation is April 2018. (Tables 2.3.1 and 2.3.2). Regional growth through F. Sample includes 13 economies. Last observation is March 2018. Click here to download data and charts. 2020 will come almost exclusively from private consumption and investment (Figure 2.3.2). Accelerating private consumption growth in the region reflects the effect of previous interest rate cuts and supportive consumer confidence in some G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 LATIN AMERICA AND CARIBBEAN 127 large economies. Investment growth in LAC is FIGURE 2.3.2 LAC: Outlook and risks expected to reach 3.7 percent in 2018, and to firm Growth in Latin America and the Caribbean is projected to continue to to 4.6 percent in 2020. The investment recovery accelerate during the forecast horizon, driven almost exclusively by will be supported by a broad-based cyclical domestic demand— in particular, private consumption and investment. Although per capita GDP growth is projected to rise after a long period of recovery in Brazil, rising copper prices and fading contraction, it will only marginally exceed that in advanced economies by disruptions in the mining industry (e.g., Chile, 2020, resulting in stalled convergence. Significant downside risks to the Peru), large infrastructure projects (e.g., growth outlook remain, including an abrupt tightening of external financing conditions, increased trade protectionism, policy uncertainty, and the Argentina, Colombia, Panama, Peru), and stable effects of natural disasters. capital inflows. A. Regional growth B. Capital inflows to LAC In most large commodity exporters, including Brazil, Chile, Colombia, and Peru, growth is projected to accelerate in 2018 and 2019. In these economies, the recovery is expected to reflect upward momentum in private consumption, continued acceleration in investment growth, and, in all except Colombia, a modest contribution from net exports. In Argentina, on the other hand, growth is expected to slow in 2018 as monetary and fiscal tightening, together with the C. Per capita GDP growth and D. Economic policy uncertainty effects of the drought on the agricultural sector, potential growth counter strong momentum at the start of the year. In Ecuador, growth is expected to moderate during the forecast horizon in the context of gradual fiscal consolidation. For oil exporters across the region, the upward revision to oil prices will provide a boost to growth. Growth in commodity importers, which are geographically concentrated in the Mexico and E. Primary balance adjustment F. Export losses in case of tariff hikes Central America and the Caribbean subregions, is needed to stabilize government debt to WTO bound rates also expected to strengthen in 2018, in part due to rising demand for exports as growth picks up in the United States. In Mexico, a reversion to positive investment growth is also projected to support growth through the forecast horizon, while private consumption growth is expected to stall at a lower rate than in recent years. The outlook for Central America is mixed, with growth in some agricultural exporters (e.g., Costa Sources: Baker, Bloom, and Davis (2016); Haver Analytics; Institute of International Finance; Kutlina-Dimitrova and Lakatos (2017); Végh et al. (2018); World Bank. Rica, Guatemala) expected to accelerate A. Bars show contribution of each of the components of GDP to regional growth. A.C. GDP-weighted averages. moderately through 2020 and that in commodity B. Sample includes Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela. Estimates importers (El Salvador, Panama) expected to as of May 2018. C. Bars show annual per capita growth and lines average potential growth during 2016–20. stabilize or decelerate. D. For Brazil, the index is normalized to equal 100 at its 1991–2011 median. For Mexico, the index is normalized to equal 100 at its 1996–2016 median. Horizontal lines show medians during these periods. Last observation is April 2018. In the Caribbean, post-hurricane reconstruction, E. Calculated using methodology described in Végh et al. (2018). Venezuela, not shown in the figure, is estimated to need a primary balance adjustment of 26 percentage points of GDP to stabilize debt. robust tourism, and supportive commodity F. Based on simulations using the GDyn computable general equilibrium model. Results show prices are expected to lift growth in 2018. cumulative decline by 2020, relative to a business-as-usual scenario, assuming that tariff hikes start in 2018. The scenario is defined as a worldwide increase in tariffs up to legally allowed bound rates Some commodity-reliant economies (Suriname, coupled with an increase in the cost of traded services of 3 percent. World Trade Organization (WTO) bound tariffs are the maximum tariffs under WTO commitments. Trinidad and Tobago) are expected to register Click here to download data and charts. their highest growth rates since before the 2014– 128 CHAPTER 2.3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 16 oil and metals price drop. Rapid development Downside risks also emanate from international of an offshore oil industry is expected to boost trade channels. Adverse outcomes of the NAFTA Guyana’s growth sharply in 2020. renegotiations could hold back growth in Mexico. Additional trade-restricting actions by China and Despite the cyclical recovery underway in the the United States could have negative effects on region, potential growth is expected to moderate the region through trade, confidence, financial, in the medium term, averaging 2.3 percent in and commodity market channels, and may 2018–22, compared to an estimated 2.7 percent encourage policy support for increased protec- in 2013–17 (World Bank 2018c). This projection tionism (Huidrom, Kose, and Ohnsorge 2017; reflects slower labor force growth and capital Kose et al. 2017). Protectionism in the form of accumulation, as well as continued weakness in increases in actual tariffs to bound tariffs would total factor productivity, and raises doubts about reduce exports from LAC significantly (Kutlina- the region’s ability to deliver sustained progress on Dimitrova and Lakatos 2017). However, for some per capita income convergence with advanced specific agricultural products, such as soybeans, economies. Per capita GDP growth in the region and maize, tariff increases by China on U.S. is projected to exceed that in advanced economies exports could raise demand for LAC exports. only in 2020, following a long stretch of Furthermore, the region has recently become contraction, but remain well below the EMDE more active in pursuing new trade agreements, average. This outlook reinforces the need for most prominently between Mercosur and the reforms to counter less favorable demographics, European Union. boost investment growth after the extended period of weakness, and raise persistently low On the domestic front, a key downside risk is an productivity (World Bank 2018c). escalation of policy uncertainty. The medium- term policy environment in the two largest Risks economies in the region, Brazil and Mexico, could shift following presidential and legislative Risks to the regional growth outlook continue to elections in the second half of the year. Significant be predominantly downside, through external and delays in key reforms could lead to sudden domestic channels. However, the possibility of changes in investor sentiment and derail a still- favorable spillovers as the United States fragile investment recovery. implements fiscal stimulus cannot be ruled out. Externally, an abrupt tightening of financing Recent years have also demonstrated the conditions or changes in investor sentiment vulnerability of the region to floods, droughts, regarding EMDEs as advanced economies hurricanes, earthquakes, and wildfires, which unwind monetary policy accommodation, such as threaten to become more common in the medium that experienced by Argentina recently, could set to long term as climate conditions change (Bello back capital inflows and growth in the region. 2017). This is a particular risk for countries with large current account deficits (e.g., Argentina, Bolivia, An upside risk to the regional outlook is the Nicaragua, Panama) or significant fiscal adjust- possibility of stronger-than-expected favorable ment needs (e.g., Argentina, Brazil), and for those spillovers from the United States as it implements where credit quality has deteriorated. A marked fiscal stimulus. This would tend to benefit Mexico tightening of the external financing environment and Central America the most. However, any or a softening of global commodity prices could boost would likely be short-lived given that U.S. also contribute to a growth slowdown, which may fiscal stimulus is slated to fade later in the forecast not be sufficiently addressed with countercyclical horizon, and that the stimulus will occur in the fiscal policy given the lack of fiscal space (Végh et context of expected monetary policy tightening. al. 2018). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 LATIN AMERICA AND CARIBBEAN 129 TABLE 2.3.1 Latin America and Caribbean forecast summary (Real GDP growth at market prices in percent, unless indicated otherwise) Percentage point differences from January 2018 projections 2015 2016 2017e 2018f 2019f 2020f 2018f 2019f 2020f EMDE LAC, GDP1 -0.4 -1.5 0.8 1.7 2.3 2.5 -0.3 -0.3 -0.2 (Average including countries with full national accounts and balance of payments data only)2 EMDE LAC, GDP2 -0.4 -1.5 0.8 1.7 2.3 2.5 -0.3 -0.3 -0.2 GDP per capita (U.S. dollars) -1.5 -2.6 -0.3 0.7 1.3 1.5 -0.3 -0.3 -0.2 PPP GDP 0.2 -0.9 1.1 1.9 2.4 2.6 -0.3 -0.3 -0.2 Private consumption -0.3 -1.7 1.4 2.1 2.5 2.7 0.0 -0.2 -0.2 Public consumption 0.9 0.0 -0.4 -0.2 0.2 0.7 -0.2 -0.7 0.0 Fixed investment -5.5 -6.0 -0.9 3.7 4.0 4.6 1.1 0.4 0.9 Exports, GNFS3 4.3 1.3 2.0 3.2 3.7 3.9 -0.7 -0.3 0.1 Imports, GNFS 3 -2.0 -2.9 4.8 4.3 4.1 4.6 0.8 -0.1 0.6 Net exports, contribution to growth 1.3 0.9 -0.6 -0.2 -0.1 -0.2 -0.3 -0.1 -0.2 Memo items: GDP South America4 -1.8 -3.2 0.2 1.3 2.1 2.3 -0.6 -0.4 -0.4 Mexico and Central America 5 3.4 3.1 2.2 2.5 2.7 2.8 0.1 -0.1 0.1 Caribbean6 3.7 2.6 2.4 3.5 3.5 3.8 0.0 0.0 0.4 Brazil -3.5 -3.5 1.0 2.4 2.5 2.4 0.4 0.2 -0.1 Mexico 3.3 2.9 2.0 2.3 2.5 2.7 0.2 -0.1 0.1 Argentina 2.7 -1.8 2.9 1.7 1.8 2.8 -1.3 -1.2 -0.4 Source: World Bank. Notes: e = estimate; f = forecast. EMDE = emerging market and developing economy. 