EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL A World Bank Group TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) Flagship Report JUNE 2018 Global Economic Prospects The Turning of the Tide? EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) JUNE 2018 EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) Summary of Contents Chapter 1 e Turning of the Tide?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 EM7 in commodity production ..............................64 Box SF1.2 Commodity consumption: Policies and consequences ...............74 EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) CHAPTER 1 GLOBAL OUTLOOK The Turning of the Tide? EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 18 C H A P TE R 1 3 Global growth remains robust and is projected to reach 3.2 percent in 2018. However, it is expected to edge down in the next two years, to 2.9 percent by 2020, as global slack dissipates and investment growth plateaus. Looking ahead, the international context will be less supportive to activity, amid tightening financing conditions and moderating global trade. 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 during the next two years. Progress in per capita income growth will be uneven, however, remaining particularly subdued in Sub-Saharan Africa. Amid shifting policies in major economies, the outlook is subject to various risks. The possibility of escalating trade protectionism has increased substantially in recent months, and the risks of disorderly financial market movements and heightened geopolitical tensions 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 however, remains below central bank targets in some advanced economies. Despite ongoing uncertainty about trade and Among emerging market and developing other policy developments, global growth remains economies (EMDEs), the recovery in commodity robust, with business and consumer confidence exporters has broadened, with growth expected to near post-crisis highs (Figure 1.1). The recovery in accelerate this year in almost 60 percent of global trade and manufacturing activity has been countries in this group, as consumption and stronger than previously expected. With advanced investment firm up. The upturn in many energy economies growing faster than potential, the exporters is lagging behind that of exporters of withdrawal of monetary policy accommodation other commodities, reflecting ongoing adjust- has led to some tightening of global financing tments to the 2014-16 collapse in oil prices, and conditions, although borrowing costs remain production cuts in key oil exporters. Across generally contained. Oil prices are notably higher commodity exporters, inflation is generally than previously expected mainly because of supply moderating as the impact of past currency factors, and other commodity prices have also depreciations wanes. risen. Global inflation is trending up, but only gradually and from low levels. Growth in commodity importers continues to be robust, with the East Asia and Pacific region In advanced economies, the investment-led leading the revival in global trade. Growth in pickup continues, despite some moderation in China is gradually slowing but remains resilient, recent high-frequency indicators, while additional while constraints to growth are dissipating in fiscal stimulus measures in the United States are other large commodity importers—notably India expected to provide a further lift to near-term and Mexico, where investment is recovering. activity. Labor markets have been improving Inflation remains broadly stable despite higher steadily. With output gaps closing or closed, commodity prices and limited remaining slack. inflation expectations have crept up and monetary policy is becoming less expansionary. Inflation, Global growth projections for 2018 have been revised up for the second consecutive time, mainly Note: is chapter was prepared by Carlos Arteta and Marc reflecting additional fiscal stimulus in the United Stocker, with contributions from Patrick Kirby, Ekaterine States and more robust activity in some major Vashakmadze, and Collette M. Wheeler. Additional inputs were EMDEs. Nevertheless, only 45 percent of provided by John Ba es, Gerard Kambou, Eung Ju Kim, Csilla Lakatos, Peter Nagle, Yirbehogre Modeste Some, and Dana Vorisek. countries are expected to experience a further Research assistance was provided by Anh Mai Bui, Ishita Dugar, acceleration of growth this year, down from 55 Xinghao Gong, Brent Harrison, Julia Roseman, and Jinxin Wu. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 4 C H A P TE R 1 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 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 3.2 3.0 2.9 0.1 0.0 0.0 Advanced economies 2.3 1.7 2.3 2.3 2.0 1.7 0.1 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 2.2 1.7 1.5 0.1 0.0 0.0 Japan 1.4 0.9 1.7 1.3 0.8 0.5 0.0 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 3.1 -0.2 -0.1 0.0 Other EMDEs 6.1 5.9 6.2 5.9 5.8 5.7 0.2 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 5.3 5.3 5.4 0.0 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 3.2 3.1 0.3 0.2 0.1 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 4.7 4.4 4.0 1.2 0.4 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 1.8 2.4 2.5 -0.2 -0.2 -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 2.6 0.2 -0.1 0.0 Argentina 2.7 -1.8 2.9 2.5 2.7 3.0 -0.5 -0.3 -0.2 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 South Africa 1.3 0.6 1.3 1.4 1.8 1.9 0.3 0.1 0.2 Nigeria 2.7 -1.6 0.8 2.1 2.2 2.4 -0.4 -0.6 -0.4 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 2.3 2.0 1.8 0.1 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 5.4 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 0.1 Commodity prices Oil price5 -47.3 -15.6 23.3 23.1 0.0 0.7 13.7 -1.7 -1.0 Non-energy commodity price index -15.8 -2.6 5.5 4.1 0.3 0.6 3.5 -0.5 -0.6 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. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 5 percent in 2017; moreover, global activity is still FIGURE 1.1 Summary – Global prospects lagging behind previous expansions despite a The global economic upturn continues amid robust consumer and decade-long recovery from the global financial business confidence. Growth is rebounding in commodity-exporting crisis. Accordingly, after reaching a five-year peak EMDEs, albeit slowly in energy producers. Despite the recovery, global activity still lags previous expansions. Moreover, global growth is projected of 3.2 percent in 2018, global growth is projected to decelerate in 2019-20, as global trade and investment moderate. to moderate in 2019-20, edging down to 2.9 Progress in per capita income will be uneven and insufficient to tackle percent by the end of the forecast period. Global extreme poverty in Sub-Saharan Africa. growth projections are above estimates of potential, suggesting that capacity constraints will A. Growth B. Global confidence become more binding and inflation will continue to rise during the forecast horizon. Growth in advanced economies is expected to decelerate toward potential rates in coming years, as monetary policy stimulus is pared down and the effect of U.S. fiscal expansion wanes. A projected deceleration of capital spending in these economies, combined with that in China, will contribute to more moderate global trade growth C. Growth in commodity-exporting D. Global GDP during expansion in 2019 and 2020. Shifts in the policy mix of EMDEs periods advanced economies—most notably, monetary policy tightening and fiscal policy loosening in the United States—are expected to result in a faster- than-previously-anticipated 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 E. Global trade and investment F. Per capita EMDE GDP growth, by growth, volume region growth is projected to gradually plateau, reaching 4.7 percent in both 2019 and 2020. Over this period, only about half of commodity exporters, and less than half of commodity importers, are expected to grow above their pre-crisis long-term averages. In the longer term, absent policy reforms, potential growth in EMDEs is expected to weaken, reflecting softening productivity and demographic headwinds. Progress in per capita Sources: Federal Reserve Bank of St. Louis, International Monetary Fund, Organisation for Economic income growth will be uneven. Per capita growth Co-operation and Development, World Bank. in Sub-Saharan Africa, where nearly half of the A. C. E. F. Shaded area indicates forecasts. A. EMDEs = emerging market and developing economies. Aggregate growth rates calculated using extreme poor live, is projected to remain below or constant 2010 U.S. dollar GDP weights. Data for 2017 are estimates. B. Average confidence indexes aggregated using U.S. dollar GDP weights, based on the seven around 1 percent, while it is expected to reach 6 largest advanced economies and seven EMDEs. Confidence is normalized through amplitude adjustments, such that any cyclical movements have the same amplitude and the long-term average percent in South Asia, a region that includes the of a respective country series is equal to 100. Last observation is March 2018. second largest number of people in extreme 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. poverty. Cycle dates based on global recessions and slowdowns identified in Kose and Terrones (2015). Dashed line corresponds to 2018-20 forecasts. E. Trade measured as the average of export and import volumes. Uncertainty around global growth projections has F. SAR = South Asia and SSA = Sub-Saharan Africa. GDP per capita calculated using constant 2010 U.S. dollar GDP weights. risen, and is increasingly driven by the possibility of trade and other policy shocks from major EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 6 C H A P TE R 1 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 FIGURE 1.2 Global risks and policy challenges economies (Figure 1.2). While a synchronous upturn in large economies could lead to further Uncertainty surrounding the outlook has risen and downside risks continue to dominate. Escalating trade protectionism could disrupt the recovery in growth upgrades in the near term, risks remain global trade, while EMDEs remain susceptible to a sudden increase in tilted to the downside, with some becoming more borrowing costs amid elevated debt levels. Improving education outcomes could help raise per capita income levels and growth prospects in key acute. EMDE regions. Regional trade agreements could provide a positive response to stalled trade liberalization at the global level. In particular, the risk of mounting trade protectionism has markedly increased since the A. Probability of global growth in 2019 B. Impact on trade of worldwide being 1 ppt below / above baseline increase in tariffs to bound levels start of the year. A worldwide escalation of tariffs, by 2020 up to the limits permitted under existing international trade rules, could lead to cumulative trade losses equivalent to those experienced during the global financial crisis in 2008-09, with particularly severe consequences for EMDEs. The risk of financial market disruptions has also risen amid shifting monetary and fiscal policy stances in major advanced economies. A sudden tightening of global financing conditions would leave highly C. EMDE debt as a share of GDP, D. Impact of interest-rate shock on indebted EMDEs particularly vulnerable, with by borrowing sector fiscal sustainability gaps in EMDEs, rising debt service costs hampering investment and by region heightening financial stability risks. Other risks include the possibility of intensifying geopolitical tensions, as well as heightened conflicts in some regions. The probability of an abrupt slowdown in global growth remains low in the near term, but it could increase substantially if one or several downside risks materialize, including a combined escalation E. Students proficient in math and F. Size of new regional trade of trade protectionism and disorderly financial reading, by region agreements market developments. Most countries would be unprepared to confront such an outcome if it were to occur, 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. The immediate policy challenge for advanced economies is to calibrate their fiscal, monetary, Sources: Bank for International Settlements, International Monetary Fund, Kose et al. (2017b), Kutlina-Dimitrova and Lakatos (2017), World Bank. and trade policy stances to nurture the recovery A. Probabilities for 2019 are computed from the forecast distribution of 18-month-ahead oil price and to avoid disorderly financial adjustments. In 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 observation is April the longer term, they need to confront the slow 2018. B. D. E. EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the pace of potential growth and demographic Caribbean, MNA = Middle East and North Africa, SAR = South Asia, SSA = Sub-Saharan Africa, and EU = European Union. pressures through structural reforms that boost B. Based on simulations using the GDyn computable general equilibrium model (Ianchovichina and productivity, labor force participation, and fiscal McDougall 2000; Ianchovichina and Walmsley 2012). Results are reported relative to a baseline scenario in 2020. Bars denote the percent deviation from the baseline. sustainability. C. Debt is defined as loans and debt securities. Sample includes 16 EMDEs. D. 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 In EMDEs, monetary and fiscal buffers need to be balance and the debt-stabilizing primary balance. A negative gap indicates that government debt is on a rising trajectory; a positive gap indicates government debt is on a falling trajectory. Sample rebuilt in order to prepare for monetary policy includes 70 EMDEs and 35 advanced economies. E. Data for South Asia are unavailable. Horizontal lines show advanced-economy average. tightening in advanced economies and restore the F. CPTPP = Comprehensive and Progressive Agreement for Trans-Pacific Partnership, scope for policy support against negative shocks. AfCFTA = African Continental Free Trade Area. Data are as of 2017. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 7 In particular, rising global interest rates will FIGURE 1.3 Advanced economies heighten corporate vulnerability and raise EMDE Growth is generally robust in major advanced economies, but is projected debt-service costs and fiscal sustainability gaps. In to moderate toward subdued potential growth rates, as labor market slack the longer run, EMDE policy makers also need to diminishes and monetary policy stimulus is withdrawn. confront intensifying structural challenges and A. GDP and demand component B. Growth accelerate measures to tackle poverty. The decisive growth implementation of growth-enhancing structural reforms is critical in light of the likelihood of weaker-than-expected long-term growth outcomes—which, if past experience is any guide, is a material possibility (Box 1.1). For commodity exporters, the end of the commodity super-cycle and secular shifts in demand for commodities call for accelerated efforts to diversify and transform their economies C. Unemployment rate D. Actual and potential growth in 2018-19 as a way of boosting income per capita and mitigating volatility. For all EMDEs, rapid technological changes highlight the need to support skill acquisition and adaptability. This would assist the process of integration in regional and global value chains, and bolster firms’ ability to absorb new technologies and compete internationally. For many low- and middle- income countries, improving basic numeracy, Sources: Haver Analytics, World Bank. literacy, and skills related to information and A. B. Green diamonds correspond with the January 2018 edition of the Global Economic Prospects communication technologies from current low report. Shaded areas indicate forecasts. B. Aggregate growth rates and contributions calculated using constant 2010 U.S. dollar GDP weights. levels remains a key priority. Comprehensive C. Data are seasonally adjusted. Last observation is April 2018 for the United States, and March 2018 for Japan and the Euro Area. preferential trade agreements can help boost D. Blue bars refer to average actual growth over 2018-19 period and vertical orange lines show the income per capita of member countries, and minimum-maximum range of potential growth estimates based on eight different methodologies (production function approach, multivariate filter, three univariate filters—Hodrick-Prescott filter, provide a positive response to stalled trade Christiano-Fitzgerald filter, and Butterworth filter—IMF World Economic Outlook estimates, and estimates in OECD Economic Outlook and Long-Term Baseline Projections), over 2018-19. For liberalization at the global level. Recent regional further details on potential growth estimates, refer to the January 2018 edition of the Global Economic Prospects report. initiatives are a promising step forward to that goal. indicators suggest some moderation, they continue Major economies: Recent to point to above-potential growth this year across sectors and countries (Figure 1.3). Consumer developments and outlook confidence is high, businesses are responding to In advanced economies, above-potential growth has growing demand by increasing investment, and extended into 2018. Monetary policy, despite some new jobs are being created at a brisk pace. Beyond tightening, is expected to remain accommodative. In 2018, however, as the recovery matures, growth is the United States, significant fiscal stimulus will expected to decelerate toward its potential rate. As boost near-term activity. As the recovery matures over output gaps close and become positive, inflation the forecast horizon, growth is projected to moderate will rise toward target rates. Central banks will, in toward its potential rate. In China, growth remains response, continue to remove monetary stimulus. solid and is expected to gradually slow as rebalancing The advanced-economy forecast for 2018 has been continues. revised up to 2.3 percent—0.1 percentage point above previous projections—mainly reflecting Economic conditions across major advanced significant additional fiscal stimulus in the United economies remain generally strong. While recent States. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 8 C H A P TE R 1 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 BOX 1.1 Long-term growth prospects: Downgraded no more? Consensus forecasts for long-term growth appear to be stabilizing after a series of downgrades since 2010. Although this recent development could be another encouraging sign that global activity is picking up, past experience cautions that long-term forecasts are often overly optimistic. Although well below levels expected a decade ago, long-term growth forecasts remain above model-based potential growth estimates. Moreover, adverse structural forces continue to overshadow long-term growth prospects. A prolonged period of increasingly weaker growth growth expectations are stabilizing at levels well expectations, during which long-term forecasts were below those expected a decade earlier and also well systematically downgraded, seems to have come to an below current growth rates. Third, long-term growth end. For the first time since 2010, the 10-year-ahead expectations have in the past proven too optimistic consensus forecast for global growth appears to have and above other estimates of potential growth that stabilized (Figure 1.1.1A). In 2018, long-term are dampened by multiple structural forces. growth expectations were upgraded for more than half of countries—the largest number since 2010— Against this background, the box briefly analyzes the and there have also been recent upgrades in short- behavior of long-term global growth expectations to term forecasts (Figures 1.1.1B, 1.1.1C). address the following questions: If long-term forecast upgrades are sustained, it could • How have long-term global growth expectations be another sign that the legacies of the global evolved? financial crisis are fading. Growth is expected to reach a post-2011 high this year, and the negative • How do these expectations compare with actual global output gap is likely to be closed for the first outcomes and estimates of potential growth? time since 2008 (World Bank 2018a). The recent synchronized global upturn has even sparked hopes • When do long-term growth expectations tend to that the crisis-induced damage to potential growth— be higher? “hysteresis” effects, which entrench weak growth after • What does the recent stabilization in forecasts deep recessions—could be reversed if investment, imply for long-term prospects? productivity and employment continue to improve (Yellen 2016; Draghi 2018).1 In light of recent technological innovations, long- term growth prospects have been a subject of intense However, such enthusiasm needs to be tempered by several considerations. First, the short-term global debate. Some argue that growth will be much slower in the coming decades because of the declining growth outlook is predicated on highly accommo- marginal impact of new technologies on productivity dative monetary policy and, in some advanced (Gordon 2016). In contrast, others claim that the economies, fiscal stimulus. Second, long-term global global economy will enjoy a surge in productivity growth driven by new digital technologies (Brynjolfsson and McAfee 2014). This box focuses on long-term growth prospects as captured in Note: is box was prepared by M. Ayhan Kose, Franziska Ohnsorge and Naotaka Sugawara. Research assistance was provided by Shijie Shi. 10-year-ahead growth forecasts and model-based 1 Hysteresis e ects caused by the global nancial crisis were sizeable potential growth estimates. It is very difficult, if not and persistent (Ball 2014, Lo and Rogo 2015, Oulton and Sebastiá- impossible, to undertake a credible quantitative Barriel 2017). e current growth rebound towards long-term actual growth rests on considerable and sustained demand stimulus since the analysis of the impact of new technologies on global nancial crisis. Absent such demand stimulus, growth may be productivity growth and overall growth prospects. much lower as a result of “secular stagnation,” a phenomenon of rising propensities to save and declining propensities to invest in advanced economies (Summers 2015, 2016). Secular stagnation could also in part Long-term growth expectations refer to 10-year- account for persistently low real interest rates (Rachel and Smith 2015). ahead growth forecasts of real GDP from Consensus EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 9 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, while short-term forecasts have been upgraded. 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 different E. Ten-year-ahead output growth F. Ten-year-ahead global investment and forecast horizon forecasts consumption growth forecasts Sources: Consensus Economics, United Nations, World Bank. Note: Samples include 38 countries, consisting of 20 advanced economies and 18 EMDEs, where consensus forecasts are consistently available over the period of 1998- 2018. These countries 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. Global, advanced-economy and EMDE growth is computed with GDP in constant 2010 U.S. dollars as weights. A. E. F. The horizontal axis refers to the year of consensus forecast surveys. A. Per capita global output growth is computed as a difference between ten-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 ten-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 in 2018 when data are based on surveys in April. D. Lines show the years of consensus forecast surveys. F. Global growth is computed with private consumption and investment in constant 2010 U.S. dollars as weights. Economics.2 Short-term growth forecasts are defined are for annual growth and refer to averages of semi- as one-year-ahead consensus forecasts. All forecasts annual or quarterly projections. Evolution of expectations 2 10-year-ahead forecasts are presented as an average of 6- to 10-year- ahead growth forecasts in Consensus Economics. 