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. 1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Cuba. 2. Aggregate includes all countries in notes 4, 5, and 6 except Grenada, St. Kitts and Nevis, and Suriname, for which data limitations prevent the forecasting of GDP components. 3. Exports and imports of goods and non-factor services (GNFS). 4. Includes Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay, and Venezuela. 5. Includes Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, and Panama. 6. Includes Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, 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. 130 CHAPTER 2.3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 TABLE 2.3.2 Latin America Caribbean country forecasts1 (Real GDP growth at market prices in percent, unless indicated otherwise) Percentage point differences from January 2018 projections 2015 2016 2017e 2018f 2019f 2020f 2018f 2019f 2020f Argentina 2.7 -1.8 2.9 1.7 1.8 2.8 -1.3 -1.2 -0.4 Belize 3.8 -0.5 1.2 2.0 1.9 1.7 -0.2 0.2 0.0 Bolivia 4.9 4.3 4.2 3.9 3.6 3.4 0.1 0.2 0.1 Brazil -3.5 -3.5 1.0 2.4 2.5 2.4 0.4 0.2 -0.1 Chile 2.3 1.3 1.5 3.3 3.4 3.5 0.9 0.7 0.7 Colombia 3.0 2.0 1.8 2.7 3.3 3.6 -0.2 -0.1 0.2 Costa Rica 3.6 4.2 3.2 3.4 3.6 3.6 -0.2 0.1 0.1 Dominican Republic 7.0 6.6 4.6 5.0 4.7 4.6 0.1 0.0 -0.1 Ecuador 0.1 -1.6 3.0 2.2 1.5 0.9 1.4 0.6 -0.1 El Salvador 2 2.4 2.6 2.3 2.3 2.2 2.2 0.5 0.4 0.3 Grenada 6.4 3.7 4.5 3.3 2.8 2.8 1.1 0.7 0.7 Guatemala 4.1 3.1 2.8 3.1 3.3 3.3 -0.3 -0.2 -0.2 Guyana 3.1 3.4 2.1 3.8 3.8 29.0 0.0 0.1 25.3 Haiti3 1.2 1.5 1.2 1.8 2.4 2.4 -0.4 -0.1 -0.1 Honduras 3.8 3.8 4.8 3.5 3.6 3.8 -0.1 0.1 0.3 Jamaica 0.9 1.4 0.5 1.7 1.9 2.0 -0.1 -0.1 0.0 Mexico 3.3 2.9 2.0 2.3 2.5 2.7 0.2 -0.1 0.1 Nicaragua 4.8 4.7 4.9 4.7 4.5 4.4 0.3 0.1 0.0 Panama 5.6 5.0 5.4 5.6 5.6 5.6 0.0 0.0 -0.1 Paraguay 3.0 4.0 4.3 4.3 4.2 4.2 0.3 0.2 0.2 Peru 3.3 4.0 2.5 3.5 3.8 3.8 -0.3 0.0 -0.2 St. Lucia 2.0 0.9 2.1 2.8 2.3 2.3 0.6 0.5 0.5 St. Vincent and the Grenadines 1.4 1.9 1.0 2.1 2.5 2.7 -0.6 -0.3 -0.1 Suriname -2.6 -5.1 0.1 1.1 1.7 2.1 -1.1 0.5 0.9 Trinidad and Tobago 1.5 -6.0 -2.3 1.6 1.9 1.2 -0.3 -0.3 -0.4 Uruguay 0.4 1.7 2.7 3.3 3.1 2.9 0.5 -0.1 -0.3 Venezuela -6.0 -16.5 -14.5 -14.3 -7.0 -4.0 -10.1 -7.6 -4.9 Source: World Bank. Notes: e = estimate; f = forecast. 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. 1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. 2. A recent rebasing of El Salvador's GDP, from 1990 to 2014, has resulted in significant changes to historical growth rates compared to January 2018. 3. GDP is based on fiscal year, which runs from October to September of next year. For additional information, please see www.worldbank.org/gep. Growth in the Middle East and North Africa (MENA) region is projected to pick up to 3 percent in 2018 from 1.6 percent in 2017 as oil exporters ease fiscal adjustments amid firming oil prices. The region is also expected to benefit from a favorable global environment, post-conflict reconstruction efforts, and from oil importers’ reforms to boost domestic demand and increase foreign investment. The outlook for growth in MENA is expected to improve slightly in both 2019 and 2020. Positive surprises in trading partner activity or reconstruction efforts could further raise growth prospects. Geopolitical tensions or possible renewed volatility in oil prices could cloud the outlook. Recent developments have been associated with tightening fiscal policies and diversification of revenues, such as the Growth in the Middle East and North Africa introduction of value-added taxes (VAT) in Saudi (MENA) region improved in early 2018. Oil Arabia and the United Arab Emirates in 2018. exporters were recovering following a year of Non-oil sectors showed modest growth, including declining oil production and fiscal tightening in services and manufacturing. In 2018, a number (Figure 2.4.1).1 Oil importers’ growth was robust of oil exporters have eased fiscal adjustment plans, in 2017, and high-frequency data indicate that in response to somewhat more buoyant oil prices this momentum is continuing into 2018. Many and improved terms of trade, including by countries in the MENA region are pursuing expanding capital expenditure plans in Algeria and broad-based reforms that should eventually Saudi Arabia. improve productivity, but growth continues to be Growth in large oil importers has been supported challenged by geopolitical tensions and fiscal by broad-based improvements in domestic and adjustment. external demand, reflecting progress in policy Low oil production led to slow growth for oil reforms, higher business confidence, and an exporters in 2017, as members and non-members improved global economy. In the Arab Republic of the Organization of the Petroleum Exporting of Egypt, the region’s largest oil importer, Countries (OPEC) adhered to agreement on investment and net exports have improved, production limits intended to support global oil supported by the stability of the exchange rate and prices. Generally subdued oil revenues since 2014 stronger domestic demand. Morocco and Tunisia have also further benefited from more favorable agricultural production. International reserves Note: This section is prepared by Lei Sandy Ye. Research assistance is provided by Julia Roseman. have grown in Egypt and Morocco, aided by 1 The World Bank’s Middle East and North Africa aggregate capital inflows, although they have declined in includes 16 economies. Bahrain, Kuwait, Oman, Qatar, Saudi Tunisia due to a rising current account deficit and Arabia, and the United Arab Emirates comprise the Gulf Cooperation Council (GCC); all are oil exporters. Other oil exporters central bank interventions in the foreign exchange in the region are Algeria, Iran, and Iraq. Oil importers in the region market. Other smaller oil importers still face are Djibouti, Egypt, Jordan, Lebanon, Morocco, Tunisia, and West sluggish growth that hinders progress on their Bank and Gaza. The Syrian Arab Republic, Yemen, and Libya are excluded from regional growth aggregates due to data limitations. labor market challenges. 132 CHAPTER 2.4 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE 2.4.1 MENA: Recent developments Inflation is well-contained across most of the MENA region. It is averaging less than 3 percent The MENA region is improving from a year of weak growth in 2017, associated with oil production reductions as well as fiscal adjustments in in the Gulf Cooperation Council (GCC) in response to subdued oil prices. As oil prices have firmed, terms of trade 2018, despite edging upwards recently due to have improved in large GCC oil exporters in the past year. Among the oil importers, industrial production has markedly improved, boosted by VAT introduction in its two largest economies. enhanced competitiveness and external conditions. Inflation in the region In Egypt, inflation has subsided substantially in has been generally contained. 2018, falling to 13 percent in April from a peak of more than 30 percent in July 2017, allowing A. Growth B. Fiscal break-even prices: Oil the central bank to implement two interest rate exporters cuts this year to support activity (Central Bank of Egypt 2018). In Tunisia, inflation has risen markedly as the dinar has depreciated, leading the central bank to hike rates in March, although rates remain negative in real terms. In the Islamic Republic of Iran, inflation edged downwards to about 8 percent in April from 10 percent at the end of last year, as declining food prices have offset upward pressure from currency de- preciation. C. Real effective exchange rate: GCC D. Industrial production growth: Oil importers Financing conditions in the MENA region are stable, while the financial sector is deepening throughout the region. Partly to finance fiscal deficits, international sovereign bond issuance rose further in 2018, both in the GCC and among major oil importers. The inclusion of Saudi Arabia in the FTSE Emerging Markets Index (effective next year) is expected to attract foreign equity investors. Deeper and more liquid financial sectors E. International reserves: Oil import- F. Inflation have also supported FDI inflows, even in the face ers of elevated geopolitical uncertainty. Outlook GDP growth in the region is projected to strengthen to 3.0 percent in 2018, and rise slightly higher in 2019-2020, with oil exporters con- tinuing their recovery from the collapse of oil Sources: Bank for International Settlements, International Monetary Fund, Haver Analytics, World prices, and oil importers experiencing a smaller Bank. A. Aggregate growth rates calculated using constant 2010 US dollar GDP weights. acceleration. The outlook assumes continued B. Non-GCC includes Algeria, Iraq, and Iran. GCC includes Bahrain, Kuwait, Qatar, Oman, Saudi Arabia, and the United Arab Emirates. Unweighted averages. policy reforms and oil prices remaining above their C. CPI-based broad indices for Saudi Arabia and the United Arab Emirates. PPI-based index for 2017 average. Kuwait. Last observation is April 2018. D. Industrial production indexes of Egypt, Jordan, Tunisia, and West Bank and Gaza. Unweighted averages. Figure shows average of year-on-year 3-month moving average growth rates. E. International reserves. Last observation is April 2018. In 2018, growth in oil exporters is expected to rise F. Unweighted averages. Last observation is April 2018. substantially to 2.7 percent due to additional Click here to download data and charts. government spending, enabled by increased domestic revenues and firm oil prices. In the GCC, 2018 growth will be further supported by G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 MID D LE E AS T AN D NO RTH AFRIC A 133 higher fixed investment, bolstered by public FIGURE 2.4.2 MENA: Outlook and risks investment programs and improved demand. The short-term outlook in MENA is positive. Public-private partnerships are Growth will remain stable during 2019-20, expected to support private sector participation in infrastructure propelled by steady growth in private con- investment. However, geopolitical tensions may deter the recovery of tourism in oil importers. Upside risks are associated with the possibility of sumption, infrastructure investment programs like higher-than-expected activity in key trading partners. those related to the Dubai Expo 2020 or Qatar’s World Cup 2022, and the expiration of OPEC+ A. Public-private partnership B. Tourism: Oil importers agreement. Growth in non-GCC exporters is investment: MENA expected to be supported by higher capital expenditures. Fiscal balances in oil exporters are expected to improve as oil prices are forecast to stay firm and revenue-enhancing measures, such as VAT and energy subsidy reforms, are imple- mented. These measures are expected to improve the non-oil share of government revenue in oil exporters. Higher oil prices are also expected to support remittance inflows (World Bank 2018j). C. Exports exposure to the Euro Area D. Euro Area activity expectations: 2018 Growth in oil importers is expected to rise to 4.0 percent in 2018, as business and consumer confidence are spurred by business climate reforms and improving external demand. Policies to relax foreign investment restrictions have supported higher capital flows, and are expected to boost foreign investment and trade flows, in part through relaxing financial constraints in firms (Kiendrebeogo and Minea 2017; Wood and Yang Sources: Consensus Economics, Haver Analytics, International Monetary Fund, World Bank. 2016). Tourism growth is also expected to A. Denotes public-private partnership physical investment in infrastructure projects. Sum of investments from 2015-16 based on available data. improve upon stable security conditions. B. Figure shows 6-month moving averages of growth of tourism arrivals for Egypt, Jordan, and However, fiscal consolidation is expected to be an Morocco. Last observation is April 2018. C. Denotes share of exports to the Euro Area as a ratio to total exports in each country group. Data important headwind for activity among oil are for goods exports value as of 2017. D. Dates in legend denote month and year in which Consensus forecast is generated. Columns importers. In smaller oil importers (e.g., Jordan, denote growth rates in respective indicators. Click here to download data and charts. Lebanon), external and fiscal imbalances remain a constraint to higher growth in the short-term. Reform programs, such as World Bank-supported Risks initiatives to improve urban investment capacity or electricity performance, are expected to improve Risks to the outlook are diverse, but tilt to the growth potential (World Bank 2017e, 2018k). downside. Key downside risks include renewed Similarly, public-private partnerships and bilateral volatility in oil prices, an intensification of agreements within the region are expected to geopolitical tensions, and a slower-than-expected support private sector participation in pace of reforms. Nonetheless, favorable spillovers infrastructure investment, which benefits from stronger than expected activity in key trading economic activity (Figure 2.4.2, Arezki et al. partners and recovery in war-torn areas cannot be 2018; Calderon and Serven 2004). Additional ruled out. plans in energy subsidy reforms or tax revenue On the downside, the recent rise in oil prices may enhancement across oil importers will support not be sustained in the short term, potentially due further fiscal adjustment. to higher-than-expected U.S. shale production 134 CHAPTER 2.4 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 (Chapter 1). This would reduce fiscal space in oil On the upside, positive growth surprises in key exporters and complicate fiscal management advanced and emerging economy trading partners reform across many economies. Tighter fiscal would provide an important support to growth in policy in oil exporters may lead to spillovers to MENA. Oil-importing economies in the Maghreb oil importers via external linkages (e.g., FDI region are dependent on the Euro Area for trade, and remittances). Volatility in oil prices may also remittances, or financial flows. Stronger-than- affect oil importers through their current account expected external demand could mitigate exposure to higher oil prices. headwinds to growth associated with domestic policy uncertainty in smaller oil importers, or The amplification of security concerns or from potential spillovers associated with reduced escalation of geopolitical tensions may cloud oil FDI and remittance flows from GCC economies importers’ tourism prospects, which have strength- to oil importers. ened considerably in the past year. Intra- and interregional tensions in the region may also affect Stronger-than-expected impacts from reconstruc- investor confidence and access to finance, such as tion programs and rising infrastructure investment through higher sovereign spreads. in war-torn countries, such as Iraq, could lead to a sustained economic recovery. Associated spillover Continued progress in reforms could face effects could unlock the potential for higher challenges to implementation. Among oil growth among other countries in the region. This importers, potential social discontent about higher would also allow the restoration of access to energy prices may lead to delayed implementation health, water, or food (Devarajan and Mottaghi of fiscal adjustments. This issue may be further 2017a; World Bank 2018l) to these economies, compounded by the high debt levels (in some and improve the conditions of neighboring host cases exceeding 100 percent of GDP) among economies (e.g., Djibouti, Jordan, Lebanon) by several economies in the region. The loss of providing more resources for public services for momentum in these reforms could negatively both host residents and refugees (Devarajan and impact longer-term growth in the region. Mottaghi 2017b). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 MID D LE E AS T AN D NO RTH AFRIC A 135 TABLE 2.4.1 Middle East and North Africa forecast summary Percentage point differences (Real GDP growth at market prices in percent, unless indicated otherwise) from January 2018 projections 2015 2016 2017e 2018f 2019f 2020f 2018f 2019f 2020f EMDE MENA, GDP 1 2.8 5.0 1.6 3.0 3.3 3.2 0.0 0.1 0.0 (Average including economies with full national accounts and balance of payments data only)2 EMDE MENA, GDP2 2.6 4.8 1.8 3.0 3.3 3.3 0.1 0.0 0.0 GDP per capita (U.S. dollars) 0.7 2.9 0.1 1.4 1.8 1.9 0.1 0.0 0.0 PPP GDP 2.6 5.1 2.1 3.2 3.4 3.5 0.1 -0.1 0.0 Private consumption -0.4 1.5 3.2 3.4 3.5 3.5 0.4 0.2 0.2 Public consumption 1.4 -5.1 1.0 1.3 1.4 1.6 -0.3 -0.5 -0.2 Fixed investment 1.6 -2.1 0.8 5.1 3.6 4.8 0.0 -2.5 -1.2 Exports, GNFS 3 2.5 10.0 3.4 3.7 4.1 4.0 0.0 0.5 0.3 Imports, GNFS 3 -2.1 -1.2 4.1 3.7 3.1 3.4 0.4 -0.2 0.1 Net exports, contribution to growth 2.0 5.1 0.2 0.5 0.9 0.8 -0.1 0.4 0.2 Memo items: GDP Oil exporters4 2.7 5.5 1.2 2.7 3.1 2.9 -0.1 0.1 0.0 GCC countries5 3.6 2.5 0.2 2.1 2.7 2.7 0.1 0.0 0.0 Saudi Arabia 4.1 1.7 -0.7 1.8 2.1 2.3 0.6 0.0 0.1 Iran -1.3 13.4 4.3 4.1 4.1 4.2 0.1 -0.2 -0.1 Oil importers 6 3.6 3.0 3.8 4.0 4.4 4.6 0.1 0.1 0.1 Egypt 4.3 4.2 4.6 5.3 5.7 5.8 0.4 0.1 0.0 Fiscal year basis7 4.4 4.3 4.2 5.0 5.5 5.8 0.5 0.2 0.0 Source: World Bank. Notes: e = estimate; f = forecast. EMDE = emerging market and developing economy. 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. 1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Libya, Syria, and Yemen due to data limitations. 2. Aggregate includes all countries in notes 4 and 6 except Djibouti, Iraq, Qatar, and West Bank and Gaza, for which data limitations prevent the forecasting of GDP components. 3. Exports and imports of goods and non-factor services (GNFS). 4. Oil exporters include Algeria, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. 5. The Gulf Cooperation Council (GCC) includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. 6. Oil importers include Djibouti, Egypt, Jordan, Lebanon, Morocco, Tunisia, and West Bank and Gaza. 7. The fiscal year runs from July 1 to June 30 in Egypt; the column labeled 2017 reflects the fiscal year ended June 30, 2017. For additional information, please see www.worldbank.org/gep. 136 CHAPTER 2.4 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 TABLE 2.4.2 Middle East and North Africa economy forecasts1 Percentage point differences (Real GDP growth at market prices in percent, unless indicated otherwise) from January 2018 projections 2015 2016 2017e 2018f 2019f 2020f 2018f 2019f 2020f Algeria 3.7 3.3 1.6 3.5 2.0 1.3 -0.1 -0.5 -0.3 Bahrain 2.9 3.2 3.9 1.7 2.1 2.1 -0.3 0.5 0.4 Djibouti 6.5 6.5 7.0 6.5 6.4 6.3 -0.5 -0.6 -0.7 Egypt 4.3 4.2 4.6 5.3 5.7 5.8 0.4 0.1 0.0 Fiscal year basis 2 4.4 4.3 4.2 5.0 5.5 5.8 0.5 0.2 0.0 Iran -1.3 13.4 4.3 4.1 4.1 4.2 0.1 -0.2 -0.1 Iraq 4.8 11.0 -0.8 2.5 4.1 1.9 -2.2 2.4 0.0 Jordan 2.4 2.0 2.1 2.2 2.4 2.4 0.0 0.0 -0.1 Kuwait 0.6 3.5 -2.9 1.9 3.5 3.0 0.0 0.0 -0.5 Lebanon 0.8 2.0 2.0 2.0 2.0 2.0 -0.2 0.0 0.0 Morocco 4.5 1.2 4.0 3.0 3.5 3.7 -0.1 0.3 0.5 Oman 4.7 5.4 0.7 2.3 2.5 2.9 0.0 0.0 0.4 Qatar 3.6 2.2 1.6 2.8 3.2 2.8 0.2 0.2 -0.2 Saudi Arabia 4.1 1.7 -0.7 1.8 2.1 2.3 0.6 0.0 0.1 Tunisia 1.0 1.2 1.9 2.4 2.9 3.4 -0.3 -0.4 -0.6 United Arab Emirates 3.8 3.0 2.0 2.5 3.2 3.3 -0.6 -0.1 0.0 West Bank and Gaza 3.4 4.7 3.1 2.5 2.3 2.3 -0.5 -0.6 -0.6 Source: World Bank. Notes: e = estimate; f = forecast. 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. 1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Libya, Syria, and Yemen due to data limitations. 