10-year-ahead consen- Pre-crisis upgrades, post-crisis downgrades. The sus forecasts are consistently available for 38 countries (20 advanced global financial crisis marked a turning point in long- economies and 18 EMDEs) from 1998. ese 38 countries constitute 87 percent of post-crisis global GDP. Forecasts are available for 45 countries term global growth expectations. From 1998 to (25 advanced economies and 20 EMDEs) for as early as 1989. Consensus 2007, long-term expectations improved slightly Economics has been canvasing long-term forecasts from multiple institu- tions four times a year since 2015. Prior to that, long-term forecasts were (from 3 percent to 3.4 percent). During the same made available twice a year or three times a year. period, 18 of the 38 economies’ long-term growth EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 10 C H A P TE R 1 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 BOX 1.1 Long-term growth prospects: Downgraded no more? (continued) forecasts were upgraded. Following the 2007-09 economy registered in the 2003-07 period one of its global financial crisis, however, long-term forecasts best growth records since the early 1970s. have steadily declined from 3.4 percent in 2007 to 2.5 percent in 2017, reflecting a broad-based Tailwinds, however, turned into headwinds during downgrading of growth prospects. Since the crisis, the 2009 global recession that was followed by an long-term growth forecasts were lowered for all anemic recovery, especially in advanced economies. economies (by about 1.4 percentage points, on The post-crisis period was marked by widespread average). The evolutions of global growth forecasts unemployment and weak investment growth. In over various horizons (from 2- to 10-year-ahead) all many countries, elevated debt burdens weighed on point to gradual deterioration in global growth investment growth (World Bank 2017a). Over the expectations since the global financial crisis (Figure 2010-15 period, long-term prospects were further 1.1.1D). clouded by the 2011-12 Euro Area debt crisis, and by a sharp slowdown in EMDEs that was partly related The pattern of pre-crisis strength and post-crisis to the bursting of the commodity price boom. weakness in growth expectations is broadly shared among different country groups and alternative These adverse cyclical effects were compounded by measures of growth. Emerging market and structural weaknesses, namely poor productivity developing economies (EMDEs) enjoyed growth and a broadening decline in the growth of improvements in their growth prospects before the working-age populations (Didier et al. 2015; World crisis, while advanced economies had already started Bank 2018a). A slowdown in total productivity experiencing a gradual decline in growth forecasts in growth that had begun in advanced economies in the early 2000s. Post-crisis, both groups witnessed 2004 was compounded, from 2008, by an even deteriorating long-term growth forecasts (Figure steeper decline in EMDEs.3 Similarly, in 2010, the 1.1.1E). Similar trends occurred in per capita growth share of the working age population in EMDEs and medium-term (5-year-ahead) forecasts. The post- began, first, to plateau and, then, started to fall—a crisis decline in long-term output growth turning point that advanced economies had already expectations was accompanied by similar weakening passed in the mid-1980s. As a result, global potential of forecasts for global investment and consumption growth—the rate of change in output an economy growth (Figure 1.1.1F). would sustain at full capacity utilization and full employment—in 2013-17 was 0.9 percentage point Recent stabilization. Since 2017, long-term growth lower than a decade earlier (World Bank 2018a). expectations have stabilized. In 21 economies (out of 38), long-term growth expectations improved from The recent stabilization in long-term growth 2017 to 2018—the largest number of countries since expectations is a result of improved global growth 2010. In EMDEs, 5-year-ahead forecasts showed the since mid-2016, tight labor markets in major first sign of stabilization following eight years of advanced economies, and recoveries in some large consecutive declines. commodity-exporting EMDEs. Indeed, global GDP is expected to return to its potential this year for the Factors driving the evolution of forecasts. The first time since 2008. evolution of long-term forecasts has reflected the global economy’s roller coaster ride over the past two decades. Pre-crisis strength in growth prospects in part reflected rapid expansion of investment and international trade and financial flows with the 3 In advanced economies, the productivity growth slowdown has been spread of information and communications attributed to several factors, including the lack of transformative technologies, slowing improvements in educational attainment, and the technology (Kose and Prasad 2010; World Bank maturation of information technologies (Gordon 2016; Cette, Fernald, 2018a). Thanks to these developments, the global and Mojon 2016). EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 11 BOX 1.1 Long-term growth prospects: Downgraded no more? (continued) FIGURE 1.1.2 Growth forecasts: Comparisons with outturns and potential growth For most countries, long-term growth forecasts have systematically exceeded actual growth outturns over the past decade, and forecast optimism is stronger for longer term forecasts than for shorter-term forecasts. Ten-year-ahead forecasts also persistently exceed concurrent potential growth estimates and were even higher during sustained growth spurts and investment surges. Over a decade, growth disappointments can make a major difference to incomes. A. 10-year-ahead growth forecast errors B. Global growth forecast errors, by C. Comparison of global forecasts and different forecast horizon potential growth D. 10-year-ahead growth forecasts during E. Global growth forecasts and potential F. Cumulative change in global GDP, strong growth and investment episodes growth 2018-27 Sources: Consensus Economics, Kilic Celik et al. (2018), World Bank. Note: Annual averages of results from multiple surveys conducted in each year are presented. Growth in aggregate groups is computed with GDP in constant 2010 U.S. dollars as weights. Potential growth is measured by production function. Samples include 38 countries (20 advanced economies and 18 EMDEs) in all panels except in Panel D, which is based on 45 countries including those consensus forecasts are available over the shorter period. A. 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. B. A forecast error is defined as a difference between growth forecasts at different horizons (over 3 years, 5 years, and 10 years) and actual growth. Averages and medians are computed from available observations up to 2017. C. 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. D. 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. 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. E. Period averages of actual growth (2010-18) and potential growth (2018-27). Forecast is an average of growth forecasts for 2018-27 surveyed in 2018. In forecast corrected for bias, average forecast errors over respective time horizons (as shown in Panel B) are adjusted. A yellow ticker refers to a forecast simply corrected for an average error over 10 years. F. Cumulative change in global GDP since 2018, when growth in every year during 2018-27 is assumed to be as defined in Panel E. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 12 C H A P TE R 1 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 BOX 1.1 Long-term growth prospects: Downgraded no more? (continued) Comparison with outcomes and potential -term expectations and the model-based estimate is growth mostly driven by advanced economies but long-term growth forecasts are currently larger than potential Systematic optimism. Not surprisingly, during growth in the majority of countries. 2008-17, long-term global growth forecasts made a decade earlier exceeded actual growth outcomes in all Sources of over-optimism. The over-optimism in years except in 2010 (Figure 1.1.2A). Growth long-term growth forecasts is a result of both cyclical forecasts were higher than eventual growth outcomes and structural factors. In part, this optimism reflected in the majority of countries in almost all years since an initial underappreciation of the headwinds to 2008, except during 2010-11. Even during those two potential growth, especially in advanced economies, years, forecasts were overly optimistic for around 50 from demographics and weak investment and percent of advanced economies and 25 percent of productivity. In part, optimism was a natural EMDEs. The analysis here covers mainly the crisis outcome of the failure to predict, or even recognize and post-crisis periods that witnessed an unusual in real time, shocks that could trigger crises, business series of negative growth shocks but it is widely cycle turning points and the lasting impact of severe documented that growth forecasts for long-term tend shock (Juhn and Loungani 2002; Ho and Mauro to be more optimistic than growth outcomes even in 2016).6 data samples with longer time periods (Frankel 2011; The global financial crisis constitutes one of the Ho and Mauro 2016). Moreover, the longer the forecast horizon, the larger is the degree of over- largest such episodes in a century, which was not foreseen by most forecasters. The post-crisis period optimism (Figure 1.1.2B). On average, 10-year- ahead growth forecasts disappointed by 1.2 has also been marked by severe shocks to large groups percentage point and 5-year-ahead forecasts by 0.8 of countries, such as the Euro Area debt crisis and the 2014-16 oil price collapse. These shocks—which percentage point over the period until 2017.4 could not be foreseen 10 years prior—give rise to Above potential growth. Since long-term growth substantial and persistent growth disappointments. expectations presumably abstract from cyclical Long-term forecasts adjusted gradually, as new effects, they should reflect forecasters’ judgment information revealed the lasting damage the financial about an economy’s potential growth. By crisis had dealt to the global economy. Indeed, long- comparison, model-based estimates of potential term growth forecast downgrades were historically growth can be made using a number of different associated with disappointing growth outcomes: methods. To study whether long-term growth when growth fell short of 1-year-ahead forecasts in expectations differ from other estimates of potential three consecutive years (in a sample of 55 country- growth, estimates of potential growth based on a year episodes), 10-year-ahead forecasts were, on production function model are compared with 10- average, downgraded by (a statistically significant) year-ahead growth forecasts made in the same year 0.2 percentage point. (Kilic Celik et al. 2018; World Bank 2018a). 10- year-ahead forecasts for global growth often exceed Factors associated with higher long-term forecasts the model-based global potential growth over the next decade (Figure 1.1.2.C).5 The gap between long As shown in the preceding section, long-term forecast revisions are quite common over time and across 4 For 5-year-ahead forecasts, this is larger than the average growth countries. To analyze the major factors associated disappointments of 0.34 percentage point estimated in 5-year-ahead with higher forecasts, two simple event studies are World Economic Outlook forecasts for 188 countries for 1990-2012 (Ho and Mauro 2016). 5 Estimating potential output is fraught with measurement challenges the di erence between 10-year-ahead forecasts and cross-country- (World Bank 2018a). However, 10-year-ahead forecasts remain above consistent potential growth estimates. other model-based measures of potential growth available in Kilic Celik 6 e average 10-year-ahead forecast error for the growth in years up to et al. (2018). For commodity exporters, accounting for resource rents can 2000-08 was correspondingly smaller, at 0.1 percentage point, compared materially alter potential growth estimates and may account in part for with 1.2 percentage points for the sample from 2000-17. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 13 BOX 1.1 Long-term growth prospects: Downgraded no more? (continued) undertaken. These illustrate how forecasts are revised forecast errors materialize yet again, growth in the during periods of strong output or investment coming decade may turn out to be much weaker than growth. These episodes are particularly relevant current long-term growth forecasts, around 2.1 considering that the recent stabilization in growth percent instead of 2.6 percent (Figure 1.1.2E). Over- expectations has also coincided with above-potential optimism has reflected an underappreciation of growth in some major economies and an acceleration structural headwinds to potential growth as well as an in investment since mid-2016. inability to forecast global recessions. Historically, the global economy experiences a recession every decade Sustained growth spurts. Sustained periods of (in 1975, 1982, 1991, and 2009).7 This suggests that above-potential growth were generally accompanied it is possible that the global economy will be hit by by higher 10-year-ahead growth forecasts. The event another recession over the next decade. study sample includes 55 episodes (of which 43 concluded before the global financial crisis in 2009) Yet, even if a growth forecast disappointment is not during which actual growth exceeded potential triggered by an outright global recession, average growth in at least three consecutive years. Conversely, potential growth over the next decade is estimated to in 49 setback episodes, of which 17 straddled the be slower than during 2013-17. This reflects an crisis and 24 were pre-crisis, growth slowed in three awareness that weak productivity growth, or more consecutive years. During growth spurts, increasingly unfavorable demographic trends, and long-term growth forecasts were, on average, 0.3 subdued investment prospects are likely to weigh on percentage point (and statistically significantly) global potential growth in the coming years. higher than during growth setbacks (Figure 1.1.2D). Specifically, model-based estimates suggest that average global potential growth during 2018-27 will Investment surges. The event sample includes 88 be about 2.4 percent, much lower than the post-crisis periods (of which 66 ended before 2009) in which average growth of 3 percent (World Bank 2018a). investment growth was positive in at least three consecutive years and 41 setback episodes in which Over a decade, such differences in growth outcomes investment growth was negative for at least three translate into significant changes in global income consecutive years. Again, long-term growth forecasts and living standards (Figure 1.1.2F). For example, were, on average, 1 percentage point (and statistically should global growth average its current consensus significantly) higher during investment growth spurts forecasts, incomes a decade from now would be, than investment growth contractions (Figure cumulatively, 31 percent higher than in 2018 (but 3 1.1.2D). percentage points less than if growth remained at its post-crisis average pace). This income gain could turn Implications: A respite from gloom about out to be 4 percentage point lower should growth growth prospects? instead average its estimated potential rate, and about Recent long-term growth forecasts indicate that the 9 percentage points lower should growth fall short of period of post-crisis gloom about growth prospects consensus forecasts by the average historical forecast may be coming to an end. Long-term growth error. forecasts currently envisage global growth in 2028 at 2.6 percent—slightly higher than a year ago but less 7 In 1975, a surge in oil prices coincided with recessions in major than this year’s projected growth (3.2 percent). The advanced economies and debt crises in EMDEs. In 1982, monetary policy tightening in major advanced economies precipitated further debt recent stabilization of long-term growth forecasts has crises in many EMDEs. In 1991, an abrupt tightening of credit in the been encouraging and, if it heralds a period of United States coincided with banking and currency crises in many sustained upgrades, could even suggest that the effects European countries. And in 2007-09, there were particularly deep nancial crises in major advanced economies. In addition to these four of the global financial crisis are waning. global recessions, the global economy experienced two major slowdowns: during 1997-98, the Asian Crisis was followed by the Russian crisis and, However, past experience cautions that these forecasts in 2001, the U.S. stock market corrected in the dot-com crash (Kose and may yet again turn out to be overly optimistic. If past Terrones 2015) . EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 14 C H A P TE R 1 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 United States BOX 1.1 Long-term growth prospects: Downgraded no more? (concluded) U.S. GDP expanded 2.3 percent in 2017, supported by broad-based strength in domestic These factors warn that the recent stabilization in long- demand, especially investment. The economy may term growth prospects may be fleeting. The risk of be near its productive potential, as both capacity further adverse shocks and underlying structural utilization and the employment rate are moving weaknesses still suggest an urgent need to press ahead toward peaks attained prior to the financial crisis with growth-enhancing reforms—including in product (Figure 1.4). Wage growth has picked up slightly, and labor markets—and to build the policy buffers that but is still weak compared to previous recoveries. would be needed to allow an appropriate counter-cyclical response to shocks when they materialize. The Bipartisan Budget Act passed in early February, which will add about 1.5 percent of GDP in government spending to the economy FIGURE 1.4 United States over the next three years, is the main factor behind The U.S. economy continues to be robust and may be reaching its the forecast upgrade relative to January productive capacity. Nevertheless, wage growth remains soft, especially projections. Combined with the Tax Cuts and as compared to previous expansions. Procyclical fiscal stimulus is Jobs Act enacted last year, the discretionary fiscal expected to provide a significant but temporary boost to growth, which has contributed to a rise in the Federal Reserve’s policy rate projections. stimulus amounts to about 4.5 percent of GDP over 2018-2020, a highly procyclical stance (CBO A. Productive capacity B. Wage growth during expansions 2018a; CBO 2018b; JCT 2017). In all, the stimulus is expected to add more than 1 percentage point to growth over the forecast horizon, but will result in budget deficits of 4.6 percent of GDP in 2019, up from 3.5 percent in 2017. As a consequence, net federal public debt, currently at about 82 percent of GDP, is set to rise in coming years (Auerbach, Gale, and Krupkin 2018). As fiscal stimulus measures have been introduced and inflation has moved toward target, C. Federal deficit and unemployment D. U.S. Federal Reserve policy rate the Federal Reserve has signaled a faster pace of rate projections over time policy tightening. Unless there are further trade policy changes or retaliatory actions, the recent imposition of tariffs is not expected to have a material effect on U.S. growth, which is projected to reach 2.7 percent in 2018 and edge down to 2.5 percent in 2019. As fiscal and monetary stimuli fade, growth is forecast to slow to 2 percent in 2020, above the mid-point of the 1-2.4 percent range of estimates of its 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 potential pace (Fernald et al. 2017; World Bank calculations. A. The horizontal lines indicate the peak values for capacity utilization and the employment to 2018a). working-age population ratio in the two years prior to the global financial crisis (i.e., December 2005 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 for the employment to Euro Area working-age population ratio, and March 2018 for capacity utilization. B. Wage growth is the average hourly earnings of private, non-farm production, and nonsupervisory employees. Wages have been indexed to the trough of the corresponding National Bureau of The Euro Area economy grew 2.4 percent in Economic Research (NBER) business cycle. Last observation is April 2018. C. Shaded area indicates forecasts. Forecast for the federal deficit based on the most recent 2017, its fastest increase since the financial crisis, Congressional Budget Office (CBO) baselines. Forecast for the unemployment rate based on World Bank calculations using an Okun’s law coefficient of 0.5. reflecting strong consumption, investment, and D. Figure shows the range and median of the federal funds rate projections for 2018, 2019, and 2020 released on September 2017, December 2017, and March 2018. The projections show the median exports. Although recent high-frequency and range of FOMC participants’ assessment of the midpoint of the projected appropriate target indicators—such as composite purchasing 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. managers’ indexes—have softened, they still EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 15 suggest continued strength across all major FIGURE 1.5 Euro Area countries (Figure 1.5). However, headline Although recent activity indicators have softened, they continue to suggest inflation stands at 1.2 percent, well under the that growth will remain solid in the near term. Inflation is still below target, central bank target of close to but below 2 percent. though wage growth and inflation expectations have ticked up. The current account surplus remains sizable. Wages and inflation expectations have ticked up, pointing to preliminary signs of rising price A. Composite PMIs B. Headline and core inflation pressures. The European Central Bank (ECB) has committed to 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 2.2 percent in 2018. It is forecast to slow to 1.7 percent in 2019 and 1.5 C. Inflation expectations and wage D. Euro Area current account balance growth percent in 2020, as slack dissipates, monetary accommodation is gradually unwound, and borrowing costs increase. Net exports are also expected to become a drag on near-term growth, as the earlier strengthening of the euro and improving domestic demand translate into a narrowing of the sizable current account surplus. Positive spillovers from expansionary U.S. fiscal policy are expected to be limited. Throughout the Sources: Bloomberg, European Central Bank (ECB), Haver Analytics, World Bank. projection horizon, growth is projected to remain A. Purchasing Managers’ Index (PMI) readings above 50 indicate expansion in economic activity; readings below 50 indicate a contraction. Last observation is April 2018. above the mid-point of the 0.7-1.5 percent range 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. of potential growth estimates (ECB 2017; World C. Long-term inflation expectations are derived from 5-year over 5-year forward swap rates, averaged Bank 2018a). 