2. The fiscal year runs from July 1 to June 30 in Egypt; e.g., the column labeled 2017 reflects the fiscal year ended June 30, 2017. Growth in South Asia is projected to accelerate to 6.9 percent in 2018 from 6.6 in 2017, mainly reflecting fading disruptions to economic activity in India. Growth in the rest of the region is expected to stabilize at 5.6 percent in 2018. Over the forecast horizon, growth is projected to reach 7.1 percent on average in 2019-20, reflecting broad-based strengthening across the region. Despite the possibility of upside surprises to global activity, risks to the outlook are still tilted to the downside. Downside risks relate to both domestic factors, especially policy slippages amid sizable fiscal adjustment needs, and external factors, including the possibility of a faster-than-expected tightening of global financial conditions and increased global trade tensions. Recent developments State Bank of Pakistan recently hiked its policy rate to reduce growing external pressures. Inflation has been increasing in the region Growth in South Asia slowed but remained strong recently, and is close to or above targets in some at an estimated 6.6 percent in 2017 (Figure countries (e.g., India, Sri Lanka). In many 2.5.1). Growth in the region has improved countries, budget deficits continue to be sizable or markedly since mid-2017 and continued to firm have widened further in 2018 reflecting both in early 2018, reflecting improved consumer and weaker-than-expected revenues and expansionary investor sentiment, higher investment, and policies (e.g., Bangladesh, Nepal) with fiscal firming exports (e.g., Bangladesh, India, Sri policies being generally pro-cyclical in the region. Lanka). Growth in South Asia continues to rely on domestic demand, with firming but modest India’s GDP growth bottomed out in the middle support from export growth (e.g., Bangladesh, of 2017 after slowing for five consecutive quarters, India). Import growth is accelerating amid and has since improved significantly, with strengthening domestic demand, while higher momentum carrying over into 2018 on the back energy prices are also contributing to a further of a recovery in investment. Although investment deterioration of trade and current account growth was still moderately lower in 2017 than in balances (e.g., India, Nepal, Pakistan). 2016, high-frequency indicators suggest that it accelerated into 2018. The temporary disruptions Domestic and external financial market caused by the implementation of the Goods and conditions have been generally supportive, but Services Tax dissipated by mid-2017, and sovereign bond spreads have increased in 2018 manufacturing output and industrial production amid rising inflation expectations and monetary have continued to firm since then (World Bank policy normalization in advanced economies. 2018m).1 Monetary policy in the region has remained broadly accommodative and supported fast credit Growth in the region excluding India has been growth (e.g., Bangladesh, Pakistan); however, the mixed in the first half of 2018. In Bangladesh, Note: This section was prepared by Temel Taskin with 1 World Bank (2018m) presents a comprehensive section on the contributions from Ekaterine Vashakmadze. Brent Harrison provided research assistance. structure of Goods and Services Tax. 138 CHAPTER 2.5 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE 2.5.1 SAR: Recent developments 2018 has been supported by a recovery in investment, especially in the construction and Growth in South Asia moderated in 2017 to an estimated 6.6 percent. Economic activity in 2018 continues to rely mainly on domestic demand, agriculture sectors, and related activities, following with improved but modest support from export volume growth, despite a a slowdown in 2017 driven in part by adverse strong rebound in global trade. Current account balances have deteriorated due to higher imports and rising oil prices. Strong domestic weather conditions. demand has supported credit growth, and inflation is above or close to central bank targets. China’s investment has been rising in the region, Pakistan’s GDP growth rose in FY2017/18, especially through the China-Pakistan Economic Corridor. supported by infrastructure projects funded by the A. GDP growth B. Exports China-Pakistan Economic Corridor (CPEC), improvements in energy supply, and persistent private consumption growth. In Bhutan, growth has been moderating, partly owing to delays in hydropower projects. However, growth is still strong, at 5.8 percent in FY2017/18. In Afghanistan, the recovery continues to be disrupted by security challenges and political uncertainty. C. Current account balances D. Credit growth Outlook Growth in South Asia is forecast to pick up to 6.9 percent in 2018, mainly reflecting the fading effects of temporary factors that weakened activity in India (Figure 2.5.2). The forecast is broadly unchanged from January 2018. Domestic demand is the key driver of growth in the region, although firming exports should provide additional support in 2018 (World Bank 2018n). The baseline E. Inflation F. FDI, Pakistan scenario assumes a moderating recovery in global trade, higher commodity prices, and gradually tightening global financing conditions. Growth in India is projected to accelerate to 7.3 percent in FY2018/19 and 7.5 percent on average in 2019-20, reflecting robust private consumption and firming investment, broadly in line with January projections. In the rest of the region, Sources: Haver Analytics, International Monetary Fund, Pakistan Board of Investment, World Bank. A. SAR stands for South Asia Region. Aggregate growth rates calculated using constant 2010 U.S. growth will remain stable at about 5.6 percent in dollar GDP weights. Shaded area indicates forecasts. Data for 2018 are forecasts. 2018 and throughout the forecast horizon as B. Data refers to trade volume of goods and non-factor services. Shaded area indicates forecasts. Data for 2018 are forecasts. Data for Bangladesh, India, and Pakistan are based on fiscal year. ongoing recoveries in Bangladesh, Pakistan, and Data for Sri Lanka are based on calendar year. C. Shaded area indicates forecasts. Data for Bangladesh, India, and Pakistan are based on fiscal Sri Lanka are offset by slower growth in year. Data for Sri Lanka are based on calendar year. D. Last observation is March 2018. Afghanistan, Bhutan, and Maldives. In Pakistan, E. Last observation is April 2018. GDP growth is estimated to rise to 5.8 percent in F. 2018 (FY2017/18) figures are from July through February. Click here to download data and charts. FY2017/18, before moderating to 5.0 percent in FY2018/19, reflecting tighter policies to improve macroeconomic stability. In Bangladesh, growth is growth has rebounded following the natural expected to recover from the effects of natural disasters of mid-2017 (e.g., severe floods and disasters in FY2017/18 and reach 6.7 percent in landslides), and activity has remained strong and FY2018/19, supported in part by robust export broad-based in 2018. In Sri Lanka, activity in growth and remittances. Sri Lanka’s GDP is G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 SOUTH ASIA 139 projected to grow 4.6 percent on average over the FIGURE 2.5.2 SAR: Outlook and risks period 2018-20, reflecting a recovery from the Growth in the region is predicted to pick up to 6.9 percent in 2018, and effects of last year’s natural disasters on stabilize at around 7.1 percent over the medium term. Domestic demand agriculture, as well as robust consumption and will continue to be the main driver of growth. Natural disasters and persistent droughts remain a downside risk for economic activity. The investment growth. After the strong rebound in region continues to face significant fiscal vulnerabilities. FY2016/17 from the effects of the devastating earthquakes in FY2015/16, Nepal’s GDP growth A. Growth B. Share of countries where droughts is forecast to moderate to 4.6 percent in FY starting after 2015 persisted 2017/18 and average 4.3 percent in 2019-20. In Bhutan and Maldives, growth will continue to benefit from construction and services, especially tourism, and average 7.4 and 5 percent respectively over the forecast horizon. In Afghanistan, growth will remain subdued due to continued security challenges and political uncertainty. C. Fiscal balances D. Debt Per capita growth rates in the region are strong, and are expected to help bring down poverty in coming years, particularly in India. Nonetheless, addressing underlying structural weaknesses and macroeconomic vulnerabilities remain key challenges in the region (Farole and Pathikonda 2016; World Bank 2018c). Risks Sources: Bank for International Settlements, Emergency Events Database (www.emdat.be, Brussels, Belgium), Institute of International Finance, International Monetary Fund, World Bank. A. SAR stands for South Asia Region. Risks to South Asia outlook are tilted to the A.C. Shaded areas represent forecast. Data for Bangladesh, India, and Pakistan are based on fiscal year. Data for Sri Lanka is based on calendar year. downside, although upside surprises to global D. The peak is defined as the highest debt-to-GDP ratio since 2005Q1. It is identified to have oc- growth remain a possibility in the short-term. curred in 2009Q3 in India, 2017Q2 in Pakistan, in 2017Q3 in Bangladesh, and 2017Q3 in Sri Lanka. 2017 data reflects 2017Q3. Total debt comprised of credit to non-financial corporations, households, These include domestic policy slippages, renewed and general government debt. All data are based on calendar year. Click here to download data and charts. security challenges, and natural disasters. The outlook could also be adversely affected by external shocks such as an abrupt tightening of balance sheets could hold back the investment global financial conditions and escalating trade recovery currently underway and dampen credit protectionism, even though the region is relatively growth in the region. less open to trade. Since South Asia is net oil importer, a higher-than-expected rise in oil prices An increase in political uncertainty (e.g., might amplify macroeconomic vulnerabilities and Afghanistan, Bangladesh, Pakistan, Sri Lanka) and weigh on economic activity. further deterioration in the security environment in some countries (e.g., Afghanistan) might In a number of countries, a further deterioration dampen confidence and set back growth. In recent in fiscal balances (e.g., India, Maldives, Pakistan, years, the number of people and geographical areas Sri Lanka), a continued buildup of debt, and affected by natural disasters such as drought, widening current account deficits (e.g., Pakistan), floods, and earthquakes have risen in the region. A present significant vulnerabilities to a tightening of rise in the prevalence of natural disasters, domestic or external financing conditions (Basu, including those caused by climate change, could Eichengreen, and Gupta 2015). Furthermore, a disrupt infrastructure, agricultural output, and setback in the implementation of reforms to economic activity in general (e.g., Bhutan, Nepal, resolve weakening corporate and financial sector Sri Lanka). 