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. D. Aggregates calculated using constant 2010 U.S. dollar GDP weights. Last observation is 2017Q4. Japan Growth in Japan reached 1.7 percent in 2017 and FIGURE 1.6 Japan has remained solid this year, underpinned by supportive financial conditions and strong export The Japanese labor market continues to add workers as unemployment falls and the participation rate rises. Increases in earnings have been growth. Unemployment is falling to levels not moderate, but core inflation has been trending up. seen since the 1990s, while the participation rate has increased, primarily due to greater entry of A. Unemployment and labor B. Core inflation and wage growth women into the labor force (Figure 1.6). While participation rates overall inflation has increased to 1.1 percent, core remains only slightly above zero, and wages and inflation expectations have been generally stable, suggesting that monetary policy will likely remain accommodative for some time. Over the forecast period, growth is expected to gradually decelerate—to 1.3 percent in 2018, 0.8 percent in 2019, and 0.5 percent in 2020—as the Sources: Haver Analytics; Japan Ministry of Health, Labor, and Welfare; Japan Ministry of Internal Affairs and Communications. labor market tightens and fiscal consolidation A. Last observation is March 2018. B. Average monthly earnings are 12-month moving averages and are the average monthly earnings starts to drag on growth, notably due to the effects of workers in companies with 30 or more employees, in all industries. The core CPI index excludes fresh food and energy, and has been adjusted to exclude the impact of Value-Added Tax (VAT) of the VAT hike scheduled for late 2019. The hikes. Last observation is March 2018. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 16 C H A P TE R 1 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 FIGURE 1.7 China During the first half of 2018, fiscal policy has become less expansionary, while monetary and Growth in China remains solid and rebalancing continues, amid robust consumption and a slowdown in investment. In the first quarter of 2018, prudential policies continue to rein in excessive China recorded its first current account deficit since 2001. Stricter credit growth, especially shadow financing. The enforcement of capital flow management measures has helped ease capital outflows and exchange rate pressures. Credit growth continues to stock of outstanding debt is high, although the decline because of regulatory tightening. largest component—credit to non-financial corporations—has been declining as a share of A. Contribution to growth B. Investment growth GDP (BIS 2018a). Tight housing market regulations have contributed to some correction in the housing sector. Consumer price inflation has been trending up toward target, reflecting higher food prices; in contrast, producer price inflation has moderated as an earlier rebound in raw material prices unwound. Tight enforcement of capital flow management measures continues to limit capital outflows and exchange rate pressures. C. Balance of payments D. Credit growth China’s growth is projected to edge down to 6.5 percent in 2018 and slow further to 6.3 percent on average in 2019-20, as export growth moderates and deleveraging takes hold. In addition, policy accommodation is expected to further diminish as authorities continue to tighten macroprudential regulation and gradually remove their supportive fiscal stance. Downside risks to the outlook stem from financial sector vulnerabilities and further intensification of trade Sources: China National Bureau of Statistics, Haver Analytics, International Institute of Finance, People’s Bank of China, World Bank. tensions amid increased protectionism in key A. Shaded area indicates forecasts. Investment refers to gross capital formation, which includes change in inventories. trading partners. B. Investment refers to fixed asset investment (urban area). Deflated by fixed asset investment price index. Last observation is 2018Q1. C. Current account balance is based on seasonally adjusted data. Net capital flows and change in reserves are estimates. Last observation is 2018Q1. Global trends D. Credit refers to total loans in domestic and foreign currency. Last observation is 2018Q1. Global trade was robust last year, benefiting from an upturn in capital spending and manufacturing long-term growth outlook remains constrained by activity. It is expected to remain strong in 2018 but an aging and shrinking labor force (World Bank to moderate thereafter, amid decelerating global 2018a). investment. Financing conditions are expected to tighten more rapidly than previously envisioned, China along with faster normalization of monetary policy in Growth in China reached 6.9 percent in 2017 and major advanced economies, in part because of the has remained solid this year (Figure 1.7; World stepped-up U.S. fiscal stimulus. Capital flows to Bank 2018b). Economic rebalancing continues, EMDEs are likely to further moderate. Commodity with activity shifting to consumption, and prices have risen and, while their near-term investment growth rates that are well below those projections have generally been revised up, they are in recent years. Industrial production has expected to level off later in the forecast horizon. stabilized following significant cuts in overcapacity sectors implemented over the past two years. In Global trade the first quarter of 2018, China recorded its first Following a prolonged period of marked weak- current account deficit since 2001. ness, a cyclical recovery in global manufacturing EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 17 and investment propelled global goods trade FIGURE 1.8 Global trade growth to 4.6 percent in 2017, three times the Goods trade growth continues to recover, supported by strong flows in pace observed the previous year, and momentum Asia and Europe, and services trade is on a sustained upward trend. remains strong in 2018 (Figure 1.8). This pickup However, global trade and investment growth are expected to moderate in 2019-20, while structural factors are still weighing on the income elasticity has been led by strong trade flows in Asia and of trade. Announced tariffs could affect a significant share of trade flows Europe. Services trade also gained strength last between the United States and China and have broad-ranging year. Since the global financial crisis, services trade consequences for some sectors. has been growing at a faster pace and has been more stable than global goods trade (Georgieva, A. Global goods trade growth, volume B. Goods trade growth between major Loayza, and Mendez-Ramos 2018). Moreover, regions in 2017, values services trade continues to have the largest untapped potential for future growth (Lodefalk 2017; Miroudot and Cadestin 2017). Overall, growth in global trade of goods and services combined is expected to reach 4.3 percent in 2018, down from a post-crisis peak of 4.8 in 2017. These projections have been revised up on account of stronger-than-expected intra-regional C. Global goods and services trade, D. Global trade and investment trade growth in Asia and import demand from values growth, volume major advanced economies. The additional fiscal stimulus in the United States is expected to lift U.S. import growth, benefiting key U.S. trading partners. Although benefits from the strength of global trade are broad-based across EMDE regions, they were most pronounced in East Asia and Pacific and Eastern Europe and Central Asia. Export growth in these two regions, which peaked in 2017, is forecast to remain robust in 2018-19. More generally, a projected deceleration of capital E. Income elasticity of trade F. Trade flows between the United States and China spending in China and in most advanced economies will contribute to more moderate global trade growth over the forecast horizon, edging down to 3.9 percent by 2020 (Freund 2018; Auboin and Borino 2017). Over the medium term, structural factors— including slower growth of global value chains and a reduced appetite for further trade liberalization—will continue to constrain global Sources: CPB Netherlands Bureau for Economic Policy Analysis; Direction of Trade Statistics, trade growth. These factors have contributed to International Monetary Fund; Global Trade Alert; United Nations Conference on Trade and Development (UNCTAD); World Bank; World Trade Organization (WTO). the decline in the long-run income elasticity of A. Horizontal line indicates the historical median, which is computed from January 2001 to February 2018. Last observation is February 2018. trade over the last decade. B. Global trade growth from 2016 to 2017. Average of export and import values. Bilateral trade flows 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. In terms of trade policy, the outcome of ongoing dollars. Data are 4-quarter moving averages, indexed to 100 in 2005Q4. Last observation is 2017Q4. trade negotiations involving major economies is D. Trade measured as the average of export and import volumes. Shaded area indicates forecasts. E. Income elasticity measured as the ratio of real trade growth to real GDP growth. Horizontal line still uncertain, and the risk of escalating trade denotes an income elasticity of one. F. Figure shows top five traded goods categories based on 2017 trade values in U.S. dollars. Man. restrictions has markedly increased since the start denotes miscellaneous manufactured goods, plastics refers to plastic and rubber goods, and metals is base metals. of 2018. While the global impact of import tariffs imposed by the United States—and China’s response—could be limited, the risk of further EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 18 C H A P TE R 1 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 FIGURE 1.9 Global finance escalation has already negatively affected global equity markets and could hamper confidence U.S. long-term yields have increased this year, reflecting rising inflation expectations and prospects of a faster pace of U.S. interest rate hikes. (Bown 2018; Francois and Baughman 2018). The This, alongside rising concerns about trade protectionism, contributed to measures announced by the United States and bouts of stock market volatility. As monetary policy accommodation continues to be withdrawn in advanced economies, global bond yields are China, if implemented, would affect about one- expected to increase, putting upward pressure on borrowing costs for tenth of China’s exports to the United States, and EMDEs and downward pressure on their capital flows. more than one-third of U.S. exports to China. This could cause disruptions in sectors such as A. U.S. yield curve since the start of B. Global equity market machinery, electrical, and transport equipment, as the tightening cycle in December 2015 well as vegetable products. If the exemptions to U.S. steel and aluminum tariffs expire, other major trading partners could also retaliate. On a more positive note, the European Union and the United Kingdom reached agreement on guidelines for trade negotiations, the U.S.-Korea Free Trade Agreement was successfully re- negotiated, the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) was signed by C. Impact of U.S. Federal Reserve D. Net EMDE portfolio flows balance sheet reduction on U.S. term 11 member countries, and leaders from more than premium 40 African nations endorsed a framework establishing a future African Continental Free Trade Area. Financial markets Following a prolonged period of stable and exceptionally favorable global financing conditions, prospects of a faster withdrawal of monetary policy accommodation in advanced E. EMDE international bond issuance F. Capital inflows to EMDEs economies have led to rising global borrowing costs since the start of 2018. In particular, U.S. long-term yields have increased to about 3 percent, their highest level since mid-2014, as inflation expectations picked up and markets factored in the possibility of accelerated interest rate hikes by the Federal Reserve, amid strong global growth and the stepped-up U.S. fiscal stimulus (Figure 1.9). This reassessment—along Sources: Sources: Bloomberg; Bonis, Ihrig, Wei (2017); Dealogic; Federal Reserve Bank of St. Louis; with fears of escalating trade tensions between the Institute of International Finance; International Monetary Fund; J.P. Morgan; U.S. Department of the Treasury; World Bank. United States and China, and rising geopolitical A. Yield values from the yield curve at fixed maturities, from 3 months to 30 years. Last observation is May 8, 2018. risks—contributed to bouts of volatility in global B. World MSCI indices are weighted benchmarks that use large- and mid-cap securities in emerging equity markets in the first half of 2018. Concerns and developed markets, respectively, in order to reflect market conditions across relevant regions and sectors. Volatility is measured by the VIX implied volatility index of option prices on the U.S. S&P in some advanced economies about overstretched 500. Last observation is May 7, 2018. C. Estimated impact at the end of each year, from Bonis, Ihrig, and Wei (2017). stock valuations, and the increasing use of D. Net flows into EMDE bond and equity funds. Last observation is May 2, 2018. complex derivatives allowing a broad range of E. Last observation is April 2018. F. Shaded area indicates forecasts. Total non-resident inflows. The 23 EMDEs in the sample include investors to make bets on volatility, have also Argentina, Brazil, Chile, China, Colombia, Egypt, Hungary, India, Indonesia, Lebanon, Malaysia, Mexico, Nigeria, Philippines, Poland, Russia, Saudi Arabia, South Africa, Thailand, Turkey, United amplified price movements (BIS 2018b). Arab Emirates, Ukraine, and Venezuela. Looking forward, global interest rates are expected to rise at a faster pace than previously predicted, as EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 19 upward revisions to the U.S. growth outlook lead FIGURE 1.10 Commodity markets to a somewhat steeper pace of U.S. interest rate Crude oil prices rose over the first half of 2018 amid robust demand and hikes in 2019-20 (FOMC 2018). Above-trend supply concerns, despite rising U.S. oil production. Metals prices growth and narrowing economic slack will also increased in the first half of the year following a pickup in demand from China. Grain stocks, in general, remain very high, which will continue to lead to further monetary policy normalization in weigh on agricultural prices, while soybean production has fallen other advanced economies. Policy interest rates in substantially. the Euro Area and Japan are not expected to increase before 2019, but a drawdown of net asset A. Crude oil prices and equity markets B. Contribution to oil consumption growth purchases by major central banks is projected to put upward pressure on global long-term yields. In particular, the European Central Bank is expected to bring its asset purchase program to a close by the end of 2018, and the U.S. Federal Reserve is on track to shrink its balance sheet by 4 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). C. Crude oil production D. Contribution to metals demand growth A rise in global interest rates, combined with U.S. dollar appreciation, have contributed to tighter external financing conditions for EMDEs since the start of 2018, while capital inflows have generally decelerated. During recent periods of financial market volatility, EMDEs experienced portfolio outflows, but these were generally less pronounced than during previous episodes. Nevertheless, appetite for higher-yielding EMDE E. Soybean production F. Stocks-to-use ratios of main grains debt has persisted in 2018. This is reflected in low albeit increasing sovereign and corporate bond spreads, as well as robust international bond issuances, which matched 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. A favorable global economic backdrop—including Sources: Bloomberg, Energy Information Administration, U.S. Department of Agriculture, World Bank, stronger-than-expected global trade growth and World Bureau of Metal Statistics. A. Average of Brent, Dubai, and WTI. Weekly data. Last observation is May 4, 2018. rising commodity prices—has helped offset B. Shaded area (2018Q1-2018Q4) represents IEA projections. concerns about elevated debt levels in many C. Data for Saudi Arabia are unavailable before 1984. Last observation is March 2018 for Saudi Arabia and February 2018 for the United States. EMDEs. However, credit quality has continued to D. Last observation is February 2018. E. F. USDA April 10, 2018 update. Years represent crop seasons (e.g., 2016 refers to 2016-17 crop deteriorate, leading to further debt rating season). downgrades in several countries in 2018. Foreign direct investment (FDI) flows to EMDEs could foster stronger FDI in many countries, continue to be subdued, as flows to China remain particularly in Sub-Saharan Africa (World Bank et below their long-term trend and the recent al. 2017; Amendolagine et al. 2017). recovery in commodity prices has not been sufficient to stimulate a significant revival of Over the forecast horizon, capital flows to EMDEs investment in resource sectors. Increased are expected to further moderate, as global participation in more complex global value chains financing conditions tighten. Investors are also EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 20 C H A P TE R 1 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 likely to increasingly differentiate between tally-driven supply cuts in China, rose modestly in countries, depending on their exposure to rising the first quarter of 2018. Prices posted further interest rates and currency pressures. However, gains in April, after the imposition of U.S. capital flows should remain generally sustained, sanctions on a large Russian aluminum producer. provided that the EMDE growth outlook Metals prices are expected to increase 9 percent in continues to improve, and financial and 2018, reflecting strong demand, but then commodity markets do not experience significant moderate in 2019. Upside risks to prices include disruptions. stricter pollution-control policies in China or stronger-than-expected demand from that Commodities country, since China accounts for about half of Crude oil prices rose 10 percent in the first quarter global metals consumption (Special Focus 1). An of 2018 and have averaged $67 per barrel (bbl) escalation or broadening of sanctions on key over the first half of 2018 (Figure 1.10). Oil metals producers could also lead to higher prices. demand has been robust, with consumption Agricultural prices gained 4 percent during the increasing 1.6 million barrels per day (mb/d), or first half of 2018 compared to a year earlier, 1.6 percent, in the first quarter of 2018 from a following three years of price stability. The price year earlier. An agreement between most uptick was primarily driven by lower plantings of Organization of the Petroleum Exporting wheat and maize in the United States, as well as Countries (OPEC) members and some non- some weather-related disruptions to soybean OPEC oil producers to extend production cuts to production in Argentina. Yet, stocks-to-use ratios the end of 2018 boosted prices in late 2017 and for most grains—a measure of global supply into 2018—despite further increases in U.S. oil availability relative to demand—remain high, production, which reached 10.6 million barrels reducing the likelihood of a food price spike. per day in April. Geopolitical concerns—most Prices are expected to rise modestly in 2018 and notably, the prospect that the United States would 2019, although a key downside price risk is the reinstate sanctions on the Islamic Republic of possibility of China imposing import duties on Iran—boosted prices further in April to $75/bbl, soybeans in response to U.S. tariffs. their highest level since 2014. Prices have remained close to this level even after the U.S. government announced in May that it would Emerging and developing reinstate such sanctions, suggesting that they had economies: Recent already been priced in by markets. developments and outlook Oil prices are expected to average $65/bbl in 2018 and 2019, up $7/bbl in 2018 and $6/bbl in 2019 EMDE growth has continued to firm and is expected relative to January forecasts. Upside price risks to reach a five-year high of 4.5 percent in 2018. The primarily arise from geopolitical tensions involving recovery in commodity exporters has broadened across key oil-producers in the Middle East and North countries, and activity in commodity importers Africa—including possible reinstatement of remains robust. Beyond this year, however, EMDE sanctions on Iran; or further deterioration of growth is projected to strengthen only slightly, República Bolivariana de Venezuela’s oil industry, approaching its potential pace, as the recovery in where output has declined by 0.7 mb/d over the commodity exporters matures. Over the forecast past two years. Downside risks reflect the horizon, commodity exporters and importers will see possibility of faster-than-expected U.S. shale uneven progress in per capita income growth, which production due to further technological is projected to remain subdued in Sub-Saharan improvements, or an earlier-than-anticipated end African countries with a large number of poor. to the OPEC/non-OPEC cuts, which could be decided at the upcoming June 22 OPEC meeting. Recent developments Metals prices, which increased 22 percent in 2017 EMDE growth accelerated to 4.3 percent in 2017 due to robust global demand and environmen- and has generally continued to firm in 2018. This EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 21 reflects an ongoing cyclical upturn in commodity FIGURE 1.11 Activity in EMDEs exporters, whose contribution to overall EMDE EMDE growth has generally continued to strengthen, mainly reflecting the growth is rising, as well as robust activity in ongoing cyclical recovery in commodity exporters. Domestic demand, commodity importers (Figure 1.11). particularly investment, has firmed in commodity exporters and remains robust in commodity importers. High-frequency indicators have, for the most part, remained solid across EMDEs. The recovery in commodity exporters has broadened, as investment has strengthened amid higher commodity prices, improved confidence, A. Growth B. Contribution to EMDE growth rising corporate earnings, and supportive monetary policies. Private consumption growth has also firmed, benefiting from improving labor markets and rising household income amid moderating inflation. Trade flows have risen, although by varying degrees. In commodity importers, growth remains strong, supported by robust domestic demand and solid exports. Activity in EMDEs excluding China has firmed, C. GDP and demand component D. Business and consumer led by countries in Europe and Asia, which have growth confidence particularly benefited from the recovery of global manufacturing, investment, and trade. Recent economic activity data and sentiment indicators across EMDEs have for the most part remained solid. Consumer and business confidence, industrial production, purchasing managers indexes (PMIs), and retail sales are generally around multi-year highs, even if their pace of increase appears to be stabilizing. E. Industrial production growth F. Manufacturing PMIs Commodity-exporting EMDEs After a strong rebound in 2017, activity in commodity exporters has continued to pick up in 2018 (Figure 1.12). The recovery has broadened and is now seen in close to 60 percent of countries in this group. Almost all economies that suffered recession in the past two years—about 20 percent of commodity exporters in 2016 and about 10 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. percent in 2017—are expected to see positive dollar GDP weights. growth this year. B. Horizontal line indicates EMDE average. D. Median of confidence indexes for Brazil, Chile, Colombia, Hungary, Indonesia, India, Mexico, Poland, Russia, Turkey, and South Africa. The sample excludes China. Confidence is normalized Many commodity exporters have eased monetary through amplitude adjustments, such that any cyclical movements have the same amplitude and the long-term average of a respective country series is equal to 100. Last observation is March 2018. policy as inflation moderates (e.g., Azerbaijan, E. F. Figures show 6-month moving averages. Brazil, Colombia, Kazakhstan, Mozambique, E. Horizontal lines indicate 1995-2017 averages. Last observation is February 2018. F. PMI = Purchasing Managers’ Index. Blue and red horizontal lines indicate 2012-17 averages. Last Peru, Russian Federation, Uganda, South Africa, observation is April 2018. Zambia). Although fiscal consolidation continues, its pace has generally diminished as revenues from Business and consumer confidence has also commodity exports increased. External conditions improved. remain broadly supportive, including higher commodity prices, robust trade, and sustained Against this backdrop, investment is rebounding albeit generally decelerating capital inflows. in more than two thirds of commodity exporters. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 22 C H A P TE R 1 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 FIGURE 1.12 Activity in EMDE commodity exporters a recovery of domestic demand (World Bank 2018c). In Russia, growth has remained stable, While the recovery in commodity exporters continues to reflect improvements in large economies, it has become more broad-based. albeit lackluster, as the impact of oil production Investment is strengthening amid higher commodity prices, improved cuts and policy uncertainty has been offset by confidence, and greater monetary policy accommodation. Growth in many energy exporters continues to lag behind that of other commodity more accommodative monetary policy and higher exporters, mainly due to ongoing production cuts. energy prices (World Bank 2018d). In South Africa, the political transition and economic A. Contribution to growth B. Share of commodity exporters with reform initiatives have supported investor increasing/decreasing growth confidence and contributed to stronger activity this year (World Bank 2018e). The solid cyclical recovery continues in several other large commodity exporters with lingering negative output gaps (e.g., Azerbaijan, Colombia, Saudi Arabia, United Arab Emirates; World Bank 2018d, World Bank 2018f). In particular, in oil- exporting economies that implemented significant C. Contribution to investment growth D. Growth reductions in oil production in 2017 (e.g., Algeria, Iraq, Kuwait, Saudi Arabia), growth has been recovering this year, reflecting diminishing fiscal adjustment amid 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, Sources: Haver Analytics, World Bank. social tensions, and security issues (e.g., Equatorial A. -D. Shaded areas indicate forecasts. Guinea, Venezuela). In all, growth in many energy A. B. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. B. Sample includes 85 commodity-exporting EMDEs. Increasing/decreasing growth are changes of at exporters continues to lag behind that of exporters 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. of other commodities. C. Investment refers to fixed asset investment. D. Simple average of GDP growth. Orange lines indicate interquartile ranges of growth in each group. Activity continues to show resilience in a number of more diversified economies and agriculture This partly reflects increased commodities exporters (e.g., Benin, Burkina Faso, Côte production (e.g., Chile, Nigeria, Peru, Saudi d’Ivoire, Ethiopia, Indonesia, Malaysia, Morocco, Senegal, Uganda; World Bank 2018e). Supported Arabia), as well as large infrastructure investment programs (e.g., Colombia, Côte d’Ivoire, Qatar, by higher metals prices, growth among metals exporters continues to improve, albeit at varying Saudi Arabia, Senegal, United Arab Emirates). Private consumption is also recovering (e.g., degrees reflecting country-specific conditions. In Armenia, Azerbaijan, Brazil, Kazakhstan, Russia, some economies, temporary disruptions previously weighing on growth (e.g., policy South Africa, United Arab Emirates, Zambia), boosted by wage gains, improving labor markets, uncertainty in Peru, mining strikes in Chile) have dissipated. In others, new mines are coming on and stronger consumer purchasing power amid moderating inflation and firming currencies. To stream and investment into existing mines varying degrees, export and import growth in continues (e.g., Armenia, Mongolia, Zambia). commodity exporters have generally continued to Commodity-importing EMDEs recover, as domestic demand strengthens and global trade remains robust. Growth in commodity importers remains strong, Among the largest commodity exporters, although it is moderating somewhat this year, supportive policies in Brazil continue to underpin reflecting a structural deceleration in China. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 23 Excluding China, the solid pace of activity has FIGURE 1.13 Activity in EMDE commodity importers, firmed further, reflecting robust domestic demand excluding China and spillovers from increased global growth Growth in commodity importers excluding China remains solid. However, (Figure 1.13). With output gaps closed, or in capacity constraints are limiting further acceleration this year. Investment many cases positive, capacity constraints are growth continues to be robust, particularly in EMDE commodity importers in Europe and Asia. Export growth has generally been strong this year, increasingly limiting further acceleration in albeit to varying degrees. commodity importers. Accommodative policies and solid labor markets continue to support A. Contribution to growth B. Share of commodity importers with domestic demand. However, with price and wage increasing/decreasing growth pressures rising, several large commodity importers have begun to tighten policies (e.g., Georgia, the Philippines, Pakistan, Romania, Turkey). 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 has C. Contribution to investment growth D. Export growth been recovering so far, as the effects of temporary factors wane. Upbeat investor sentiment and support from Euro Area 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 Sources: Haver Analytics, International Monetary Fund, World Bank. A. -D. Shaded areas indicate forecasts. Aggregate growth rates calculated using constant 2010 U.S. Bank 2018g). dollar GDP weights. 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 Trade flows have continued to firm this year, 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. although to varying degrees, reflecting the ongoing C. D. EAP = East Asia and Pacific, excluding China; SAR = South Asia; ECA = Europe and Central rebound in global manufacturing, trade, and Asia. C. Investment refers to fixed asset investment. investment, as well as stronger intra-regional trade, D. Data refer to trade volume of goods and non-factor services. especially in emerging Asia and Europe. Robust investment and exports are boosting demand for imports of machinery, equipment, and investment (e.g., Cambodia, Maldives, Sri Lanka, intermediate goods. Thailand, Vietnam). In Latin America, growth in Mexico is improving, reflecting positive spillovers Positive trade and financial spillovers from from strong U.S. growth, which have been stronger Euro Area growth and steady activity in offsetting the uncertainties related to the Russia are supporting activity in Europe and renegotiation of NAFTA and upcoming elections. Central Asia, and in the Middle East and North Africa (e.g., Belarus, Bosnia and Herzegovina, Low-income countries Bulgaria, Arab Republic of Egypt, Georgia, Hungary, Jordan, former Yugoslav Republic of The economic recovery among low-income Macedonia, Moldova, Poland, Romania, Tunisia, countries (LICs) is firming (Box 1.2). Among Turkey). Asian economies continue to benefit metals exporters, mining production is increasing, from robust growth in China and India, including as new projects come onstream and investment in resurgent trade and substantial infrastructure the expansion of existing mines continues, EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 24 C H A P TE R 1 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 BOX 1.2 Low-income countries: Recent developments and outlook e recovery in low-income countries is strengthening. Growth is expected to rise to 5.7 percent in 2018 and to an average of 6.1 percent in 2019-20, from 5.4 percent in 2017. is upswing re ects rising mineral production, en- couraged 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. On the upside, stronger-than- expected economic activity in advanced economies and large emerging market and developing economies could provide positive spillovers to many low-income countries. Recent developments Current account deficits are widening in many countries. They are rising among metals exporters, Economic activity continues to strengthen in most reflecting the effects of a pickup in import-intensive low-income countries (LICs), helped by favorable mining investment. In non-resource-intensive external conditions (Figure 1.2.1).1 Among metals countries, these deficits are expected to widen, as exporters, mining production is rising, as new import growth remains strong due to high public projects come on stream and investment in the investment levels. However, in oil exporters, the expansion of existing mines continues, encouraged by marked improvement in current account deficits in higher metals prices (e.g., Democratic Republic of 2017 is expected to continue, helped by higher oil Congo, Guinea). Nevertheless, in some cases, high prices and subdued import growth due to soft government debt levels are weighing on activity (e.g., domestic demand. Foreign reserve positions are Mozambique, Sierra Leone). Among non-resource- gradually improving, supported by higher intensive countries, the economic pickup is commodity prices and concessional borrowing. supported by improving agricultural output However, in many countries, foreign reserves are following droughts and continuing infrastructure well below the three-month-of-imports benchmark, investment (e.g., Rwanda, Uganda). In some indicating continued vulnerability to terms-of-trade countries, rising household spending, helped by low shocks. inflation and recovering remittance flows, underpins the economic expansion, along with some Exchange rates are broadly stable in real effective improvement in political stability (e.g., The Gambia, terms, reflecting improving trade balances and tight Haiti). However, oil exporters (e.g., Chad) are domestic policies in some countries. Remittances are struggling to emerge from recession as they continue also rebounding, following two years of decline to adjust to the sharp decline in oil revenues. (World Bank 2017b). Non-oil foreign direct investment flows are rising in some countries (e.g. Poverty levels are high in most LICs. Nearly half of Ethiopia, Guinea), and portfolio inflows are the population in LICs continues to live below the continuing, led by sovereign bond issuances (e.g., international poverty line—$1.90 a day, at 2011 Senegal). Inflation continues to fall across LICs, purchasing power parity (PPP) exchange rates. The helped by declining food prices and stable exchange proportion of the LICs’ population below the rates, prompting central banks in some countries to poverty line is higher in Sub-Saharan Africa (SSA) further cut interest rates (e.g., Mozambique, than in other regions, reflecting the relatively slow Uganda). However, inflationary pressures are high in decline in poverty levels among fragile countries and several countries, owing to currency depreciation metals exporters in SSA (Beegle et al 2016). (e.g., Democratic Republic of Congo, Ethiopia, Liberia). Fiscal deficits are gradually narrowing across LICs. Note: is box was prepared by Gerard Kambou. Research assistance The improvement reflects strong fiscal adjustment in was provided by Xinghao Gong. 1 For the current 2018 scal year, low-income economies are de ned as some oil exporters (e.g., Chad), and an increase in those with a gross national income (GNI) per capita, calculated using the domestic revenue among non-resource-intensive World Bank Atlas method, of $1,005 or less in 2016. countries where commodity revenues account for a EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 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) is continuing. Output and investment are picking 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. Non-resource-intensive countries include agricultural-based economies and commodity importers. B. Median of country groups. F. Based on the international poverty line of $1.90 a day, at 2011 purchasing power parity (PPP) exchange rates. smaller share of total revenue. Fiscal deficits remain them (e.g., Chad). A large part of Chad’s debt is elevated among metals exporters, as governments owed to commercial creditors. Debt levels among struggle to raise revenue and control spending. non-resource-intensive countries are also elevated (e.g., The Gambia), and continue to rise in some Debt levels are high and rising across a wide range of cases (e.g., Ethiopia). In The Gambia, the LICs, especially in SSA (World Bank 2018e). This is deterioration in the debt-to-GDP ratio partly reflects raising concerns about debt sustainability in some governance issues, including the weak management countries (Devarajan 2018). Debt levels among of state-owned enterprises. In Ethiopia, low public metals exporters are increasing, reflecting previously saving rates and high public investment are undisclosed borrowing in Mozambique and low contributing to the increase in government debt. The domestic revenue in other economies (e.g., Liberia, high and rising debt levels point to the need for Sierra Leone). Although fiscal consolidation efforts significant fiscal consolidation, as well as higher are helping to stabilize debt levels among oil domestic revenue in a number of LICs. exporters, the debt burden remains high in some of EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 26 C H A P TE R 1 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 BOX 1.2 Low-income countries: Recent developments and outlook (continued) Outlook FIGURE 1.2.2 Outlook Growth in LICs is expected to pick up to 5.7 percent The ongoing recovery in LICs is expected to pick up in 2018, and strengthen to an average of 6.1 percent further this year and firm in 2019-20, reflecting a gradual in 2019-20, slightly below the level reached earlier in rebound among oil and metals exporters and continued the decade (Figure 1.2.2). This upswing is predicated robust growth in non-resource-intensive countries. However, per capita income growth will recover only on firming commodity prices and policy actions to slowly among oil exporters and remain modest among tackle macroeconomic imbalances. These forecasts metals exporters. are higher than in January, and reflect a stronger- A. GDP growth forecasts than-expected recovery in some metals exporters, as higher metals prices help boost mining production. Growth in Mozambique will remain subdued, reflecting the effects of rising debt levels on investor sentiment. The recovery in oil 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 B. Per capita GDP growth soften as policy tightens to contain inflationary pressures, it will remain high. In some smaller economies (e.g., The Gambia, Haiti), improved 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 1.8 Source: World Bank. Shaded area indicates forecasts. percent in 2017 to 2.3 percent in 2018, and to an B. Median of country groups. Non-resource-intensive countries include agricultural exporters and commodity importers. average of 2.5 percent in 2019-20. Nonetheless, the effect on poverty alleviation seems likely to be subdued. The poverty headcount among LICs is projected to decrease only modestly, and decline most slowly among fragile countries and metals contribute less to poverty reduction (Bhorat and exporters in SSA. Higher population growth is Tarp 2016). These structural constraints will prevent worsening the poverty headcount. Furthermore, faster poverty reduction unless structural reforms are growth for a significant proportion of LICs in SSA introduced to increase productivity and support centers around capital-intensive sectors, which economic diversification (Chapter 1). EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 27 BOX 1.2 Low-income countries: Recent developments and outlook (concluded) 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 5.4 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 0.4 7.5 4.6 4.5 4.2 0.0 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 example, the year 2017 refers to FY2016/17. For additional information, please see www.worldbank.org/gep. Risks Although risks are more balanced than in January, growth and reform momentum. For example, in downside risks predominate. On the upside, stronger Ethiopia, political tensions could intensify following -than-expected growth in advanced economies and the re-imposition of the state of emergency. Risks to large emerging market and developing economies debt sustainability are also high in some LICs. could generate positive spillovers to LICs. On the Inadequate fiscal adjustment or currency depreciation downside, a large drop in commodity prices could could lead to an increase in the cost of servicing have a significant impact on sentiment toward LICs, external debt. Based on the LIC debt sustainability given that many of these countries depend on framework, The Gambia and Ethiopia are deemed to extractive industries. A collapse in oil and metals be facing high risk of debt distress. Chad and prices would also severely undermine efforts at fiscal Mozambique were rated as in debt distress by end- consolidation and to rein in the public debt burden, 2017. In addition, most LICs remain highly and crowd out poverty-reducing expenditures. vulnerable to weather-related shocks, and a return of On the domestic front, while political uncertainty drought conditions could severely disrupt ongoing has declined in some LICs, it remains a key risk for recoveries. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 28 C H A P TE R 1 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 FIGURE 1.14 EMDE growth prospects normalization, which contributes to higher borrowing costs and a moderation in EMDE The recovery in EMDE growth is projected to mature during the forecast horizon, as negative output gaps in commodity exporters gradually narrow capital flows. Toward the end of the forecast and investment growth stabilizes. horizon, the projected slowdown in advanced- economy growth toward potential rates is expected A. Growth B. Contribution to investment growth to put a lid on further acceleration in EMDE growth. As global financing conditions tighten, the cyclical rebound in investment in EMDEs, especially among commodity exporters, is expected to moderate in 2019-20. Moreover, the ongoing monetary policy easing in commodity exporters is expected to gradually end, while fiscal Source: World Bank. consolidation will continue, particularly in many A.B. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. Shaded area indicates forecasts. oil exporting economies. Policies in commodity B. Investment refers to fixed asset investment. importers are expected to tighten, as capacity constraints become more binding and price encouraged by the recovery in metals prices (e.g., pressures accelerate. Democratic Republic of Congo, Guinea). Oil Growth in commodity exporters is projected to exporters (e.g., Chad) are slowly emerging from recession, helped by rising oil prices. In non- plateau toward the end of the forecast horizon. After reaching 2.5 percent in 2018—the highest resource-intensive countries, the pickup in pace since 2013—it is projected to strengthen economic activity is being supported by improving harvests following droughts (e.g., Rwanda, only slightly and stabilize at an average of 3.1 percent in 2019 and 2020, as output gaps close Uganda), infrastructure investment (e.g., Benin, Senegal), and consumer spending as inflation and labor market slack gradually diminishes. By the end of the projection period, only about half moderates and remittances recover (e.g., The 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 were adjusted slightly down from January, as an factors including the disclosure of previously unreported debt (e.g., Mozambique), governance upward revision to a number of large commodity exporters (e.g., Angola, Brazil, South Africa) was issues (e.g., The Gambia), the earlier plunge in oil prices (e.g., Chad), and low public saving (e.g., more than offset by a downgrade in some other Ethiopia). Poverty levels are elevated, especially economies (e.g., Argentina, Nigeria, Venezuela). This overall outlook of a maturing cyclical among LICs in Sub-Saharan Africa, where nearly half of the population lives below the poverty line. recovery is also reflected in forecasts for EMDE regions with a substantial number of commodity EMDE Outlook exporters (Box 1.3; Chapter 2). Growth outlook Growth in commodity importers is expected to remain broadly stable in 2018-20, averaging 5.8 EMDE growth is expected to accelerate from 4.3 percent, in line with its potential rate. A structural percent in 2017 to 4.5 percent in 2018 and slowdown in China is expected to be offset by a stabilize at 4.7 percent in both 2019 and 2020, moderate pickup in the rest of the group, reflecting a continued but maturing cyclical including in India and Mexico. In commodity recovery in commodity exporters (Figure 1.14). In importers excluding China, an upgrade to growth the near term, the positive spillovers of U.S. fiscal projections in 2018 reflects an upward revision to stimulus on EMDE activity are assumed to be forecasts for some large economies (e.g., Egypt, offset by a faster pace of U.S. monetary policy Mexico, Poland, Thailand, Turkey). EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 29 Growth in low-income countries is projected to FIGURE 1.15 Per capita growth and poverty in EMDEs pick up to 5.7 percent in 2018, and stabilize at Countries with the largest number of poor are expected to grow at a about 6.1 percent on average in 2019-20, slightly somewhat faster clip in 2018-20; however, per capita growth in Sub- below the level reached earlier in the decade (Box Saharan Africa is projected to remain subdued, despite some recovery. In about one-third of EMDEs, income per capita growth will be insufficient in 1.2). These forecasts are higher than in January, coming years to restart a catch-up process with advanced economies. reflecting a stronger pickup in some metals exporters as higher metals prices help boost A. Per capita growth in EMDEs B. Regional poverty headcounts mining production. Growth in non-resource- intensive countries is projected to remain solid, supported by increasing agricultural production, infrastructure investment, and a rebound in remittances, with the larger economies expanding at a faster pace. In some fragile countries (e.g., The Gambia, Zimbabwe), political transitions will allow for a pickup in activity, as opportunities for reforms boost investor sentiment. However, the recovery will be slower than previously anticipated C. Per capita growth, selected regions D. Share of EMDEs catching up to advanced-economy GDP per capita among oil exporters, as they continue to adjust to levels low oil revenue and the heavy burden of external commercial debt. Despite the projected firming of activity in EMDEs in the near term, underlying potential growth—which has fallen considerably over the past decade—appears likely to decline further over the long term, reflecting earlier investment weakness, softening productivity, and increasingly Source: World Bank. adverse demographic patterns. Trends in these A. C. D. Shaded areas indicate forecasts. fundamental drivers of long-term growth suggest B. C. 