140 CHAPTER 2.5 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 TABLE 2.5.1 South Asia forecast summary (Real GDP growth at market prices in percent, unless indicated otherwise) Percentage point differences from January 2018 projections 2015 2016 2017e 2018f 2019f 2020f 2018f 2019f 2020f EMDE South Asia, GDP1, 2 7.1 7.5 6.6 6.9 7.1 7.2 0.0 -0.1 0.0 (Average including countries with full national accounts and balance of payments data only)3 EMDE South Asia, GDP3 7.1 7.5 6.7 6.9 7.2 7.2 0.0 0.0 0.0 GDP per capita (U.S. dollars) 5.8 6.2 5.4 5.6 5.9 6.0 -0.1 -0.1 0.0 PPP GDP 7.1 7.5 6.7 6.9 7.1 7.2 0.0 -0.1 0.0 Private consumption 5.5 8.4 7.6 6.6 6.9 7.0 -0.6 -0.2 -0.1 Public consumption 2.6 13.8 6.7 9.7 8.8 8.5 0.0 -0.4 -0.7 Fixed investment 5.5 4.7 10.3 7.6 7.7 7.7 1.5 0.7 0.0 Exports, GNFS4 -5.0 0.9 4.5 5.7 6.1 6.1 0.2 -0.4 -0.6 Imports, GNFS4 -3.8 0.3 6.2 7.5 6.5 6.1 2.1 0.8 0.2 Net exports, contribution to growth -0.1 0.1 -0.6 -0.7 -0.4 -0.3 -0.5 -0.3 -0.2 Memo items: GDP2 15/16 16/17 17/18e 18/19f 19/20f 20/21f 18/19f 19/20f 20/21f South Asia excluding India 5.4 5.8 5.6 5.6 5.6 5.7 -0.2 -0.3 -0.3 India 8.2 7.1 6.7 7.3 7.5 7.5 0.0 0.0 0.0 Pakistan (factor cost) 4.6 5.4 5.8 5.0 5.4 5.4 -0.8 -0.6 -0.6 Bangladesh 7.1 7.3 6.5 6.7 7.0 7.0 0.0 0.3 0.3 Source: World Bank. Notes: e = estimate; f = forecast. EMDE = emerging market and developing economy. 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. 1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. 2. National income and product account data refer to fiscal years (FY) for the South Asian countries, while aggregates are presented in calendar year terms. The fiscal year runs from July 1 through June 30 in Bangladesh, Bhutan, and Pakistan, from July 16 through July 15 in Nepal, and April 1 through March 31 in India. 3. Sub-region aggregate excludes Afghanistan, Bhutan, and Maldives, for which data limitations prevent the forecasting of GDP components. 4. Exports and imports of goods and non-factor services (GNFS). For additional information, please see www.worldbank.org/gep. TABLE 2.5.2 South Asia country forecasts Percentage point differences (Real GDP growth at market prices in percent, unless indicated otherwise) from January 2018 projections 2015 2016 2017e 2018f 2019f 2020f 2018f 2019f 2020f Calendar year basis 1 Afghanistan 1.3 2.4 2.6 2.2 2.5 3.3 -1.2 -0.6 0.2 Maldives 2.2 6.2 6.2 5.5 4.5 4.9 0.6 -0.5 -0.1 Sri Lanka 5.0 4.5 3.1 4.8 4.5 4.5 -0.2 -0.6 -0.6 Fiscal year basis1 15/16 16/17 17/18e 18/19f 19/20f 20/21f 18/19f 19/20f 20/21f Bangladesh 7.1 7.3 6.5 6.7 7.0 7.0 0.0 0.3 0.3 Bhutan 7.3 7.4 5.8 5.4 6.0 8.7 -1.5 -1.6 1.1 India 8.2 7.1 6.7 7.3 7.5 7.5 0.0 0.0 0.0 Nepal 0.6 7.9 6.3 4.5 4.2 4.2 0.0 -0.3 -0.3 Pakistan (factor cost) 4.6 5.4 5.8 5.0 5.4 5.4 -0.8 -0.6 -0.6 Source: World Bank. Notes: e = estimate; f = forecast. 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. 1. Historical data is 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, Maldives, and Sri Lanka, which report in calendar year. The fiscal year runs from July 1 through June 30 in Bangladesh, Bhutan, 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. Growth in Sub-Saharan Africa is projected to pick up to 3.1 percent in 2018, from 2.6 percent in 2017. This upswing reflects rising oil and metals production, encouraged by higher commodity prices, improving agricultural conditions, and increasing domestic demand. Growth is expected to firm to an average of 3.6 percent in 2019-20, as the recovery strengthens in Angola, Nigeria, and South Africa—the region’s largest economies. Nevertheless, growth will remain below its long-term average, with continued weak convergence of per capita income towards average emerging market and developing economies levels. Tighter global financing conditions and weaker-than-expected commodity prices are the main external downside risks to the regional outlook. Domestic risks include heightened conflicts, delayed fiscal adjustment, and weak implementation of structural reforms. Recent developments moderated in some oil exporters due to maturing oil fields (e.g., Angola, Nigeria). The economic recovery in Sub-Saharan Africa (SSA) has strengthened, following a moderate Current account deficits are rising, but there are rebound in 2017 (Figure 2.6.1). Purchasing significant differences between countries. Among managers’ indexes indicate firming manufacturing oil exporters, current account deficits are expected activity in several countries (e.g., Ghana, Kenya, to narrow further this year as the terms-of-trade Nigeria, Zambia). Renewed government commit- continue to improve. Nevertheless, Nigeria could ment to critical macroeconomic and governance see its current account surplus decline, as import reforms in Angola, South Africa, and Zimbabwe growth rebounds. In metals exporters, current has boosted investor confidence. Mining account deficits are narrowing moderately, production has risen in metals exporters, with new reflecting the effects of a pickup in import- mines coming on stream and investment into intensive mining investment in some countries. existing mines increasing, encouraged by higher Among non-resource-intensive countries, current metals prices (e.g., Democratic Republic of account deficits are widening, as import growth Congo, Zambia), although, in some cases, high remains strong due to high public investment government debt levels are weighing on growth levels and rising fuel imports. Global financial (e.g., Mozambique, Sierra Leone). Mining market conditions have been favorable and helped production in South Africa has also been weaker to finance the current account imbalances. While than expected. Among non-resource-intensive foreign direct investment flows are rebounding countries, the pickup in economic activity is moderately, portfolio inflows have continued at a supported by improving agricultural conditions solid pace, helped by several large sovereign-bond and infrastructure investment in some (e.g., issuances (e.g., Angola, Côte d’Ivoire, Kenya, Rwanda, Uganda); in others, it has reflected rising Nigeria, Senegal). consumer spending, helped by low inflation and a Exchange rates have been broadly stable in real rebound in remittances (e.g., The Gambia, effective terms, reflecting tight domestic policies in Kenya). However, growth in oil production has some countries, and rising foreign financing. Foreign reserve levels have increased, boosted by Note: The author of this section is Gerard Kambou. Research portfolio inflows, and supportive policies in some assistance was provided by Xinghao Gong. cases, including among the Central African 142 CHAPTER 2.6 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 FIGURE 2.6.1 SSA: Economic activity by the decline in commodity prices. Inflation continues to fall, helped by declining food prices, Economic activity in Sub-Saharan Africa rebounded in 2017, helped by a turnaround in the region’s largest economies, and has continued to prompting central banks in some countries to strengthen. Recent indicators suggest that metals production and fixed further cut interest rates (e.g., Uganda, Zambia); investment growth have picked up in the region, as commodity prices stabilized. However, oil production has risen at a slower pace in some oil and, in others, to signal a gradual easing cycle producers, partly due to maturing fields. While current account deficits are (e.g., Kenya). Nevertheless, inflation has been in increasing, due to a pickup in import growth, fiscal deficits are narrowing double digits in several countries, owing to helped by higher oil prices and an increase in domestic revenue in some cases. currency depreciations (e.g., Angola, Ethiopia), and high food inflation due to supply disruptions A. GDP growth B. Oil production (e.g., Nigeria, Sudan). In these countries, policy has been tight. Fiscal deficits have narrowed. Among oil exporters, the improvement reflects the recovery in oil prices and expenditure adjustments in countries in the CEMAC region (e.g., Chad, Republic of Congo). Progress in boosting non-oil revenue remains limited (e.g., Angola, Nigeria). In non-resource-intensive countries, where commod- C. Metals production D. Investment growth ity revenues represent a small share of total revenues, domestic revenue has increased, helping to reduce the fiscal deficit. However, in metals exporters, fiscal deficits are widening, due to weaker domestic revenue mobilization and rising expenditure. Large fiscal deficits have resulted in high public debt levels in the region (World Bank 2018o). Median debt levels among metals exporters are E. Current account balance F. Fiscal balance rising, reflecting previously undisclosed borrowing in some cases (e.g., Mozambique) and high public investment in others (e.g., Zambia). Among oil exporters, fiscal consolidation is contributing to a gradual stabilization of government debt, but the debt burden remains high (e.g., Gabon, Ghana), and some countries are in debt restructuring (e.g., Chad, Republic of Congo). Debt levels are relatively low in Nigeria, but high and rising in Sources: International Energy Agency, World Bank, World Bureau of Metal Statistics. Angola, due in part to exchange rate depreciation. Note: SSA = Sub-Saharan Africa. A. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. Low public saving rates and high public B. Nigeria oil production includes condensates. Last observation is April 2018. C. Index rebased on metric ton measurement. Last observation is March 2018. investment are contributing to an increase in debt D.-F. Median of country groups. Non-resource-intensive countries consist of agricultural exporters levels in some non-resource-intensive countries and commodity importers. Click here to download data and charts. (e.g., Ethiopia); in others, governance issues are an important contributory factor (e.g., The Gambia). Countries in the region are increasingly shifting Economic and Monetary Community (CEMAC) away from traditional multilateral and bilateral countries where fiscal consolidation has taken sources of debt toward bond issuances and non- place. However, reserve coverage is below the Paris Club bilateral creditors, which are resulting three-months-of-imports benchmark in many in higher debt service costs in some countries (e.g., countries, especially those that have been hit hard Ghana, Zambia). International bonds have started G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 SUB-SAHARAN AFRICA 143 to mature, and large repayments are expected over FIGURE 2.6.2 SSA: Outlook and risks the period 2020-25, which is likely to pose a Growth in the region is expected to pick up this year, and firm in 2019-20, significant refinancing challenge to the region. To reflecting a gradual recovery in the region’s largest economies, and contain further increases in government debt in continued robust growth in non-resource-intensive countries. However, per capita income growth will remain below its long-term average, and also the region, sustained fiscal consolidation, higher below the EMDE average, reflecting the slow pace of per capita growth in domestic revenue mobilization, and stronger oil and metals exporters. Excessive reliance on commercially-priced debt growth will be necessary. could pose a significant refinancing risk to the region. Longer-than- expected droughts would slow the recovery in the region. Outlook A. Growth B. Growth per capita Growth in Sub-Saharan Africa is projected to pick up to 3.1 percent in 2018, slightly below January forecasts, and to firm to an average of 3.6 percent in 2019-20, as the recovery strengthens in the region’s largest economies (Figure 2.6.2). These forecasts are predicated on the expectations that oil and metals prices will remain stable, external financial market conditions will continue to be supportive, and governments in the region will C. Composition of public and publicly D. Share of countries where droughts implement reforms to tackle macroeconomic guaranteed external debt over time starting after 2015 persist imbalances and boost investment. • Among the region’s largest economies, Nigeria’s growth forecasts are lower than in January. While the oil sector is expected to continue to support the recovery, oil production is likely to be less than the government’s projections, due to capacity constraints. Growth in the non-oil industrial Sources: Emergency Events Database (www.emdat.be; Université Catholique de Louvain, Brussels, Belgium), World Bank. sectors is also likely to remain subdued as Note: SSA = Sub-Saharan Africa. structural constraints slow efforts to attract A.B. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. Shaded areas represent forecasts. long-term investments. The growth forecasts Click here to download data and charts. for Angola and South Africa were revised slightly upward. In Angola, the revisions exporters, growth is projected to moderate but reflect the expectation that a more efficient remain solid in Ghana, as the effects of high allocation of foreign exchange, rising natural oil production gradually dissipate. However, gas production, and improved business the recovery will be slower than anticipated sentiment would help support the rebound in among oil exporters in the CEMAC region, economic activity. In South Africa, the pickup reflecting the need for continued fiscal in business confidence is expected to help consolidation to stabilize debt levels. sustain the ongoing recovery in investment. • In non-resource-intensive countries, growth is • Elsewhere, rising mining output as new expected to remain robust, supported by projects come on line, combined with stable improving agricultural conditions, infra- metals prices, are expected to boost activity in structure investment, and household demand. some metals exporters (e.g., Democratic Low inflation, a rebound in private sector Republic of Congo, Zambia); in others, credit growth, and rising remittance flows are growth is expected to remain subdued as high expected to boost consumer spending. The government debt levels weigh on the private larger countries will continue to grow faster sector (e.g., Mozambique). Among oil (e.g., Côte d’Ivoire, Ethiopia) than the smaller 144 CHAPTER 2.6 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 ones, due to their stronger policies and economies on commodity exports. A possible institutional capacity. In Malawi, for instance, trigger could be a slowdown in Chinese growth growth is expected to be lower than given the risks posed by interest rate hikes or trade anticipated, reflecting the adverse impact of a tensions with the United States. A collapse in oil dry spell and the spread of the fall and metals prices would severely undermine armyworm—a pervasive agricultural pest—on efforts at fiscal consolidation, derail progress in food production. reining in the region’s debt burden, and undermine investor confidence. Although per capita income growth in the region will turn positive, it will remain well below its On the domestic front, political transitions have long-term average, and also below the emerging opened opportunities for reforms in several major market and developing economy (EMDE) average Sub-Saharan African countries (Angola, South (Chapter 1). The weak convergence of per capita Africa, Zimbabwe) that, if implemented, could income toward EMDE levels reflects the slower bolster the regional outlook. Policy reforms in pace of per capita growth among oil and metals Nigeria to improve the business environment exporters. The region’s poverty headcount, at the could advance faster than expected, and international poverty line ($1.90/day in 2011 significantly boost non-oil sector growth. purchasing power parity exchange rates), is However, the risk of worsening political projected to decline only slightly over the 2018-20 instability, and a concurrent weakening of needed period, and decrease more slowly among metals reforms, remains high. Indeed, some of the exporters and fragile countries. Renewed progress region’s largest economies, such as Ethiopia and on poverty reduction will require a sustained Nigeria, are particularly vulnerable to an uptick in acceleration in per capita income growth. social unrest. Risks to debt sustainability are also Structural reforms that increase productivity and high in the region. Heavy reliance on support export diversification would be critical to commercially-priced debt could lead to debt these efforts. (Chapter 1; Bhorat and Tarp 2016; service difficulties in some countries, including Fosu 2018). Ghana, Nigeria, and Zambia (interest payments on government debt as a share of tax revenue in 2017 was estimated at more than 40 percent in Risks Ghana, and more than 25 percent in Nigeria and Risks to the regional outlook remain tilted to the Zambia). Meanwhile, the Ebola outbreak in the downside. On the external front, a faster-than- Democratic Republic of Congo has been assessed expected tightening of monetary policy among as a very high health risk, and could affect advanced economies could diminish investor economic activity in the country as well as in the appetite for higher risk assets in frontier markets, sub-region, if it spreads rapidly to major urban which would be particularly difficult for countries centers and into neighboring countries. The that rely on foreign debt financing to support large recurrence of drought is a further significant current account deficits. Sudden capital outflows downside risk. Droughts that started after 2015 could trigger large currency depreciations in some have lasted longer in Sub-Saharan Africa than in countries. A sharp decline in commodity prices other EMDE regions. A sudden return of drought would have a significant adverse impact on the conditions could severely disrupt the ongoing region, given the heavy dependence of many economic recovery in the region. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 SUB-SAHARAN AFRICA 145 TABLE 2.6.1 Sub-Saharan Africa forecast summary Percentage point differences (Real GDP growth at market prices in percent, unless indicated otherwise) from January 2018 projections 2015 2016 2017e 2018f 2019f 2020f 2018f 2019f 2020f EMDE SSA, GDP1 3.1 1.5 2.6 3.1 3.5 3.7 -0.1 0.0 0.1 (Average including countries with full national accounts and balance of payments data only)2 EMDE SSA, GDP2 3.1 1.5 2.6 3.1 3.5 3.7 -0.1 0.0 0.2 GDP per capita (U.S. dollars) 0.4 -1.2 -0.1 0.4 0.8 1.0 -0.1 0.0 0.1 PPP GDP 3.3 1.7 2.9 3.4 3.7 3.9 -0.1 0.0 0.1 Private consumption 5.8 0.6 2.0 2.6 2.8 2.9 0.0 0.1 0.1 Public consumption -2.3 1.4 2.6 2.5 2.9 3.0 0.0 0.2 0.3 Fixed investment 1.5 0.4 6.0 6.8 7.4 7.6 0.0 0.3 0.4 Exports, GNFS3 2.7 3.6 3.1 3.2 3.5 3.8 0.0 0.1 0.3 Imports, GNFS 3 2.0 -0.9 2.5 3.0 3.3 3.4 0.1 0.2 0.2 Net exports, contribution 0.2 1.4 0.2 0.1 0.1 0.2 0.0 0.0 0.1 to growth Memo items: GDP SSA excluding Nigeria, 4.6 4.3 4.7 4.9 5.3 5.5 -0.1 0.2 0.3 South Africa, and Angola Oil exporters4 2.9 -0.4 1.5 2.3 2.6 2.8 -0.5 -0.2 -0.2 CFA countries 5 3.9 2.8 3.3 4.1 4.5 4.9 -0.2 -0.1 0.0 CEMAC 1.7 -0.9 -0.2 1.4 2.3 3.0 -0.5 -0.1 0.0 WAEMU 6.2 6.6 6.6 6.4 6.3 6.4 0.0 -0.1 -0.1 SSA3 2.1 -0.5 1.0 1.7 2.0 2.2 -0.1 -0.2 0.0 Nigeria 2.7 -1.6 0.8 2.1 2.2 2.4 -0.4 -0.6 -0.4 South Africa 1.3 0.6 1.3 1.4 1.8 1.9 0.3 0.1 0.2 Angola 3.0 0.0 1.2 1.7 2.2 2.4 0.1 0.7 0.9 Source: World Bank. Notes: e = estimate; f = forecast. EMDE = emerging market and developing economy. 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. 1. 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. 2. Sub-region aggregate excludes Central African Republic, São Tomé and Príncipe, Somalia, and South Sudan, for which data limitations prevent the forecasting of GDP components. 3. Exports and imports of goods and non-factor services (GNFS). 4. Includes Angola, Cameroon, Chad, Republic of Congo, Gabon, Ghana, Nigeria, and Sudan. 