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. that EMDE potential growth could decrease by A. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. The poverty- weighted estimate of the per capita GDP growth excludes countries for which poverty head counts 0.5 percentage point on average over 2018-27. were not available. Notwithstanding its recent turnaround, B. Blue bars indicate the number of people living on or below the international poverty line of $1.90 per day, red bars are the number of people living on or below the lower-middle income poverty line of investment growth in many EMDEs is still $3.20 per day. Data as of 2016. D. EMDEs with per capita GDP growth of at least 0.1 percentage point higher than advanced- modest compared to its long-term average and will economy per capita GDP growth are those counted as converging. Advanced-economy growth rates calculated using constant 2010 U.S. dollar GDP weights. Sample includes 73 EMDE commodity not be sufficient to offset headwinds to potential exporters and 44 EMDE commodity importers. growth. Furthermore, tightening global financing conditions, higher borrowing costs, moderating capital flows, and lingering policy uncertainty may implying that per capita prospects in those constrain investment growth in the coming years, countries are still modest, particularly where and further constrain potential growth (World extreme poverty is more prevalent (Figure 1.15). Bank 2018a). That said, significant disparities exist between the Per capita income outlook and poverty outlook for the two regions comprising more than 80 percent of the world’s extreme poor: South Current near-term growth prospects are Asia and Sub-Saharan Africa. In South Asia, GDP encouraging but may not be sufficient to ensure per capita growth remains significantly above continued progress toward global poverty EMDE averages and will likely help a further alleviation (World Bank 2016). Countries that are reduction in poverty rates in coming years. In Sub home to most of the world’s poor are expected to -Saharan Africa, per capita income growth in grow at a faster clip than other EMDEs. However, countries with high poverty headcounts will their population growth is also generally higher, remain modest, complicating efforts to reduce EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 30 C H A P TE R 1 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 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 projected to continue. Risks to the growth outlook have become more balanced, but 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 to The ongoing cyclical recovery in most EMDE regions 6.1 percent on average in 2019-20. The structural with a substantial number of commodity exporters is slowdown in China will slightly offset a modest projected to continue in 2018, but mature thereafter as further pickup in the rest of the region. While risks commodity prices level off. Robust growth in EMDE regions with large numbers of commodity importers is to the forecast are more balanced, reflecting the projected to continue. Risks to the growth outlook have possibility of further upside surprises to global become more balanced, but continue to tilt to the growth, they remain tilted to the downside. The downside. main downside risks include the possibility of A. Regional growth, weighted average intensified trade restrictions and an abrupt tightening of global financing conditions. 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 edge down to 3.1 percent by 2020, as activity moderates in commodity importers amid increasing capacity constraints and less accommodative fiscal and monetary policies. A key B. Regional growth, unweighted average upside risks to this outlook is the possibility of stronger-than-expected demand from the Euro Area. Downside risks include the possibility of a disorderly tightening of financing conditions, lower-than- projected oil prices, and heightened policy uncertainty. Latin America and the Caribbean. The modest regional recovery is projected to continue, with growth anticipated to rise to 1.8 percent in 2018 and average 2.5 percent in 2019-20. In the near term, the pickup will be supported by a cyclical recovery in Brazil and improving conditions in Chile, Colombia, Source: World Bank. Mexico, and Peru. Regional growth through 2020 A.B. Average for 1990-2017 is constructed depending on data availability. For Europe and Central Asia, the long-term average uses data for 1995-2017 to exclude the immediate aftermath of the collapse of the Soviet Union. A. Bars denote latest forecast; diamonds correspond to Global Economic Prospects January 2018 forecasts. Since largest economies account for Note: is box was prepared by Carlos Arteta with contributions from almost 50 percent of regional GDP in some regions, weighted averages predominantly reflect the development in the largest economies in each Gerard Kambou, Yoki Okawa, Temel Taskin, Ekaterine Vashakmadze, region. Dana Vorisek, and Lei Ye. Research assistance was provided by Jinxin B. Unweighted average regional growth is used to ensure broad reflection of Wu. regional trends across all countries in the region. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 31 BOX 1.3 Regional perspectives: Recent developments and outlook (concluded) will mainly reflect firming private consumption and Pakistan, and Sri Lanka are expected to be investment. Downside risks are significant, however, accompanied by moderating activity in Afghanistan, including negative spillovers from a possible abrupt Bhutan, and Maldives. Over the medium term, tightening of financing conditions or shift in investor growth is expected to remain strong and reach 7.2 sentiment regarding EMDEs, a breakdown in percent by 2020 amid robust domestic demand. NAFTA negotiations or a rise in U.S. trade Risks to the near-term outlook have become more protectionism, escalation of domestic policy balanced, reflecting the possibility of stronger-than- uncertainty, and disruptions from natural disasters. envisioned spillovers from firming global growth. An upside risk is stronger-than-expected spillovers However, downside risks continue to predominate. from the U.S. fiscal stimulus. They include the possibility of fiscal slippages, delays in reforms to resolve financial vulnerabilities and Middle East and North Africa. Growth in the region improve the health of regional banking systems, and is expected to rebound from last year—when it a faster-than-expected tightening in global financing decelerated to 1.6 percent due to oil production cuts conditions. and fiscal adjustments among oil exporters—and reach 3 percent in 2018. Activity among oil exporters Sub-Saharan Africa. Regional growth is projected to is picking up in response to an easing of fiscal stances accelerate to 3.1 percent in 2018. This upswing and momentum from the non-oil sector, while oil reflects rising oil and metals production, encouraged importers continue to benefit from improved by a recovery in commodity prices, and improving competitiveness and foreign-investor confidence. agricultural production following droughts. A Regional growth is projected to accelerate to an rebound in consumer spending amid declining average of 3.3 percent in 2019-20, as domestic inflation and an increase in investment also underpin demand and exports further improve in both oil the pickup. Growth is expected to firm to an average exporters and importers. Important upside risks to of 3.6 percent in 2019-20, as the recovery the outlook include the possibility of higher-than- strengthens in Angola, Nigeria, and South Africa— expected growth in the Euro Area and rapid the region’s largest economies. However, growth will reconstruction progress in war-torn areas. The key remain below its long-term average and insufficient downside risks are geopolitical tensions, renewed to substantially reduce poverty. Public debt levels are volatility in oil prices, and slower-than-expected pace high and rising, and debt servicing costs will absorb a of reforms. large share of government revenue in some countries. Stronger-than-expected activity in advanced econo- South Asia. Growth in in the region is projected to mies could provide positive spillovers to the region. accelerate to 6.9 percent in 2018, mainly reflecting The main downside risks include a faster tightening strengthening domestic demand in India as of global financing conditions, lower-than-expected temporary policy-driven disruptions fade. Elsewhere commodity prices, heightened conflicts, and weak in the region, ongoing recoveries in Bangladesh, implementation of reforms. 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 very that of commodity importers. Per capita income 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- very weak in recent years, is expected to recover third of EMDEs. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 32 C H A P TE R 1 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 FIGURE 1.16 Risks: More balanced Baseline forecasts point to a further strengthening of global growth in 2018, to a five-year high of 3.2 Global growth projections for 2018 have been revised up for the second consecutive time, suggesting a more self-sustained recovery than percent, helped by an investment-led recovery in previously anticipated. However, uncertainty has increased and risks advanced economies, robust growth in Asia, and remain tilted to the downside. Financial markets have so far discounted risks associated with major policy shifts in key economies. diminishing headwinds in commodity-exporting EMDEs. Global growth projections have been revised up for the second consecutive time, A. Global growth forecasts for 2018 B. Probability distribution around global growth forecasts suggesting a more broad-based and self-sustained recovery than previously anticipated (Figure 1.16). However, with global slack diminishing and growth currently surpassing its estimated potential, world economic activity is expected to moderate in the next two years. Shifting policies in major economies will have a significant bearing on the outlook and risks for global growth. In the baseline scenario, growth is expected to C. Probability of global growth in 2019 D. 18-month-ahead implied volatility in moderate gradually in 2019 and 2020, as central being 1 ppt below/above baselines U.S. equity markets banks in major advanced economies remove post- crisis accommodation, 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. Risks to the outlook have become somewhat more Sources: Bloomberg, World Bank. balanced, reflecting the possibility that a A. Dates in horizontal axis correspond to the respective Global Economic Prospects report. synchronous investment-led upturn in major B. C. 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 economies leads to larger-than-expected spillovers 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). in the near term, as well as improved supply-side 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 conditions over the medium term. However, forecast distributions. Last observation is April 2018. downside risks are still dominant, with some D. The 18-month-ahead implied volatility is derived from the distribution of call options on equity futures. Last observation is April 2018. becoming more acute. A marked escalation of trade restrictions among major economies is of particular concern, as it could derail the recovery in global trade and negatively impact confidence Risks to the outlook and investment worldwide. Following a prolonged period of exceptionally low interest rates and Although risks to the outlook have become more elevated asset prices, financial market risks have balanced, reflecting the possibility of stronger and also increased. A sudden tightening of global longer-lasting growth in large economies than financing conditions could be triggered by a currently expected, they remain tilted to the reassessment of inflation risks or by shifting downside. The probabilities of escalating trade expectations about monetary or fiscal policies protectionism and disruptive financial market across major advanced economies. The impact developments have increased, while policy uncertainty could be particularly severe in an environment remains above historical averages. If a combination where debt levels have reached record highs, of downside risks were to materialize, it could trigger refinancing needs are mounting, and credit quality a sharper-than-expected slowdown in global growth, has deteriorated in a number of EMDEs. with particularly negative effects for countries with Geopolitical tensions, conflict, and extreme depleted policy buffers. weather patterns could also buffet activity in the EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 33 affected regions. A synchronous slowdown across FIGURE 1.17 Upside risks: Synchronous upturn major economies would represent a significant Upside risks stem from the possibility of stronger-than-expected spillovers hurdle for the global economy, as many countries associated with the recovery in major advanced economies and elevated have not rebuilt fiscal buffers and a majority face confidence. Absent the build-up of macroeconomic and financial imbalances, a longer-lasting recovery could help repair crisis-related deteriorating growth potential. damages to potential growth. A quantification of uncertainty around the global A. Impact of 1-percentage-point in- B. Global confidence growth outlook, which relies on the forecast crease in U.S. and Euro Area growth distribution of key financial and commodity after 1 year market indicators, suggests a wide range of possible outcomes (Ohnsorge, Stocker, and Some 2016). At current market conditions, the probability of global growth being more than 1 percentage point below baseline in 2019 is currently 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 C. Actual and potential output growth D. Potential growth around in advanced economies and EMDEs in investment booms in EMDEs embedded in the distribution of key risk factors, the post-crisis period particularly equity and oil price futures. While this market-based quantification points to relatively balanced risks in the near term, it may not fully reflect the possibility of extreme events, including policy shocks such as an all-out trade war, as well as increased political instability or escalating geopolitical tensions. Although the risks of such low-probability but high-impact events Sources: Organisation for Economic Co-operation and Development, World Bank. have not yet led to a sustained period of high A. Cumulative impulse responses of a 1-percentage-point increase in U.S. and Euro Area growth on growth in other advanced economies and in EMDEs. Solid bars represent medians, and error bars financial market volatility, they continue to tilt the represent 16-84 percent confidence intervals. B. Average confidence indexes aggregated using U.S. dollar GDP weights, based on seven balance to the downside. advanced economies and seven EMDEs. Confidence is normalized through amplitude adjustments, such that any cyclical movements have the same amplitude and the long-term average of a respective country series is equal to 100. Last observation is March 2018. C. Blue trend line is the world trend. Red dots indicate advanced economies, and blue dots indicate Stronger and longer-lasting cyclical EMDEs. Sample includes 34 advanced economies and 66 EMDEs. recovery D. An investment boom is defined as an episode during which investment growth is at least one standard deviation larger than its long-run (over the sample period) average level. t denotes the average of the investment boom. Shaded area is the peak of the investment boom. Solid lines indicate median, dotted lines indicate the interquartile range. Potential growth defined by production The ongoing simultaneous recovery in major function approach. For details, refer to the January 2018 Global Economic Prospects report. advanced economies and EMDEs could generate larger-than-expected spillovers through global trade and confidence channels, setting in motion a major economies could further amplify the stronger and longer-lasting upturn than currently recovery, making it more synchronous and self- expected. Growth prospects in advanced sustained (Angeletos, Collard, and Dellas 2017; economies have again been upgraded, reflecting Benhabib, Wang, and Wen 2015; Levchenko and fiscal stimulus measures in the United States and Nayar 2017). positive momentum in the Euro Area. These two economies are major sources of global spillovers, Over time, the cyclical recovery could help reverse and their business cycles are tightly connected to some of the damage to potential output growth those of partners with deep trade and value-chain caused by the global financial crisis in both linkages (Figure 1.17; Kose et al. 2017a; advanced economies and EMDEs (World Bank Huidrom, Kose, and Ohnsorge 2017). A 2018a). In particular, a persistent period of weak persistent period of elevated confidence across aggregate demand since 2008 might have EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 34 C H A P TE R 1 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 FIGURE 1.18 Downside risks: Trade protectionism output growth since the crisis (Reifschneider, Wascher, and Wilcox 2015; Summers 2014). An escalation of tariffs up to legally-allowed limits could have large negative effects on trade, particularly in EMDEs. Even the threat of shifting There is also evidence of lasting damage from the trade policies, particularly in the United States, could have negative effects crisis in other advanced economies and in EMDEs on EMDE investment. The drive toward trade liberalization has slowed, with the number of new trade agreements falling to an 18-year low. (Ball 2014; World Bank 2018a). Absent the build-up of macroeconomic and A. Impact on trade of worldwide in- B. U.S. trade policy uncertainty crease in tariffs to bound levels by financial imbalances, a prolonged period of strong 2020 aggregate demand could help reverse this process, raising labor participation, investment and productivity growth. A pickup in productivity in major advanced economies would allow for additional growth without a rise in inflation, which would help sustain favorable financing conditions and generate positive cross-border and inter-industry spillovers (Badinger and Egger 2016). An investment revival in EMDEs would help counterbalance the forces weighing down on C. Investment impact of 10-percent D. New regional trade agreements rise in U.S. economic policy potential growth in those countries. uncertainty Escalating trade protectionism While a trade war among major economies has not materialized, the risk of unilateral trade restrictions resulting in escalating retaliatory measures has risen. Recently announced U.S. import tariffs, and China’s retaliatory response, will likely translate into economic losses for Sources: Baker, Bloom, and Davis (2016); Bloomberg; Haver Analytics; Kutlina-Dimitrova and exporters of the targeted products (Bown 2018). It Lakatos (2017); World Bank; World Trade Organization. A. Based on simulations using the GDyn computable general equilibrium model (Ianchovichina and could also affect upstream suppliers, downstream McDougall 2000; Ianchovichina and Walmsley 2012). Results are reported relative to a baseline scenario in 2020. Bars denote the percent deviation from the baseline. LAC = Latin America and industries, and consumers (Bown 2017; Irwin Caribbean, SAR = South Asia, SSA = Sub-Saharan Africa, EAP = East Asia and Pacific, MNA = Middle East and North Africa, ECA = Europe and Central Asia, and EU = European Union. 2017). Additional measures by these two B. Horizontal line reflects the historical median from 1990 to 2017. Trade policy-related uncertainty in the United States is based on an index presented in Baker, Bloom, and Davis (2016), and computes economies could affect a much broader list of the frequency of articles in domestic newspapers mentioning terms related to trade policy (e.g., products and cause significant harm to global import tariffs, import barriers, WTO, dumping, etc.). Last observation is March 2018. C. Figure shows median impact. Cumulative impulse response after 1 year on investment growth in value chains, which would imply cascading trade 23 advanced economies and 18 EMDEs to a 10-percent increase in the U.S. economic policy uncertainty (EPU). Vector autoregression estimated for 1998Q1-2016Q2 with two lags. The model for costs and accentuate welfare losses (Erbahar and advanced economies includes U.S. EPU, MSCI index for advanced economies (MXGS), U.S. 10 -year bond yields, aggregate real GDP and investment growth in 23 advanced economies. The model for Zi 2017; Escaith 2017). Sectoral dislocations EMDEs includes U.S. EPU, MSCI emerging market equity price index, J.P Morgan’s Emerging Market Bond Index Global (EMBIG), aggregate real GDP growth, and investment growth in 18 associated with shifting trade patterns could have EMDEs. G7 real GDP growth, U.S. 10-year bond yields, and MSCI world equity price index are added large and persistent negative effects on labor as exogenous variables. D. Bars denote the number of regional trade agreements in force. markets (Autor, Dorn, and Hanson 2016). Given their major role in the global economy, a trade war between the United States and China would contributed to the loss of skills and matching result in significant spillovers for the rest of the efficiency on labor markets (Bell and Blanchflower world through trade, confidence, financial, and 2010; Bell and Blanchflower 2011), weak commodity-market channels (Kose et al. 2017a; corporate sector performance (Nguyen and Qian Huidrom, Kose, and Ohnsorge 2017). However, 2014), financing constrains (Queralto 2013), and some might benefit from trade diversion, at least to slowing total factor productivity growth in the short term. For instance, tariffs from China (Oulton and Sebastiá-Barriel 2017). In the United on U.S. exports of soybeans could lead to higher States, these factors have accounted for a demand for other producers, including in Latin significant share of the slowdown in potential America. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 35 Beyond developments in the United States and FIGURE 1.19 Downside risks: Financial stress China, a broad-based increase in tariffs worldwide A sudden recovery in wage growth in advanced economies could lead to would have major adverse consequences for global an uptick in long-term yields and higher bond market volatility, particularly trade and activity (Ossa 2014; Nicita, Olarreaga, in the United States, where policy interest rates are increasing. Elevated asset prices exacerbate risks of a disorderly tightening of global financing and Silva forthcoming). An escalation of tariffs up conditions. EMDEs remain susceptible to such risks, with both private and to legally-allowed bound rates could translate into public debt levels considerably higher than in the pre-crisis period. a decline in global trade flows amounting to 9 percent, similar to the drop seen during the global A. G4 wage growth and unemployment B. U.S. term premium and implied financial crisis in 2008-09 (Figure 1.18; Kutlina- bond market volatility Dimitrova and Lakatos 2017). The impact of increased protectionism would be more severe across EMDE regions than in advanced economies. The losses would be heaviest in regions where the gap between applied and bound tariffs is the largest (e.g.; Latin America, Sub- Saharan Africa, South Asia), and where trade openness is above EMDE averages (e.g.; East Asia and Pacific, Europe and Central Asia). Highly D. Equity price-earnings ratio and C. U.S. policy interest rates, growth, protected sectors, such as agriculture and food inflation, and unemployment corporate bond spreads in 2018 processing, would be likely to be among the most negatively affected. Non-tariff barriers could also be raised, adding to the cost of trading across borders. Costs associated with shipping, logistics, legal and regulatory impediments are already far outstripping tariff costs, particularly in EMDEs (UNESCAP 2017). Even the threat of substantial shifts in trade E. EMDE debt as a share of GDP, by F. EMDE interest payments on debt as policies in major economies, and associated borrowing sector a share of GDP, by borrowing sector uncertainty, could have negative consequences for financial markets, investment, and activity worldwide. The impact of U.S. policy uncertainty is particularly significant for investment in EMDEs, especially in those with large trade or financial market linkages with the United States (World Bank 2017a; Bhattarai, Chatterjee, and Park 2018). Sources: Adrian, Crump, and Moench (2013); Bank for International Settlements; Bloomberg; Federal Uncertainty surrounding the outcome of Reserve Bank of St. Louis; Haver Analytics; International Monetary Fund; World Bank. negotiations for major trade agreements and the A. The G4 includes the Euro Area, Japan, the United Kingdom, and the United States. Last observation is February 2018. non-renewal of preferential schemes could also B. Term premium estimates from the term structure model of Adrian, Crump, and Moench (2013). Last observation is May 8, 2018. have adverse consequences for involved countries. C. Figure shows period averages. Policy rate refers to the effective federal funds rate. Last observation is April 2018. Despite the recent ratification of a number of D. PE is the forward price-to-earnings ratio computed by MSCI. Corporate bond spreads are the deeper trade agreements that include option-adjusted spread computed by Bank of America. Percentiles are computed over the period January 2005 to May 2018, except for the forward PE ratio, which starts in May 2005 due to data comprehensive provisions beyond the availability. Last observation is May 2018. E. Debt is defined as loans and debt securities. Sample includes 16 EMDEs. liberalization of tariff barriers, the appetite for F. Interest payments include interest paid on loans and debt securities. Sample includes 12 EMDEs. trade liberalization has generally waned, particularly across major advanced economies. The is reflected in the number of new trade agreements falling to an 18-year low in 2017-18. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 36 C H A P TE R 1 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 Disorderly tightening of financing conditions substantial volatility in U.S. and global bond markets. The risk of an abrupt tightening of global financing conditions and associated financing • Monetary policy uncertainty. Changes in stress has increased in 2018, reflecting a possible expectations about interest rate and balance reassessment of inflation risks amid shifting sheet policies by major central banks could monetary and fiscal policy stances in advanced also trigger financial stress. Various factors economies, as well as stretched asset valuations. make financial markets particularly vulnerable Such development could have particularly severe to such market reassessment. First, policy consequences for more indebted EMDEs facing interest rates in the United States are still well substantial refinancing needs in coming years. A below neutral levels, and market and sudden rise in borrowing costs could be triggered policymaker expectations about their outlook by a convergence of factors: still diverge. Second, strong foreign demand for U.S. Treasuries has had a major role • In ation risks. Market participants currently compressing U.S. long-term interest rates, ascribe a low probability of a rapid partially offsetting the impact of a faster pace acceleration in in ation in major advanced of U.S. interest rate hikes. Unlike the bond economies. is follows a prolonged period of market “conundrum” in 2005-06, when rising undershooting of central banks’ in ation demand from foreign official institutions had targets, and re ects the view that a similar dampening effect, the recent increase technological changes and globalization could was entirely driven by foreign private investors keep in ation persistently low (Autor and (Cœuré 2017; Cœuré 2018). These inflows Dorn 2013; Eickmeier and Kühnlenz 2013; were encouraged by continued aggressive Elsby, Hobijn, and Şahin 2013). However, a monetary policy easing in the Euro Area and number of factors could contribute to a more Japan, contributing to a growing gap between pronounced increase in in ation than U.S. Treasury and comparable sovereign bond currently predicted. First, a persistent period yields in those jurisdictions. This increases the of low unemployment and increased labor risk of sudden portfolio adjustments and market churning could reinforce workers’ rising global bond yields as central banks in bargaining power, potentially leading to faster the Euro Area and Japan scale back their asset wage growth (Danninger 2016; Davis and purchase programs. The end of quantitative Haltiwanger 2014). At comparable easing measures will also imply that private unemployment rate levels, wage growth in investors will hold a growing share of long- advanced economies during the previous dated government debt, which could put business cycle was considerably higher (Figure additional upward pressure on long-term 1.19). If not matched by similar increases in interest rates through a rise in average productivity growth, a faster-than-expected maturity and duration risks (Chadha, Turner, recovery in wage growth could lead to an and Zampolli 2013). Rising public debt increase in current and future expected issuance—particularly in the United States in ation. Second, U.S. scal stimulus will where government deficits are predicted to provide a boost to growth in an economy balloon in 2019-20—could amplify these already operating close to full employment, risks (CBO 2018c). increasing risks of overheating. ird, the global output gap is itself expected to • Stretched asset price valuations. A prolonged disappear this year, with potentially far- period of very low interest rates has reaching implications for in ation dynamics encouraged risk-taking in financial markets in traded goods (World Bank 2018a). A and rising asset price valuations (Lian, Ma, reassessment of in ation risks could and Wang 2017). Elevated asset prices make contribute to a sudden rise in term premiums global financial markets more prone to from current exceptionally low levels, which sudden adjustments and bouts of volatility would push up long-term yields and generate (BIS 2017). The equity price-to-earnings ratio EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 37 is in the top 30th historical percentile in the FIGURE 1.20 Downside risks: Policy and geopolitical United States, while corporate bond spreads uncertainty in both advanced economies and EMDEs are Global policy uncertainty is still above historical norms, but has generally in the bottom quartile. A correction in asset moderated from a peak reached in 2016. The risk of unanticipated political valuations could impact growth prospects swings remains elevated amid rising support for populist parties. In the past, periods of low commodity prices were associated with an increased through tighter financing conditions, lower incidence of conflict in commodity exporters. confidence, and negative wealth effects (Bluedorn, Decressin, and Terrones 2013). A. Global economic policy uncertainty B. Global rise of populism EMDEs remain vulnerable to risks of sudden market adjustments and tighter global financing conditions, which could be amplified by disorderly exchange rate developments. Credit growth has slowed in most countries but corporate sector vulnerabilities remain elevated, and both private and public debt levels are considerably higher than in the pre-crisis period. Rising borrowing costs could substantially increase the C. Elections in advanced economies D. Conflict in EMDE commodity burden of debt servicing, which was compressed in and EMDEs exporters and commodity prices recent years by low global interest rates and risk premiums. In turn, rising debt service costs could lead to weakening investment and lower medium- term growth (Special Focus 2; Borensztein and Ye forthcoming; Drehmann, Juselius, and Korinek 2017; Jordà, Schularick, and Taylor 2013; Lombardi, Mohanty, and Shim 2017). A reversal in capital inflows and currency instability could also increase default risks and raise financing Sources: Allansson, Melander, and Themnér (2017); Baker, Bloom, and Davis (2016); Election stability concerns among economies with external Guide, International Foundation for Electoral Systems; Haver Analytics; national sources; Rodrik (2018); World Bank. vulnerabilities. Large current account deficits, A. Policy uncertainty is the Economic Policy Uncertainty index computer by Baker, Bloom, and Davis elevated short-term external debt, and reliance on (2016) and is based on the frequency of articles in domestic newspapers mentioning economic policy uncertainty. The index is normalized to equal 100 at its 2000-17 median, as indicated by the portfolio flows render some countries particularly horizontal line. Last observation is April 2018. B. Data measures the vote share, or support, for populist parties, defined as those which pursue an vulnerable to sudden stops in capital flows and 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 rollover risks. The transmission of global financial includes 8 EMDEs and 11 advanced economies. shocks can be amplified in EMDEs with pegged 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. exchange rate regimes, compared with countries D. Conflicts are the 2-year average of the sum of armed conflicts and dyads. Commodity index is an average of energy, non-energy, and precious metals price indexes, based on nominal U.S. dollar with flexible ones (Obstfeld, Ostry, and Qureshi prices. 2018). Among low-income countries (LICs), public indebtedness is still lower than in the mid- 2000s, but their exposure to currency, interest 2016 (Figure 1.20). The risks of destabilizing rate, and refinancing risks have risen substantially policy and political changes remain elevated, as their market access has increased (Devarajan reflecting the increased polarization of public 2018; Gill and Karakülah 2018). In 2018, 40 opinion, a backlash against globalization, and percent of LICs are in high-risk or already in debt rising support for populist parties in both distress—twice the share five years earlier (World advanced economies and EMDEs (Rodrik 2018; Bank 2018e). Inglehart and Norris 2016). Policy uncertainty and geopolitical developments Upcoming elections in both advanced economies and EMDEs, including in Latin America and the Measures of global policy uncertainty are still Caribbean and in Sub-Saharan Africa, could lead above historical norms, albeit below a peak in to renewed uncertainty. Periods of significant EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 38 C H A P TE R 1 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 FIGURE 1.21 Downside risks: History repeating itself? heightened tensions, and renewed uncertainties following the reintroduction of sanctions on Iran Activity has recovered but still lags behind previous expansions. While the probability of a recession in major economies, such as the United States, could foster volatility in oil markets, hamper remains low, it may be creeping up. Past global recessions were preceded confidence, and further amplify instability by a period when most countries operated at or above full capacity. The next episode could be triggered by the materialization of a combination of (Karasapan 2017; Polachek and Sevastianova downside risks, which could further weaken long-term investment 2012). Security conditions remain precarious in prospects. many Sub-Saharan African countries. In the past, protracted periods of low commodity prices have A. Global GDP during expansion B. Probability of U.S. recession periods tended to increase the probability of civil unrest in that region, as well as in others with large numbers of commodity exporters (Bazzi and Blattman 2014; Ciccone 2018). Heightened diplomatic tensions involving Russia with the United States and the European Union could also lead to an escalation of retaliatory measures. Renewed intensification of geopolitical risks could severely impact growth and development prospects for the affected regions, and even hinder activity at the C. Output gaps around global D. Five-year-ahead forecasts of recessions / slowdowns investment growth global level. A combination of downside risks After a decade of recovery from the global financial crisis, economic activity is still lagging behind previous expansions and is expected to decelerate in coming years (Figure 1.21). Whether the slowdown will be gradual, as currently predicted, or abrupt will depend on a number of Sources: Board of Governors of the Federal Reserve System, Consensus Economics, Federal Reserve Bank of New York, Haver Analytics, Kose and Terrones (2015), National Bureau of factors, including the materialization of some of Economic Research (NBER), World Bank. A. Global GDP levels in constant 2010 U.S. dollars, indexed to 100 at the peak of the previous the downside risks discussed above. Currently, the business cycle. Cycle dates based on global recessions and slowdowns identified in Kose and Terrones (2015). Dashed line corresponds to 2018-20 forecasts. probability of a recession in major economies, B. Figure shows probability of a recession in 12 months. Probabilities derived from the U.S. yield such as the United States, is low (Bauer and curve model of the Federal Reserve Bank of New York. Shaded areas indicate recessions, as identified by the National Bureau of Economic Research (NBER). Last observation is March 2018 (12 Mertens 2018). However, the global economy has -month-ahead probability). C. Output gaps calculated using multivariate filter. Methodology is described in Box 1.1 of the January experienced an abrupt slowdown or recession in 2018 Global Economic Prospects. Grey bars are for four global recessions in 1975, 1982, 1991, and 2009, and two global slowdowns in 1998 and 2001. every decade, which was invariably preceded by a D. Five-year-ahead forecasts of investment growth, where the horizontal axis is the forecast vintage. period when a significant majority of countries Unweighted averages of 24 advanced economies and 21 EMDEs. Last available month is April 2018. were operating above capacity. This proportion is estimated to be around 50 percent in 2018, and government changes and political instability are should increase in 2019. generally associated with lower growth in both EMDEs and advanced economies (Aisen and The next global slowdown or recession could be Veiga 2011; Perotti 1996). A lack of trust in triggered by the combined materialization of governments also increases the risk of instability several downside risks. For instance, a trade war during economic downturns (Nunn, Qian, and along with a sudden resurgence of global inflation Wen 2018). could lead to a decline in confidence and activity, as well as to tighter global financing conditions Geopolitical risks remain elevated. While tensions and disruptive financial market developments. on the Korean Peninsula may have eased Weakening growth and higher borrowing costs somewhat, strains in the Middle East have could intensify debt and financial stability intensified. In that region, continued conflict, concerns, while rising unemployment could EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 39 amplify political uncertainties and protectionist Policy challenges tendencies. Challenges in major economies The capacity of many countries to confront a synchronous slowdown has diminished since the Advanced-economy monetary policy will gradually global financial crisis. Monetary policy in become less stimulative, as output gaps become advanced economies could face renewed positive and inflation picks up. Fiscal policy is constraints, as policy interest rates are still at expected to be broadly neutral for growth, with the historic lows, and fiscal space has deteriorated in significant exception of the United States. As both advanced economies and EMDEs. Moreover, monetary and fiscal stimuli wane in the medium potential growth has deteriorated and long-term term and potential growth softens in the longer term, investment prospects have continued to worsen, the outlook is expected to weaken, highlighting the despite a tentative stabilization of market need for structural reform to boost productivity and expectations about the long-term growth outlook labor force participation. China’s key policy challenge (Box 1.1). All these conditions render the global is to manage the transition to slower but more economy particularly vulnerable to adverse shocks balanced and sustainable growth. that may lead to a global slowdown or recession. Monetary and nancial policies in advanced Such an event would lead to additional and long- economies lasting damage to potential growth, particularly when accompanied by financial stress and As the recovery firms and output gaps become significant deleveraging pressures (World Bank positive, inflation should gradually rise toward 2018a; Kose and Terrones 2015). central bank targets. The pace of this convergence, however, is subject to considerable uncertainty. Region-specific risks Throughout the recovery, inflation has generally been over-estimated (Figure 1.22). Recent There are various region-specific downside risks inflation has been less responsive to strengthening that accompany the global risks discussed earlier. activity than might have been expected, perhaps Most regions face domestic policy uncertainties reflecting hidden slack or structural forces. associated with the possibility of fiscal slippages, Inflation expectations may have shifted down reform setbacks, and lingering financial stability following a period where actual inflation has been concerns. persistently low and below target (Kiley and Roberts 2017; Hills, Nakata, and Schmidt 2016). Renewed geopolitical tensions in Europe and Globalization may have reduced the sensitivity of Central Asia, the Middle East, South Asia, as well inflation to domestic pressures (Auer, Levchenko, as around the South China Sea and the Korean and Sauré 2017; Ihrig et al. 2010). Trends in Peninsula, could negatively impact confidence and technology and competition may be suppressing disrupt trade, investment, and migrant flows in wages and prices (Kurz 2017; Autor et al. 2017). these regions. A worsening of political instability Central banks are appropriately taking a gradual or armed conflict could have substantial adverse approach to policy normalization. effects in Africa. Lower-than-expected oil and other commodity prices could also derail the Major central bank balance sheets remain large by recovery in key commodity-exporting economies, historical standards, but have likely peaked which play a dominant economic role in a globally. The Federal Reserve has started to majority of EMDE regions. Finally, natural withdraw quantitative easing, while the European disasters, such as extreme weather patterns or Central Bank is tapering its asset purchases. droughts, could become more frequent, buffeting Changing market expectations about the speed of activity in many regions, including in Latin the process could lead to sudden financial market America, Sub-Saharan Africa, East Asia and movements, reminiscent of the 2013 taper Pacific, and South Asia. tantrum. Careful and transparent communication by central banks about their plans for both policy EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 40 C H A P TE R 1 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 FIGURE 1.22 Monetary and fiscal policies in advanced rates and balance sheets can avoid adverse financial economies market reactions, particularly in an environment Inflation has generally come in below forecasts in recent years, suggesting where high asset prices are based on assumptions that central banks should take a gradual approach to raising rates. Major that monetary policy tightening will proceed in an central bank balance sheets are close to their peak size, and managing the orderly fashion. unwinding of unconventional policy will require careful communication. Fiscal balances have stabilized in most advanced economies, with the key exception of the United States, where fiscal policy will be highly Fiscal policy in advanced economies procyclical, with limited growth spillovers. Debt levels in advanced economies have risen significantly in the past decade, which may hinder their ability to respond to future negative shocks. The fiscal policy stance of advanced economies turned from contractionary to expansionary, on A. Euro Area consensus inflation B. U.S. consensus inflation forecasts balance, between 2015 and 2017, contributing to forecasts the upturn in growth during this period. In most advanced economies, the fiscal stance is expected to be largely neutral for growth over the forecast horizon. The major exception is the United States, which is undertaking a substantial, and procyclical, fiscal expansion. Fiscal stimulus is an important part of countercyclical policy, especially when monetary policy is constrained (Christiano, Eichenbaum, C. Central bank balance sheets D. Structural fiscal balance and Rebelo 2011). However, for an economy operating close to