5. Includes Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Republic of Congo, Côte d’Ivoire, Equatorial Guinea, Gabon, Mali, Niger, Senegal, and Togo. For additional information, please see www.worldbank.org/gep. 146 CHAPTER 2.6 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2018 TABLE 2.6.2 Sub-Saharan Africa country forecasts1 Percentage point differences (Real GDP growth at market prices in percent, unless indicated otherwise) from January 2018 projections 2015 2016 2017e 2018f 2019f 2020f 2018f 2019f 2020f Angola 3.0 0.0 1.2 1.7 2.2 2.4 0.1 0.7 0.9 Benin 2.1 4.0 5.6 6.0 6.1 6.3 0.0 -0.2 -0.4 Botswana2 -1.7 4.3 1.8 3.0 3.3 3.8 -1.7 -1.5 -1.0 Burkina Faso 3.9 5.9 6.4 6.0 6.0 6.0 0.0 0.0 0.0 Burundi -3.9 -0.6 0.5 1.9 2.3 2.5 0.4 -0.2 0.0 Cabo Verde 1.0 3.8 4.0 4.2 4.0 4.0 0.6 0.2 0.2 Cameroon 5.7 4.5 3.2 3.9 4.1 4.3 -0.2 -0.2 0.0 Chad 2.8 -6.3 -3.0 2.6 2.5 5.8 -1.1 -0.4 -1.0 Comoros 1.0 2.4 2.5 2.9 3.0 3.0 0.2 0.1 0.1 Congo, Dem. Rep. 6.9 2.4 3.4 3.8 4.1 4.4 0.8 0.8 1.1 Congo, Rep. 2.6 -2.8 -4.6 0.7 4.6 -1.2 -1.6 3.1 -2.7 Côte d’Ivoire 8.8 8.3 7.8 7.4 7.2 7.2 0.2 0.0 0.0 Equatorial Guinea -9.1 -9.0 -2.7 -6.4 -7.0 -0.5 -0.4 -2.8 3.7 Ethiopia2 10.4 7.6 10.3 9.6 9.7 9.9 1.4 1.9 2.1 Gabon 3.9 2.1 0.6 2.6 3.7 3.9 0.2 0.0 0.2 Gambia, The 4.3 2.2 3.5 5.4 5.2 4.9 1.9 1.0 0.7 Ghana 3.8 3.7 7.8 6.9 6.7 5.4 -1.4 1.2 -0.1 Guinea 3.8 10.5 8.2 6.0 5.9 6.0 0.2 0.0 0.1 Guinea-Bissau 6.1 5.8 5.7 5.1 5.2 5.4 -0.1 -0.2 0.0 Kenya 5.7 5.9 4.9 5.5 5.9 6.1 0.0 0.0 0.2 Lesotho 5.6 2.3 3.1 1.8 2.6 2.8 -2.2 -1.6 -1.4 Liberia 0.0 -1.6 2.5 3.2 4.7 4.8 -0.7 -0.3 -1.2 Madagascar 3.1 4.2 4.1 5.1 5.6 5.3 0.0 0.0 -0.1 Malawi 2.8 2.5 4.0 3.7 4.1 4.9 -1.3 -1.3 -0.5 Mali 6.0 5.8 5.3 5.0 4.7 4.7 0.0 0.0 0.0 Mauritania 1.4 2.0 3.5 3.6 4.6 5.2 0.6 0.0 0.6 Mauritius 3.5 3.8 3.9 4.0 4.1 3.8 0.2 0.4 0.1 Mozambique 6.6 3.8 3.7 3.3 3.4 3.6 0.1 0.0 0.2 Namibia 6.0 1.1 -1.0 1.5 2.3 3.0 -1.5 -1.2 -0.5 Niger 4.0 5.0 5.2 5.3 5.4 5.8 0.1 0.0 0.2 Nigeria 2.7 -1.6 0.8 2.1 2.2 2.4 -0.4 -0.6 -0.4 Rwanda 8.8 6.0 6.1 6.8 7.1 7.5 0.9 0.3 0.7 Senegal 6.5 6.7 6.8 6.8 6.8 7.0 -0.1 -0.2 0.0 Seychelles 3.5 4.5 4.2 4.0 3.8 3.5 0.2 0.3 0.0 Sierra Leone -20.5 6.3 4.3 5.1 5.7 6.5 -1.2 -1.0 -0.2 South Africa 1.3 0.6 1.3 1.4 1.8 1.9 0.3 0.1 0.2 Sudan 4.9 4.7 4.3 2.6 3.1 3.5 -1.1 -0.6 -0.2 Swaziland 0.4 1.4 1.9 1.1 1.7 1.8 -0.8 -0.1 0.0 Tanzania 7.0 7.0 6.4 6.6 6.8 7.0 -0.2 -0.1 0.1 Togo 5.3 5.0 4.4 4.8 5.0 5.0 -0.5 -0.4 -0.4 Uganda2 5.2 4.7 4.0 5.5 6.0 6.5 0.4 0.3 0.5 Zambia 2.9 3.8 3.9 4.1 4.5 4.8 -0.4 -0.5 -0.2 Zimbabwe 1.7 0.6 3.4 2.7 3.8 4.0 1.8 3.6 3.8 Source: World Bank. Notes: e = estimate; f = forecast. 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. 1. 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. 2. Fiscal-year based numbers. For additional information, please see www.worldbank.org/gep. G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 18 C H A P TE R 2 147 References Devarajan, S., and L. Mottaghi. 2017a. “Refugee Crisis in MENA. Meeting the Development Arezki, R., L. Mottaghi, A. Barone, Andrea; R. Y. Challenge.” MENA Economic Monitor. Fan, Y. Kiendrebeogo, and D. Lederman. 2018. 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STATISTICAL APPENDIX G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 18 S T A TI S T I C A L A P P E N D IX 151 Real GDP growth Annual estimates and forecasts1 Quarterly growth2 2015 2016 2017e 2018f 2019f 2020f 16Q4 17Q1 17Q2 17Q3 17Q4 18Q1e World 2.8 2.4 3.1 3.1 3.0 2.9 2.6 2.9 2.8 3.1 3.2 .. Advanced economies 2.3 1.7 2.3 2.2 2.0 1.7 1.8 2.2 2.1 2.4 2.5 .. United States 2.9 1.5 2.3 2.7 2.5 2.0 1.8 2.0 2.2 2.3 2.6 2.9 Euro Area 2.1 1.8 2.4 2.1 1.7 1.5 1.9 2.1 2.4 2.7 2.8 2.5 Japan 1.4 1.0 1.7 1.0 0.8 0.5 1.5 1.4 1.5 1.9 1.8 0.9 United Kingdom 2.3 1.9 1.8 1.4 1.5 1.7 2.0 2.1 1.9 1.8 1.4 1.2 Emerging market and developing economies 3.7 3.7 4.3 4.5 4.7 4.7 4.3 4.6 4.4 4.9 4.9 .. East Asia and Pacific 6.5 6.3 6.6 6.3 6.1 6.0 6.5 6.5 6.6 6.6 6.5 6.6 Cambodia 7.0 7.0 6.8 6.9 6.7 6.6 .. .. .. .. .. .. China 6.9 6.7 6.9 6.5 6.3 6.2 6.8 6.9 6.9 6.8 6.8 6.8 Fiji 3.6 0.4 3.8 3.5 3.4 3.3 .. .. .. .. .. .. Indonesia 4.9 5.0 5.1 5.2 5.3 5.4 4.9 5.0 5.0 5.1 5.2 5.1 Lao PDR 7.3 7.0 6.7 6.6 6.9 6.9 .. .. .. .. .. .. Malaysia 5.0 4.2 5.9 5.4 5.1 4.8 4.5 5.6 5.8 6.2 5.9 5.4 Mongolia 2.4 1.5 5.1 5.3 6.4 6.5 11.0 4.1 6.0 6.5 3.7 6.0 Myanmar 7.0 5.9 6.4 6.7 6.9 7.1 .. .. .. .. .. .. Papua New Guinea 5.3 1.9 2.2 -1.7 4.0 3.0 .. .. .. .. .. .. Philippines 6.1 6.9 6.7 6.7 6.7 6.6 6.7 6.5 6.6 7.2 6.5 6.8 Solomon Islands 3.7 3.5 3.2 3.0 2.9 2.8 .. .. .. .. .. .. Thailand 3.0 3.3 3.9 4.1 3.8 3.8 3.0 3.4 3.9 4.3 4.0 4.8 Timor-Leste 4.0 5.3 -1.8 2.2 4.2 4.0 .. .. .. .. .. .. Vietnam 6.7 6.2 6.8 6.8 6.6 6.5 6.8 5.1 6.2 7.5 7.7 7.4 Europe and Central Asia 1.1 1.7 4.0 3.2 3.1 3.0 2.1 3.0 3.8 5.5 3.7 .. Albania 2.2 3.4 3.8 3.6 3.5 3.5 4.3 4.0 4.4 3.6 3.4 .. Armenia 3.2 0.2 7.5 4.1 4.0 4.0 .. .. .. .. .. .. Azerbaijan 1.1 -3.1 0.1 1.8 3.8 3.2 .. .. .. .. .. .. Belarus -3.8 -2.5 2.4 2.9 2.7 2.5 -1.7 0.4 1.7 3.0 4.3 .. Bosnia and Herzegovina 3.1 3.1 3.0 3.2 3.4 4.0 3.5 3.4 2.8 3.0 3.0 .. Bulgaria 3.6 3.9 3.6 3.8 3.6 3.6 4.3 3.6 3.9 3.8 3.0 3.4 Croatia 2.3 3.2 2.8 2.6 2.7 2.8 3.5 2.6 3.0 3.3 2.0 .. Georgia 2.9 2.8 5.0 4.5 4.8 5.0 2.8 5.3 4.9 4.4 5.4 .. Hungary 3.1 2.0 4.0 4.1 3.2 3.0 1.9 4.3 3.3 3.9 4.4 4.4 Kazakhstan 1.2 1.1 4.0 3.7 3.3 2.8 .. .. .. .. .. .. Kosovo 4.1 4.1 4.4 4.8 4.8 4.8 .. .. .. .. .. .. Kyrgyz Republic 3.9 4.3 4.6 4.2 4.8 5.0 .. .. .. .. .. .. Macedonia, FYR 3.9 2.9 0.0 2.3 2.7 3.0 3.3 0.0 -1.3 0.2 1.2 .. Moldova -0.4 4.5 4.5 3.8 3.7 3.5 .. .. .. .. .. .. Montenegro 3.4 2.9 4.4 2.8 2.5 2.1 .. .. .. .. .. .. Poland 3.8 2.9 4.6 4.2 3.7 3.5 3.4 4.7 4.2 5.4 4.4 5.1 Romania 3.9 4.8 7.0 5.1 4.5 4.1 4.8 5.7 6.1 8.8 6.7 4.0 Russia -2.5 -0.2 1.5 1.5 1.8 1.8 -0.3 0.6 2.5 2.2 0.9 1.3 Serbia 0.8 2.8 1.9 3.0 3.5 4.0 2.5 1.2 1.5 2.2 2.5 4.5 Tajikistan 6.0 6.9 7.1 6.1 6.0 6.0 .. .. .. .. .. .. Turkey 6.1 3.2 7.4 4.5 4.0 4.0 4.2 5.4 5.4 11.3 7.3 .. Turkmenistan 6.5 6.2 6.5 6.3 6.3 6.3 .. .. .. .. .. .. Ukraine -9.8 2.3 2.5 3.5 4.0 4.0 4.6 2.8 2.6 2.4 2.2 3.1 Uzbekistan 7.9 7.8 5.3 5.0 5.1 5.5 .. .. .. .. .. .. 152 S T A TI S T I C A L A P P E N D IX G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 18 Real GDP growth (continued) Annual estimates and forecasts1 Quarterly growth2 2015 2016 2017e 2018f 2019f 2020f 16Q4 17Q1 17Q2 17Q3 17Q4 18Q1e Latin America and the Caribbean -0.4 -1.5 0.8 1.7 2.3 2.5 1.7 2.6 1.9 2.3 3.6 .. Argentina 2.7 -1.8 2.9 1.7 1.8 2.8 -1.1 0.6 3.0 3.8 3.9 .. Belize 3.8 -0.5 1.2 2.0 1.9 1.7 .. .. .. .. .. .. Bolivia 4.9 4.3 4.2 3.9 3.6 3.4 3.7 3.3 3.8 4.3 5.2 .. Brazil -3.5 -3.5 1.0 2.4 2.5 2.4 -2.5 0.0 0.4 1.4 2.1 .. Chile 2.3 1.3 1.5 3.3 3.4 3.5 0.3 -0.4 0.5 2.5 3.3 4.2 Colombia 3.0 2.0 1.8 2.7 3.3 3.6 1.3 1.3 1.6 2.5 1.8 2.2 Costa Rica 3.6 4.2 3.2 3.4 3.6 3.6 4.6 3.5 3.4 2.8 3.0 .. Dominican Republic 7.0 6.6 4.6 5.0 4.7 4.6 5.3 5.5 3.1 3.1 6.5 .. Ecuador 0.1 -1.6 3.0 2.2 1.5 0.9 1.0 2.7 3.0 3.3 3.0 .. El Salvador 2.4 2.6 2.3 2.3 2.2 2.2 3.1 3.5 0.3 3.2 2.5 .. Grenada 6.4 3.7 4.5 3.3 2.8 2.8 .. .. .. .. .. .. Guatemala 4.1 3.1 2.8 3.1 3.3 3.3 3.2 3.2 2.2 2.7 2.9 .. Guyana 3.1 3.4 2.1 3.8 3.8 29.0 5.3 2.5 -0.7 4.5 .. .. Haiti3 1.2 1.5 1.2 1.8 2.4 2.4 .. .. .. .. .. .. Honduras 3.8 3.8 4.8 3.5 3.6 3.8 4.2 5.5 3.5 5.9 4.3 .. Jamaica 0.9 1.4 0.5 1.7 1.9 2.0 1.4 0.1 -0.1 0.8 1.1 .. Mexico 3.3 2.9 2.0 2.3 2.5 2.7 3.3 3.3 1.8 1.6 1.5 1.3 Nicaragua 4.8 4.7 4.9 4.7 4.5 4.4 4.4 7.5 4.6 3.2 4.3 .. Panama 5.6 5.0 5.4 5.6 5.6 5.6 .. .. .. .. .. .. Paraguay 3.0 4.0 4.3 4.3 4.2 4.2 3.4 7.1 1.1 3.0 .. .. Peru 3.3 4.0 2.5 3.5 3.8 3.8 3.1 2.3 2.6 2.7 2.2 3.2 St. Lucia 2.0 0.9 2.1 2.8 2.3 2.3 .. .. .. .. .. .. St. Vincent and the Grenadines 1.4 1.9 1.0 2.1 2.5 2.7 .. .. .. .. .. .. Suriname -2.6 -5.1 0.1 1.1 1.7 2.1 .. .. .. .. .. .. Trinidad and Tobago 1.5 -6.0 -2.3 1.6 1.9 1.2 .. .. .. .. .. .. Uruguay 0.4 1.7 2.7 3.3 3.1 2.9 3.5 4.1 2.8 1.9 2.0 .. Venezuela -6.0 -16.5 -14.5 -14.3 -7.0 -4.0 .. .. .. .. .. .. Middle East and North Africa 2.8 5.0 1.6 3.0 3.3 3.2 5.9 4.5 1.6 2.0 0.6 .. Algeria 3.7 3.3 1.6 3.5 2.0 1.3 .. .. .. .. .. .. Bahrain 2.9 3.2 3.9 1.7 2.1 2.1 1.7 4.1 4.0 4.1 3.4 .. Djibouti 6.5 6.5 7.0 6.5 6.4 6.3 .. .. .. .. .. .. Egypt3 4.4 4.3 4.2 5.0 5.5 5.8 4.0 4.5 5.0 5.2 5.3 .. Iran -1.3 13.4 4.3 4.1 4.1 4.2 17.1 16.0 4.2 4.6 0.5 .. Iraq 4.8 11.0 -0.8 2.5 4.1 1.9 .. .. .. .. .. .. Jordan 2.4 2.0 2.1 2.2 2.4 2.4 2.0 2.2 2.0 1.9 1.8 .. Kuwait 0.6 3.5 -2.9 1.9 3.5 3.0 2.9 -3.8 -2.1 -3.0 -2.5 .. Lebanon 0.8 2.0 2.0 2.0 2.0 2.0 .. .. .. .. .. .. Morocco 4.5 1.2 4.0 3.0 3.5 3.7 .. .. .. .. .. .. Oman 4.7 5.4 0.7 2.3 2.5 2.9 .. .. .. .. .. .. Qatar 3.6 2.2 1.6 2.8 3.2 2.8 1.7 2.4 0.3 1.9 1.8 .. Saudi Arabia 4.1 1.7 -0.7 1.8 2.1 2.3 2.1 -0.5 -0.8 -0.4 -1.2 .. Tunisia 1.0 1.2 1.9 2.4 2.9 3.4 .. .. .. .. .. .. United Arab Emirates 3.8 3.0 2.0 2.5 3.2 3.3 .. .. .. .. .. .. West Bank and Gaza 3.4 4.7 3.1 2.5 2.3 2.3 .. .. .. .. .. .. G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 18 S T A TI S T I C A L A P P E N D IX 153 Real GDP growth (continued) Annual estimates and forecasts1 Quarterly growth2 2015 2016 2017e 2018f 2019f 2020f 16Q4 17Q1 17Q2 17Q3 17Q4 18Q1e South Asia 7.1 7.5 6.6 6.9 7.1 7.2 6.7 6.0 5.6 6.3 7.0 .. Afghanistan 1.3 2.4 2.6 2.2 2.5 3.3 .. .. .. .. .. .. Bangladesh3,4 6.6 7.1 7.3 6.5 6.7 7.0 .. .. .. .. .. .. Bhutan 3,4 6.2 7.3 7.4 5.8 5.4 6.0 .. .. .. .. .. .. India 3,4 8.2 7.1 6.7 7.3 7.5 7.5 6.8 6.1 5.7 6.5 7.2 .. Maldives 2.2 6.2 6.2 5.5 4.5 4.9 .. .. .. .. .. .. Nepal3,4 3.3 0.6 7.9 6.3 4.5 4.2 .. .. .. .. .. .. Pakistan3,4 4.1 4.6 5.4 5.8 5.0 5.4 .. .. .. .. .. .. Sri Lanka 5.0 4.5 3.1 4.8 4.5 4.5 5.4 3.4 3.0 2.9 3.2 .. Sub-Saharan Africa 3.1 1.5 2.6 3.1 3.5 3.7 0.6 1.0 2.1 2.3 2.7 .. Angola 3.0 0.0 1.2 1.7 2.2 2.4 .. .. .. .. .. .. Benin 2.1 4.0 5.6 6.0 6.1 6.3 .. .. .. .. .. .. Botswana3 -1.7 4.3 1.8 3.0 3.3 3.8 4.3 0.9 1.0 1.1 6.5 .. Burkina Faso 3.9 5.9 6.4 6.0 6.0 6.0 .. .. .. .. .. .. Burundi -3.9 -0.6 0.5 1.9 2.3 2.5 .. .. .. .. .. .. Cabo Verde 1.0 3.8 4.0 4.2 4.0 4.0 .. .. .. .. .. .. Cameroon 5.7 4.5 3.2 3.9 4.1 4.3 .. .. .. .. .. .. Chad 2.8 -6.3 -3.0 2.6 2.5 5.8 .. .. .. .. .. .. Comoros 1.0 2.4 2.5 2.9 3.0 3.0 .. .. .. .. .. .. Congo, Dem. Rep. 6.9 2.4 3.4 3.8 4.1 4.4 .. .. .. .. .. .. Congo, Rep. 2.6 -2.8 -4.6 0.7 4.6 -1.2 .. .. .. .. .. .. Côte d'Ivoire 8.8 8.3 7.8 7.4 7.2 7.2 .. .. .. .. .. .. Equatorial Guinea -9.1 -9.0 -2.7 -6.4 -7.0 -0.5 .. .. .. .. .. .. Ethiopia3 10.4 7.6 10.3 9.6 9.7 9.9 .. .. .. .. .. .. Gabon 3.9 2.1 0.6 2.6 3.7 3.9 .. .. .. .. .. .. Gambia, The 4.3 2.2 3.5 5.4 5.2 4.9 .. .. .. .. .. .. Ghana 3.8 3.7 7.8 6.9 6.7 5.4 4.5 6.7 9.4 9.7 8.1 .. Guinea 3.8 10.5 8.2 6.0 5.9 6.0 .. .. .. .. .. .. Guinea-Bissau 6.1 5.8 5.7 5.1 5.2 5.4 .. .. .. .. .. .. Kenya 5.7 5.9 4.9 5.5 5.9 6.1 6.1 4.9 4.9 4.7 5.0 .. Lesotho 5.6 2.3 3.1 1.8 2.6 2.8 .. .. .. .. .. .. Liberia 0.0 -1.6 2.5 3.2 4.7 4.8 .. .. .. .. .. .. Madagascar 3.1 4.2 4.1 5.1 5.6 5.3 .. .. .. .. .. .. Malawi 2.8 2.5 4.0 3.7 4.1 4.9 .. .. .. .. .. .. Mali 6.0 5.8 5.3 5.0 4.7 4.7 .. .. .. .. .. .. Mauritania 1.4 2.0 3.5 3.6 4.6 5.2 .. .. .. .. .. .. Mauritius 3.5 3.8 3.9 4.0 4.1 3.8 .. .. .. .. .. .. Mozambique 6.6 3.8 3.7 3.3 3.4 3.6 .. .. .. .. .. .. Namibia 6.0 1.1 -1.0 1.5 2.3 3.0 .. .. .. .. .. .. Niger 4.0 5.0 5.2 5.3 5.4 5.8 .. .. .. .. .. .. Nigeria 2.7 -1.6 0.8 2.1 2.2 2.4 -1.7 -0.9 0.7 1.2 2.1 2.0 Rwanda 8.8 6.0 6.1 6.8 7.1 7.5 .. .. .. .. .. .. Senegal 6.5 6.7 6.8 6.8 6.8 7.0 .. .. .. .. .. .. Seychelles 3.5 4.5 4.2 4.0 3.8 3.5 .. .. .. .. .. .. Sierra Leone -20.5 6.3 4.3 5.1 5.7 6.5 .. .. .. .. .. .. 154 S T A TI S T I C A L A P P E N D IX G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 18 Real GDP growth (continued) Annual estimates and forecasts1 Quarterly growth2 2015 2016 2017e 2018f 2019f 2020f 16Q4 17Q1 17Q2 17Q3 17Q4 18Q1e Sub-Saharan Africa (continued) South Africa 1.3 0.6 1.3 1.4 1.8 1.9 1.0 1.1 1.4 1.3 1.5 .. Sudan 4.9 4.7 4.3 2.6 3.1 3.5 .. .. .. .. .. .. Swaziland 0.4 1.4 1.9 1.1 1.7 1.8 .. .. .. .. .. .. Tanzania 7.0 7.0 6.4 6.6 6.8 7.0 5.5 5.7 7.8 6.8 .. .. Togo 5.3 5.0 4.4 4.8 5.0 5.0 .. .. .. .. .. .. Uganda3 5.2 4.7 4.0 5.5 6.0 6.5 2.8 4.6 6.5 7.5 6.6 .. Zambia 2.9 3.8 3.9 4.1 4.5 4.8 3.9 3.1 3.6 4.5 5.0 .. Zimbabwe 1.7 0.6 3.4 2.7 3.8 4.0 .. .. .. .. .. .. Sources: World Bank and Haver Analytics. Notes: e = estimate; f = forecast. 1. Aggregate growth rates calculated using constant 2010 U.S. dollars GDP weights. 2. Year-over-year quarterly growth of not-seasonally-adjusted real GDP, except for Ecuador, the Euro Area and the United Kingdom. Data for Bosnia and Herzegovina are from the production approach. 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, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Georgia, Hungary, Kazakhstan, FYR Macedonia, Poland, Romania, Russia, Serbia, Turkey, and Ukraine. Latin America and the Caribbean: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Honduras, Jamaica, Mexico, Nicaragua, Paraguay, Peru, and Uruguay. Middle East and North Africa: Bahrain, Egypt, Iran, Jordan, Kuwait, Qatar, and Saudi Arabia. South Asia: India and Sri Lanka. Sub-Saharan Africa: Botswana, Ghana, Kenya, Nigeria, South Africa, Tanzania, Uganda, and Zambia. 3. Annual GDP is on fiscal year basis, as per reporting practice in the country. 4. GDP data for Pakistan are based on factor cost. For Bangladesh, Bhutan, 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. G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 18 S T A TI S T I C A L A P P E N D IX 155 Data and Forecast Conventions The macroeconomic forecasts presented in this House Prices Indicators, IMF Balance of Pay- report are prepared by staff of the Prospects ments Statistics, and IMF International Financial Group of the Development Economics Vice- Statistics. Presidency, in coordination with staff from the Macroeconomics, Trade, and Investment Global Aggregations. Aggregate growth for the world and Practice and from regional and country offices, all sub-groups of countries (such as regions and and with input from regional Chief Economist income groups) is calculated as GDP-weighted offices. They are the result of an iterative process average (at 2010 prices) of country-specific that incorporates data, macroeconometric models, growth rates. Income groups are defined as in the and judgment. World Bank’s classification of country groups. Data. Data used to prepare country forecasts Forecast Process. The process starts with initial come from a variety of sources. National Income assumptions about advanced-economy growth Accounts (NIA), Balance of Payments (BOP), and and commodity price forecasts. These are used as fiscal data are from Haver Analytics; the World conditioning assumptions for the first set of Development Indicators by the World Bank; the growth forecasts for EMDEs, which are produced World Economic Outlook, Balance of Payments using macroeconometric models, accounting Statistics, and International Financial Statistics by frameworks to ensure national account identities the International Monetary Fund. Population and global consistency, estimates of spillovers data and forecasts are from the United Nations from major economies, and high-frequency World Population Prospects. Country- and indicators. These forecasts are then evaluated to lending-group classifications are from the World ensure consistency of treatment across similar Bank. DECPG databases include commodity EMDEs. This is followed by extensive discussions prices, data on previous forecast vintages, and in- with World Bank country teams, who conduct house country classifications. Other internal continuous macroeconomic monitoring and databases include high-frequency indicators such dialogue with country authorities. Throughout as industrial production, consumer price indexes, the forecasting process, staff use macro- house prices, exchange rates, exports, imports, and econometric models that allow the combination stock market indexes, based on data from of judgement and consistency with model-based Bloomberg, Haver Analytics, OECD Analytical insights. G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 18 S E L E CTE D TO P I C S 157 Global Economic Prospects: Selected Topics, 2015-18 Growth and Business Cycles Global output gap Is the global economy turning the corner? January 2018, Box 1.1 Low-income countries Recent developments and outlook June 2018, Box 1.2 Recent developments and outlook January 2018, Box 1.2 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 2018, Box 1.3 Recent developments and outlook January 2018, Box 1.3 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 Potential growth What is potential growth? January 2018, Box 3.1 Understanding the recent productivity slowdown: Facts and explanations January 2018, Box 3.2 Moving together? Investment and potential output January 2018, Box 3.3 The long shadow of contractions over potential output January 2018, Box 3.4 Productivity and investment growth during reforms January 2018, Box 3.5 East Asia and Pacific January 2018, Box 2.1.1 Europe and Central Asia January 2018, Box 2.2.1 Latin America and the Caribbean January 2018, Box 2.3.1 Middle East and North Africa January 2018, Box 2.4.1 South Asia January 2018, Box 2.5.1 Sub-Saharan Africa January 2018, Box 2.6.1 Recent investment slowdown Investment developments and outlook: East Asia and Pacific January 2017, Box 2.1.1 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 2.6.1 158 S E L E CTE D TO P I C S G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 18 Global Economic Prospects: Selected Topics, 2015-18 Growth and Business Cycles Other topics Long-term growth prospects: Downgraded no more? June 2018, Box 1.1 Education demographics and global inequality January 2018, SF 2 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 Linkages between China and Sub-Saharan Africa June 2015, Box 2.1 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 Commodity Markets The role of the EM7 in commodity production June 2018, SF1, Box SF1.1 Commodity consumption: Implications of government policies June 2018, SF1, Box SF1.2 With the benefit of hindsight: The impact of the 2014–16 oil price collapse January 2018, SF1 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, SF 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 G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 18 S E L E CTE D TO P I C S 159 Global Economic Prospects: Selected Topics, 2015-18 Monetary and Exchange Rate Policies Corporate Debt: Financial Stability and Investment Implications June 2018, SF2 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 Policies Debt dynamics in emerging market 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 Development Economics Prospects Group (DECPG): Selected Other Publications on the Global Economy, 2015-18 Commodity Markets Outlook Column1 Oil Exporters: Policies and Challenges April, 2018, SF 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 Column1 Global Monthly newsletter Global Weekly newsletter ECO-AUDIT Environmental Benefits Statement e 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. e majority of our books are printed on Forest Stewardship Council (FSC)-certified paper, with nearly all containing 50-100 percent recycled content. e recycled fiber in our book paper is either unbleached or bleached using totally chlorine-free (TCF), processed chlorine-free (PCF), or enhanced elemental chlorine-free (EECF) processes. More information about the Bank’s environmental philosophy can be found at http://www.worldbank.org/corporateresponsibility. G lobal growth remains robust in 2018 but is expected to ease over the next two years and, over the longer-term, further as potential growth softens. Emerging market and developing countries face considerable risks, such as increased protectionism and disorderly financial market movements, as well as major structural challenges, including those related to competitiveness, adaptability to new technologies, and global integration to boost long-term prospects. In addition to discussing global and regional economic developments and prospects, this edition of Global Economic Prospects includes two Special Focus essays of critical importance for emerging and developing economies: an analysis of their increasing role in global commodity markets, and an assessment of their corporate debt burdens. Global Economic Prospects is a World Bank Group Flagship Report that examines global economic developments and prospects, with a special focus on emerging market and developing countries, on a semiannual basis (in January and June). The January edition includes in-depth analyses of topical policy challenges faced by these economies, while the June edition contains shorter analytical pieces. ISBN 978-1-4648-1257-6 90000 9 781464 812576 SKU 211257