full potential, the benefits of stimulating demand are reduced, while the costs are magnified, as interest rates rise and private investment is crowded out. The same conditions also limit the magnitude of positive spillovers to other countries (Blagrave et al. 2017). More generally, many advanced economies have added significantly to their public debt load, E. Estimates of cross-border F. Public debt which may hinder their ability to respond to spillovers from fiscal policy negative shocks in the future (Romer and Romer 2017). Accordingly, they need to take advantage of the confluence of strong global growth and low borrowing costs to rebuild fiscal space (Kose et al. 2017b; IMF 2018). Structural policies in advanced economies Potential output in advanced economies is constrained by aging populations and weak Sources: Bank of Japan, Board of Governors of the Federal Reserve System, Consensus Economics, European Central Bank, Haver Analytics, International Monetary Fund, Organisation for Economic Co productivity growth (Figure 1.23). As the recovery -operation and Development, World Bank. A. B. Series indicate date at which inflation forecast surveys were taken. matures, and policy stimulus is gradually C. Annual average of monthly assets of central banks. Data uses current U.S. dollar GDP weights. D. Shaded area indicates forecasts. Structural balance is the fiscal balance adjusted for the economic withdrawn, growth will tend to converge toward cycle and for one-off effects. its slower pace of potential. Structural reforms can E. Average one-year response of recipient country GDP to a fiscal shock equal to 1 percent of source country GDP, as calculated by Blagrave et al. (2017). raise this pace by boosting labor participation and F. Net general government debt as a percentage of GDP. For cross-country comparability, the U.S. figure is adjusted to exclude unfunded pension liabilities of government employees’ defined-benefit productivity growth. pension plans. A critical challenge is to continue fostering growth-enhancing international trade. One area EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 41 with untapped potential is trade in services, which FIGURE 1.23 Structural policy in advanced economies comprises a rising share of global trade despite Potential output in advanced economies is constrained by weak population being subject to considerable restrictions. and productivity growth, suggesting that current levels of growth cannot be Reducing barriers to services trade—for instance, maintained in the longer term. by increasing regulatory cooperation and reducing barriers to entry for foreign service providers—has A. Working-age population growth B. Productivity growth 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, and WTO 2017). Sources: Haver Analytics, World Bank. In contrast, actions to protect certain domestic A. The series is a year-on-year percentage change in the working age population, which is defined as individuals between ages 15-64 years. sectors, such as steel or aluminum tariffs, may lead B. Productivity measures output per employed person. to net domestic job losses. The increase in costs for downstream users can easily destroy more jobs than the protected sector gains (Francois and Baughman 2018). Such losses would be in fiscal reforms. For example, the tax burden on multiplied if other countries retaliate in kind consumers and businesses is being further lowered (Akcigit, Ates, and Impullitti 2018). through cuts in value-added tax rates and social security contributions. Policy challenges in China The key economic policy challenge is to manage Authorities in China have implemented a wide the transition to slower but more balanced and range of reforms in recent years (IMF 2017a, sustainable growth. This will require continued World Bank 2017c, World Bank 2018a). These implementation of reforms to reduce financial included steps to reduce excess capacity in the vulnerabilities, promote market competition and industrial sector (Figure 1.24; World Bank private sector development, reallocate capital and 2018b). Notable progress has been made on labor toward more productive firms and sectors, mixed-ownership reforms aimed at diversifying and foster innovation through stronger intellectual the ownership structure of state-owned enterprises property rights as well as additional research and (SOEs). Currently, more than two-thirds of development. This will also necessitate further China's centrally administered SOEs and their actions to bolster household consumption, subsidiaries have allowed outside investors, including additional reforms to make the fiscal restructured, or gone public. Following progress in system more progressive and rebalance the opening its equity and bond markets to foreigners, intergovernmental allocation of revenues and China is now taking additional steps to remove expenditures. Relocation of public spending from foreign ownership limits in financial institutions investment to education, health, pensions, and and some other sectors. safety nets would increase aggregate consumption and boost human capital. Advancing the reform of Reforms have also included stricter regulatory the household registration (hukou) system, and of policies for the housing market, as well as rural land transfers, would contribute to a monetary, financial, and regulatory steps that have reduction of income inequality. Encouraging contributed to some reduction in corporate debt market mechanisms to promote green growth and as a share of GDP, even if household and public- more efficient, sustainable use of natural resources sector debt have continued to increase (BIS would enhance environmental sustainability 2018a). The authorities have also made progress (World Bank 2018a, World Bank 2018h). EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 42 C H A P TE R 1 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 FIGURE 1.24 Policy challenges in China include the need to intensify economic diversification in commodity exporters, boost skills and adaptability China has implemented a wide range of reforms, including significant steps to reduce excess capacity and to diversify ownership structure of to confront rapid technological change, and promote state-owned enterprises. While monetary and prudential policies have regional trade integration. Improving school learning 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. outcomes remains a high priority. Progress on fiscal reforms includes the reduction of tax and social security burdens on businesses. Monetary and nancial policies A. Industrial overcapacity B. Industrial state-owned enterprises Among EMDEs, median inflation in commodity and state controlled enterprises with exporters has been moderating toward that of mixed ownerships commodity importers. Policy interest rate adjustments this year have consisted mostly of cuts in commodity exporters, extending easing cycles already underway in some economies (e.g., Brazil, Colombia, Kazakhstan, Peru, Russia, Zambia; Figure 1.25). Thus far, short-term, survey-based inflation expectations in EMDEs have shown modest upward momentum. However, with the aggregate EMDE output gap closing, there may be C. Public, corporate, and household D. Social security contribution greater upward pressure on inflation during the debt statutory rates forecast horizon. Moreover, a closed global gap could amplify this tendency through imported inflation (World Bank 2018a). The challenges associated with increasing inflation pressures could be compounded if monetary policy normalization in advanced economies, and the associated tightening of international financing conditions, leads to capital outflows and Sources: Bank for International Settlements, China National Bureau of Statistics, Institute of currency depreciation among EMDEs (Chari, International Finance, World Bank. A. Last observation is March 2018. Stedman, and Lundblad 2017; Dahlhaus and B. Both lines represent industrial enterprises. State-controlled mixed ownership enterprises refer to Vasishtha 2014). The current policy mix in the enterprises of whose total assets the state-owned assets have a majority or dominate share. Last observation is December 2017. United States amplifies this challenge. If the 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 Federal Reserve were to hike policy rates more consistent with the People’s Bank of China Aggregate Financing to the Real Economy (stock) level. Public debt, which is general government debt, includes central and local government debt and social steeply than markets expect to offset overheating security funds, but excludes public enterprises. Data presented in the chart is broadly consistent with the IMF estimates of total debt. Includes debt swaps and other debt restructuring operations. and inflationary pressures generated by the large D. Measures the sum of employer and employee contributions. fiscal expansion, there could be additional pressure for rate increases in some EMDEs. At the same Challenges in emerging and developing time, policymakers in EMDEs need to continue economies preparing their domestic financial sectors for potentially adverse spillovers from post-crisis EMDE policymakers need to be able to respond to a banking regulatory tightening in advanced rise in inflation and cope with advanced-economy economies (Briault et al. 2018). monetary policy normalization, as well as manage possible bouts of financial market volatility. How susceptible individual countries may be to Deteriorating debt dynamics inhibit fiscal space and capital flow reversals depends on their existing underline the importance of revenue mobilization vulnerabilities and other domestic factors, such as and for medium-term fiscal frameworks to strengthen their degree of financial openness and institutional or rebuild buffers. EMDEs face various structural quality (Byrne and Fiess 2016). In anticipation of challenges to boost longer-term prospects. They rising borrowing costs and the possibility of renewed, more persistent episodes of market EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 43 volatility, it is critical for EMDE policymakers to FIGURE 1.25 EMDE monetary policy maintain an environment where expectations of Policy interest rate actions in commodity exporters in the first half of 2018 longer-term inflation are low and stable. This consisted mostly of cuts, extending easing cycles already well underway in includes credible commitment to explicit inflation some economies. This is consistent with moderating inflation and still negative output gaps. Survey-based inflation expectations are rising in targets in those countries that have implemented commodity importers, and have stabilized in commodity exporters after an such a framework. In some countries, it will also extended period of downward adjustment. be necessary to tackle ongoing vulnerabilities, such as sizable current account deficits or high stocks of A. Policy interest rates B. One-year-ahead inflation corporate debt. Although maintaining an expectations appropriate level of exchange rate flexibility and building policy buffers should be first lines of defense in confronting sudden financial shocks, EMDE policymakers also need to be prepared to use additional tools, such as intervention in foreign exchange markets, or even targeted capital inflow management measures if other options have been exhausted and a financial crisis is imminent (IMF 2017b). To reduce financial Sources: Consensus Economics, Haver Analytics, World Bank. A. The blue bars show the interquartile range of policy rates for each country group. Sample includes stability risks associated with elevated corporate 38 commodity exporters and 24 commodity importers. B. Figure shows median one-year-ahead inflation expectations based on a quarterly survey debt, prudential policies and bankruptcy conducted by Consensus Economics. Sample includes nine commodity exporters and 11 commodity importers. Last observation is April 2018. protection regimes should be reinforced, while access to equity finance should be further developed (Special Focus 2). prices, but remain large (e.g., Algeria, Bahrain, Fiscal policy Bolivia, Ghana, Nigeria; World Bank 2018a). Government revenue growth was positive in 2017 Public finances are fragile in various EMDEs. and is set to accelerate in 2018. However, the Many economies are running large government improvement is not enough to bring revenues as a deficits—a trend expected to persist over the next share of GDP back to levels observed before the two years—while adverse debt dynamics will 2014-16 oil price collapse, and government debt continue to constrain fiscal space across EMDEs continues to rise. (Figure 1.26). Limited fiscal buffers leave EMDEs short of an effective fiscal instrument should they In other commodity exporters, government need to react to a negative economic shock. In finances deteriorated following the decline in LICs, public debt-to-GDP ratios remain below commodities prices after 2011. Fiscal balances levels observed prior to the mid-2000s following bottomed out in 2015-16 and are envisaged to debt relief initiatives, but have increased rapidly in further improve; however, they remain firmly recent years. Debt vulnerabilities are compounded negative. Although the fiscal sustainability gap in in those countries by a rising exposure to commodity exporters is expected to narrow in international markets, a lack of transparency, and 2018, the improvement is not yet sufficient to limited debt management capabilities. Across place debt on a sustainable path. These trends EMDEs more generally, the challenges posed by suggest that there is still significant need for fiscal inadequate fiscal buffers are expected to be consolidation in commodity exporters. In amplified as global financing conditions tighten, commodity importers, robust growth has especially if procyclical U.S. fiscal measures are supported government revenues. However, accompanied by a higher-than-expected path for government expenditure growth is expected to U.S. and global interest rates, which would raise outpace that of revenues, contributing to rising borrowing costs. gross government debt. In oil exporters, fiscal deficits narrowed in 2016 Going forward, tightening global financing and 2017, in part aided by recovering energy conditions will have substantial implications for EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 44 C H A P TE R 1 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 FIGURE 1.26 EMDE fiscal policy refinancing risks and the burden of servicing debt (IMF 2018). Fiscal sustainability gaps could also Gross government debt has been rising across EMDEs, further constraining fiscal space. Fiscal balances across commodity exporters deteriorate across all EMDE regions in response to continue to recover from earlier commodity price declines, except for rising borrowing costs—especially in Latin metals exporters, where deficits are anticipated to remain large in 2018. Fiscal sustainability gaps could deteriorate across all EMDE regions in America and the Caribbean, as well as in Sub- response to increasing interest rates. Tax policy appears to be procyclical Saharan Africa and Europe and Central Asia across many EMDEs, which could exacerbate fluctuations in their business (World Bank 2018c). Although aggregate cycles. corporate debt in EMDEs has fallen modestly since 2016, it remains high in several large A. Gross government debt B. Fiscal balances economies (e.g., China, Turkey; Special Focus 2; Beltran, Garud, and Rosenblum 2017). Deterioration of corporate debt profiles could lead to rising contingent liabilities for the public sector, which would compound the challenges associated with elevated public debt. Although favorable global growth conditions and recovering revenues are likely to improve fiscal space, EMDE policymakers need to continue to C. Impact of interest-rate shock on D. Share of tax changes during fiscal sustainability gaps in EMDEs, contractions, 1981-2017 actively address underlying fiscal vulnerabilities. by region Placing government finances on a more sustainable path could prevent the need for procyclical fiscal consolidation in the presence of negative shocks—as was the case in commodity exporters in 2016-17, 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 Sources: International Monetary Fund, Kose et al. (2017b), Végh and Vuletin (2015), World Bank. managing the composition of debt could ease the A. B. Shaded area indicates forecasts. A. Figure shows the constant 2010 U.S. dollar GDP-weighted average for each country group, using servicing burden on tax revenues. However, the an unbalanced sample. The sample in 2018 includes 80 commodity exporters and 60 commodity urgency to strengthen or rebuild fiscal buffers importers. B. Figure shows median in each country group. Sample includes 21 metals, 35 agricultural, and 36 should be balanced against other pressing energy exporters, as well as 62 commodity importers. C. EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the considerations. These include protecting social 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 safety nets and financing growth-enhancing deviation interest rate increase. Sustainability gap is measured as the difference between the primary balance and the debt-stabilizing primary balance. A negative gap indicates that government debt is investment, including in infrastructure. on a rising trajectory; a positive gap indicates government debt is on a falling trajectory. Sample Mobilizing fiscal revenues by reallocating spending includes 70 EMDEs and 35 advanced economies. D. A net tax hike occurs when the number of tax hikes exceeds the number of tax cuts, while a net toward investment and infrastructure projects can tax cut occurs when the number of tax hikes is less than the number of tax cuts. Tax changes are measured as the change in statutory rates in either the corporate income, personal income, or value- prioritize such needs when fiscal space is added tax as described in Végh and Vuletin (2015). Output gaps that are more negative than -1 percent of potential GDP indicate an economic contraction. Unbalanced sample, where data for 2017 constrained, which is generally the case in LICs. includes 16 EMDEs. Across EMDEs, introducing medium-term expenditure frameworks and fiscal rules to control spending, as well as improving overall governance, fiscal policy in EMDEs. For sovereign borrowers, can build credibility to support revenue collection public balance sheets could come under stress as and buck the historical trend of procyclical fiscal governments face rising costs in financing deficits policy. This should be complemented by measures and rolling over maturing debt (IMF 2017b). to enhance debt transparency, improve debt EMDEs with elevated external borrowing— management capacity, and promote sustainable especially from private creditors—are vulnerable lending practices, particularly in LICs. to capital flow reversals, which can increase EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 45 Structural policies FIGURE 1.27 EMDE structural policy Decreasing export concentration is generally associated with rising While EMDE growth is expected to continue to income per capita. The need for increased diversification is particularly accelerate in 2018, potential growth has declined acute among oil-exporting EMDEs. Automation creates new challenges for considerably over the past decade, and structural manufacturing-led growth in EMDEs. Regional trade agreements offer prospects of increased integration, particularly in Sub-Saharan Africa. challenges are intensifying. For commodity Improving basic reading and mathematics proficiency remains a major exporters, the end of the commodity super-cycle priority in some regions. and secular shifts in demand for commodities call for accelerated efforts to diversify their economies A. Export concentration and GDP per capita levels B. Export concentration, 2016 as appropriate (Special Focus 1). For all EMDEs, rapid changes in manufacturing and technology imply rising challenges and opportunities, putting ever-increasing emphasis on education, skills, and adaptability to bolster long-term growth prospects. Fostering diversification Resource-rich countries need to focus on enhancing the overall competitiveness of their C. Supply of industrial robots by D. Size of new regional trade economies. In addition to fostering human and industries worldwide agreements physical capital and improving institutions and governance, they need to pursue policies that help diversify their economies away from natural resources (Gill et al. 2014). For low- and middle- income countries, increased diversification is generally associated with higher levels of income per capita (Figure 1.27; Cadot, Carrère, and Strauss-Kahn 2011; Imbs and Wacziarg 2003). For resource-intensive countries, low levels of E. Impact of AfCFTA on employment, F. Students proficient in math and economic diversification are particularly by sector reading challenging, as sharp commodity price fluctu- ations disproportionality impede investment, growth, and stability in those countries (Bahar 2016; Hesse 2008; Lederman and Maloney 2007; Papageorgiou and Spatafora 2012; IMF 2016). In addition, there appears to be an inverse relationship between resource intensity and education outcomes, which could reflect a lower quality of institutions more generally. This can Sources: International Federation for Robotics; Saygili, Peters, and Knebel (2018); United Nations Conference on Trade and Development (UNCTAD); World Bank. further hamper the potential for development in A. 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. GDP per resource-rich countries (World Bank 2018i). capita measured in Purchasing Power Parity (PPP) terms. Trend computed using a local 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. The prospect of persistently moderate commodity 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 prices intensifies the need for reforms to EMDEs, and 36 advanced economies. Herfindahl-Hirschmann concentration index measures the degree of product concentration, where values closer to 1 indicate a country’s exports are highly encourage economic diversification, particularly in concentrated on a few products. less diversified oil producers. Such a process C. Estimated annual supply of industrial robots at year-end. D. CPTPP = Comprehensive and Progressive Agreement for Trans-Pacific Partnership, AfCFTA = generally occurs with incremental changes around African Continental Free Trade Area. Data are as of 2017. E. Man. refers to other manufactured goods. The employment effect of the African Continental Free existing sectors and comparative advantages, Trade Area (AfCFTA) have been estimated using the Global Trade Analysis Project (GTAP) model. The GTAP model is a static, multi-regional, multi-sectoral general equilibrium model assuming perfect leveraging available skills and infrastructure competition, constant returns to scale and imperfect substitution between foreign and domestic goods (Hausmann, Hwang, and Rodrik 2007). and among imports from different sources. 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 Asia are unavailable. Horizontal lines show advanced-economy average. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 46 C H A P TE R 1 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 • The successful diversification experience of Adapting to evolving trends in manufacturing some energy producers (e.g., Malaysia, Mexico) suggests the need to support both Despite heightened uncertainty about trade vertical diversification in oil, gas, and policies in major economies, the potential for petrochemical sectors, as well as horizontal export-led manufacturing growth remains diversification beyond these sectors. significant in many EMDEs, as their productivity Continued commitment to reforms aimed at levels, which lag behind the global technological improving governance and the business frontier, have substantial scope for convergence. A climate, and reducing regulatory barriers to rising share of manufacturing employment and competition and to foreign investment, has increased vertical specialization has generally been the potential to diminish reliance on the oil associated with higher productivity and income sector (Callen et al. 2014; Stocker et al. 2018; per capital levels (Diao, McMillan, and Rodrik Devarajan 2017). 2017; Hallward-Driemeier and Nayyar 2018; Szirmai and Verspagen 2015). Manufacturing can • Similarly, metals and agricultural exporters foster the diffusion of technologies than can benefit from vertical diversification—the strengthen global value chain integration, development of industries closely related to particularly for countries that are currently less existing production and export structures— integrated, and thus boost long-term growth and the expansion of high value-added prospects. resource-based manufacturing activities. For instance, mining and forestry have become Rapid technological changes—including increased knowledge-intensive sectors with high digitalization and the use of advanced robotics— technological content in both upstream and may significantly affect countries’ comparative downstream activities. Successful examples of advantages. Increased diffusion and adoption of vertical diversification include Thailand, digital technologies in EDMEs are likely to be Chile, and Uganda (Hesse 2008; Gylfason positive for growth and job creation, particularly and Nguessa Nganou 2014; Maloney and in countries with elevated levels of digital literacy. Valencia Caicedo 2017). Mobile and internet technologies can lower costs of market access, foster entrepreneurship and While incremental diversification around resource greater labor market efficiency, helping people and sectors can help foster learning and the adoption firms match skills to jobs. of new technologies, proper regulatory and institutional frameworks need to be in place to While evidence of employment-saving industrial attract new investments, help the development of automation is limited in EMDEs, task-replacing higher value-added export sectors, and boost technologies could potentially contribute to labor competitiveness and participation in regional and displacement over time, including in more global value chains. Regulations and institutions traditional manufacturing activities (Acemoglu that slow the emergence of new sectors should be and Restrepo 2018; Autor and Salomons 2018; identified and reformed in order to support Maloney and Molina 2016). At the same time, the efficiency-seeking and productivity-enhancing increasing services intensity of manufacturing can investments, including through improved create important labor market opportunities and competition policies. Rapid technological changes productivity advancement in EMDEs (Enache, also offer new opportunities for private-sector-led Ghani, and O’Connell 2016; Kinfemichael and growth, including in digital services and Morshed 2015; WTO 2017; UNCTAD 2017a). information technologies (World Bank 2018i). Diversification can also be hindered by the These trends suggest rapid changes in the types of absence of local market access, emphasizing the investments and skills needed for manufacturing- need for further regional integration, particularly led growth in EMDEs. Opportunities and risks in Sub-Saharan Africa (Imbs 2018). will vary across sectors, depending on the extent of trade in international markets, the degree of EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 47 export concentration, the level of automation, and reduced following the withdrawal of the United the importance of complementary services. Labor- States from the original TPP (Maliszewska, intensive industries, including commodity-based Olekseyuk, and Osorio-Rodarte 2018). The and less-automated manufacturing processes, AfCFTA was launched by countries representing a remain important entry points for less notably smaller share of global GDP and trade; industrialized economies. This applies to rapidly however, once ratified by its 44 members, it would 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 ranging commitments in the areas of competition, industrialization 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 positive experiences in Europe contribute to boosting value chain integration, and Asia show. investment, and productivity. Despite the lack of progress in multilateral trade negotiations, new Improving education and training trade agreements have been concluded or are being negotiated by EMDEs, including the Education and training policies should be Comprehensive and Progressive Agreement for a redesigned to adapt available skills to changing Trans-Pacific Partnership (CPTPP), the European development needs and new technologies, and Union–Mercosur trade agreement, the Regional thereby to ultimately boost growth and Comprehensive Economic Partnership between employment prospects (World Bank 2018j). As the Association of Southeast Asian Nations countries become increasingly engaged in more (ASEAN) countries and six of their major trading complex production processes, higher levels of partners, and the African Continental Free Trade tertiary school enrollment and investment in skills Area (AfCFTA). These have the potential to boost related to information and communication not only intra-regional trade and incomes of technology (ICT) have a bigger payoff. Training member countries, but also to provide a programs that are responsive to changing industry counterbalance against rising protectionist needs are particularly important (Hallward- sentiments. Driemeier and Nayyar 2018). As technologies are likely to change more quickly than national Full implementation of the CPTPP, signed by education systems are able to adapt to them, eleven countries accounting together for 16 innovative ways of imparting skills will need to be percent of global GDP and 14 percent of global developed, including through experimentation trade, is expected to provide a boost to trade flows and impact evaluation. The importance of for its members, even if potential gains have been equipping people with the necessary skills to adapt EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 48 C H A P TE R 1 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 to new opportunities is emphasized in the G20’s learning deficits are magnified over time and tend agenda on the future of work. to accentuate inequality, whereas higher inter- generational mobility in education is associated For many low- and middle-income countries— with higher growth and lower poverty (PASEC particularly in Sub-Saharan Africa and in the 2015; World Bank 2017d). Improving learning Middle East and North Africa—improving basic outcomes require better measurement and numeracy, literacy, and ICT-related skills remains monitoring, improved school practices and a key priority. Even though school enrollment and accountability. Helping to develop “soft” skills average years of schooling have markedly increased that foster adaptability, initiative and problem over the last decade, learning and the acquisition solving, could come at a premium in view of the of basic skills remain insufficient in these countries rapid and unforeseen changes in skills demands (Altinok, Angrist, and Patrinos 2018). Early and the increasing automation of repetitive tasks. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 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, Arab Rep. 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, Islamic Rep.* Ukraine Mauritius Iraq* United Arab Emirates* Mexico Kazakhstan* Uruguay Micronesia, Fed. Sts. Kenya Uzbekistan Moldova, Rep. Kosovo Venezuela, RB* 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. 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. This taxonomy results in the classification of some well-diversified economies as importers, even if they are exporters of certain commodities (e.g., Mexico). 3 Commodity importers are all EMDEs that are not classified as commodity exporters. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 50 C H A P TE R 1 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 References Autor, D., and A. Salomons. 2018. “Is Automation Labor-Displacing? Productivity Growth, Acemoglu, D., and P. Restrepo. 2018. “Artificial Employment, and the Labor Share.” Brookings Intelligence, Automation and Work.” NBER Papers on Economic Activity, Washington, DC. Working Paper No. 24196, National Bureau of Autor, D., and D. Dorn. 2013. “The Growth of Economic Research, Cambridge, Massachusetts. Low-Skill Services Jobs and the Polarization of the Aisen, A., and F. J. 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Educational Mobility Recovery: Causes and Implications for Future around the World. Washington DC: World Bank. Business Cycle Dynamics” 60th Annual Economic Conference, Federal Reserve Bank of Boston, ———. 2018a. Global Economic Prospects: Broad- Boston, Massachusetts, October 14. Based Upturn, but for How Long? January. Washington, DC: World Bank. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) SPECIAL FOCUS 1 The Role of Major Emerging Markets in Global Commodity Demand EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U 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, global metal demand growth could slow by one quarter and food demand growth 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, metals, particularly aluminum consumption, has been much faster than driven by rapid growth in large emerging market GDP and population growth, while energy consumption growth has been slower. 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 with the crude oil price collapse. While commodity markets 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 con- Indonesia, Mexico, Russian Federation and population, energy and metals sumption consumption, 1996-2016 Turkey). Together, these economies account for around 25 percent of global GDP and 50 percent of the world’s population. In commodity markets, this group accounts 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, World Bureau of Metals Statistics, USDA, World Bank A. Deflated using the manufacturing unit value index from World Bank (2018a). percent of the increase in energy consumption. B. -D. Metals aggregate includes aluminum, copper, lead, nickel, tin and zinc. Energy aggregate includes coal, crude oil, natural gas, nuclear and renewables. D. Grains includes maize, rice and wheat. Note: This Special Focus was prepared by John Baffes, Alain Kabundi, Peter Nagle, and Franziska Ohnsorge. Research assistance was provided by Xinghao Gong. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 62 S P E C I AL FO C U S 1 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 FIGURE SF1.2 Vulnerabilities to oil price fluctuations growth over the medium-term (World Bank 2018a). The oil price collapse in 2014 severely set back economic activity and worsened fiscal positions in oil-exporting countries. Oil-exporting countries tend to have an above-average export concentration compared with other Slowing commodity demand and modest price commodity-exporting EMDEs. Activity in oil exporters with lower levels of growth will have important consequences for export concentration recovered more quickly than in those with high export concentrations. The deterioration in fiscal deficits was greater in oil- growth and poverty alleviation among other exporting EMDEs with higher reliance on oil-related revenues. EMDEs. Two-thirds of EMDEs depend significantly on agriculture and mining and quarrying for government and export revenues, A. Share of oil-exporting EMDEs with B. Export concentration, 2016 and half of the world’s poor live in commodity increasing/decreasing growth 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 deterioration in economic activity largest in countries with higher levels of export concentration (Figure SF1.2; World Bank 2017a, 2018b). The fall in prices C. GDP changes since 2014, by export D. Change in fiscal balance since weakened fiscal positions and required sharp cuts concentration 2014, by reliance on oil revenue in government spending. The prospect of persistently low prices intensifies the need for reforms to encourage economic diversification in commodity exporters, and for reforms to strengthen monetary and fiscal policy frameworks (World Bank 2018a). This Special Focus addresses the following questions: Sources: IMF, UNCTAD, World Bank B. -D: Sample includes 31 oil-exporting EMDEs. Figure shows average and range for the separate • What impact have the EM7 had on categories. B.C: Export concentration is measured by a Herfindahl-Hirschmann Index, where values closer to 1 consumption of major commodities? indicate a country’s exports are highly concentrated on a few products. C. “Above average concentration” and “below average concentration” groups are defined by countries above or below the sample average for export concentration in 2014. • What is the role of per capita income growth D: Change in overall fiscal balance is measured from 2014-16. Above average and below average oil revenue groups are defined by countries above or below the sample average of oil revenues as a in rising commodity consumption? share of GDP based on 2014 data. • What are the prospects for global commodity EMDEs are likely to remain important drivers of consumption? commodity market developments, although the importance of individual countries will change. • What policy measures can commodity While China has been the main driver of growth exporters implement to boost resilience? in industrial materials, its expected growth slowdown and shift towards less commodity- This Special Focus presents a comprehensive and intensive activities such as services could herald detailed analysis of the role of major emerging softer commodity consumption in the future. markets in global consumption of a wide range of Global growth is expected to be increasingly commodities. It also presents estimates for the driven by economies that are, at present, much less income elasticities of consumption for a range of commodity intensive than China. Weaker energy, metals, and food products. In doing so, it commodity consumption growth is a key factor expands on previous research looking at the behind the World Bank’s forecast of modest price impact of China and India on commodity EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U 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 Although still smaller than that of the G7, the role of the EM7 in the global set of stylized scenarios of consumption growth economy has grown rapidly and they now account for 25 percent of global prospects based on the estimated income GDP. Since 2010, EM7 have accounted for more than half of global growth, 19 percent of global trade and 18 percent of global FDI flows. elasticities, together with long-term population Shocks to growth in EM7 countries can have sizeable spillovers both to and GDP projections. other EMDEs, and globally. 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, Kose, and Ohnsorge 2017; World Bank 2016b). Sources: UNCTAD, World Bank. A.-C. EM7 includes Brazil, China, India, Indonesia, Mexico, the Russian Federation and Turkey. G7 Individual EM7 countries can also have global and includes Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. A.B. Output is measured in international dollars at market exchange rates. 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. • China plays a uniquely important role among D. Results are derived from a Bayesian VAR using the methodology outlined in Huidrom, Kose and Ohnsorge (2017). The model includes, in this order, G7 growth, the U.S. interest rate, Emerging the EM7. Growth spillovers from China have Market Bond Index (EMBI), EM7 growth, oil prices, and growth in other EMDEs. Other EMDEs con- sist of 15 countries. Cumulative impulse responses of growth in other EMDEs, at the 1-year and 2- a global reach, while those of other EM7 are year horizon, due to a 1-percentage-point increase on impact in EM7 growth. largely regional (World Bank 2016a). China has 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 of commodities Latin America and the Caribbean (LAC), (Box SF1.1, Annex Tables SF1.1 and SF1.2).1 accounting for 60 percent of regional GDP. The group accounts for a larger share of global Shocks to growth in Brazil, in particular, have consumption than the G7 in coal, all base metals, a statistically significant impact on precious metals, and most foods (rice, wheat, neighboring EMDEs (World Bank 2016b). soybeans; 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 important spillovers to Central Asia and consumption, as well as intermediate inputs into the manufacture of 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. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 64 S P E C I AL FO C U S 1 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 BOX SF1.1 The role of 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 • Russia is the largest exporter of wheat, second commodity production, in part in response to rising largest producer of aluminum and natural gas, domestic demand, the EM7 have become major and third largest producer of oil. commodity producers. For many commodities, their production exceeds that of the G7 economies by a • Brazil is the largest producer of coffee and sugar, wide margin. China in particular is now a major the largest exporter of soybeans, and the third- commodity producer, although its consumption of largest producer of bauxite. commodities has outpaced its production. • Indonesia is the largest producer of tin and palm This box analyzes the following questions. oil and second largest producer of rubber. • What is the role of EM7 in today’s commodity • Mexico is the largest producer of silver. production? China’s production of rice and wheat is almost as large as that of all other EM7 combined, while its • How has this role evolved over time? production of most metals (aluminum, copper, lead, zinc, and tin) is a multiple of that of all other EM7 EM7’s current role in commodity production combined. Majority of production of most commodities. The EM7 account for more than half of global Evolution of EM7 role over time production in coal, rice and most base metals The Role of EM7 in energy and metals markets. (aluminum, copper, lead, tin, and zinc). In some Between 1996 and 2016, the EM7 share of global energy commodities (oil and natural gas), they metals production more than doubled to 60 percent account for more than one-fifth of global production. and their share of global energy production increased EM7 production dwarfs G7 production in coal, to 39 percent (Figure SF1.1.1). Over this period, the metals, rice and maize, while it almost matches G7 EM7 accounted for almost 90 percent of the increase production in crude oil, natural gas, and wheat. The in metals production and over half of the increase in EM7 produce about 20 times as much rice as G7 global energy production. economies, almost eight times as much aluminum; and three to five times as much copper, coal, and Role of China in energy and metals markets. The zinc. growing role of the EM7 in global commodity production largely reflects expansion in China. Individual EM7. Individual EM7, especially China, dominate global production of several commodities China’s share of global metals production increased to 48 percent between 1996 and 2016 (driven by (Table SF1.2): aluminum), and its share of global energy production • China is the world’s largest producer of coal, nearly doubled. Growing domestic production several metals (aluminum, refined copper, lead dampened the impact of the increase in China’s and gold), rice and fertilizers. demand on global commodity markets, with domestic supply accounting for nine-tenths of the • India is the largest producer of cotton and largest increase in Chinese metals consumption. China’s exporter of rice, and the second largest producer consumption of copper and nickel was more of fertilizers. dependent on imports than consumption of other EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U 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. Evolution of share of commodity production Sources: BP Statistical Review, USDA, World Bureau of Metals Statistics, World Bank. A.B Other EM7 includes Brazil, Indonesia, Mexico, Russia and Turkey. A. Other AEs contains 4 countries. Other EMDEs is calculated as the residual of the global total. B. Other AEs contains 10 countries. Other EMDEs contains 27 countries. C. Other EM7 includes Brazil, India, Indonesia, Mexico, Russia and Turkey. metals. While production of metals rose in the other iaries. Sub-Saharan Africa has been one of the main EM7, they lost global market share (from 16 percent beneficiaries of investment, which has been prevalent to 12 percent) to China. The EM7 share of energy in agriculture and metals, notably rare earths production rose slightly, driven by oil in Russia and (Deininger et al. 2011; Dollar 2016). Again, China Brazil, and coal in India and Indonesia. has been the most prominent country, although Russia has also been a key player, particularly in Role of EM7 in agricultural commodities. In aluminum. contrast to energy and metals, the role of the EM7 in agricultural production has been fairly constant over Conclusion the last two decades, similar to the evolution of their consumption. The EM7 share of the three main The EM7 have become the world’s largest grains (maize, rice, and wheat) has stayed broadly flat commodity producers after a period of rapid at around 44 percent since 1996. production growth. As a result, policies that affect their production or ability to export commodities— Role of EM7 in other EMDEs. Some of the EM7 are such as environmental policies to reduce pollution, or increasingly involved in production in other EMDEs trade-related measures—can move global commodity through investments, or partnerships and subsid- markets and have spillovers to other regions. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 66 S P E C I AL FO C U S 1 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 FIGURE SF1.4 EM7 in commodity markets quarter of Chinese consumption) and gold (for fabrication, about two-thirds of Chinese China’s share of global metals and coal consumption has risen to around 50 percent in 2016, while the share of the other EM7 is smaller, but still consumption). India is also the third-largest significant. Over the last 20 years, the EM7 account for the majority of the consumer of crude oil and natural rubber. increase in metals consumption, two-thirds of the increase in energy consumption, and more than one-third of the increase in agricultural commodity consumption. While the commodity intensity of GDP has Combined, China’s and India’s use of generally declined, it increased from the mid-2000s for metals, mainly due commodities is a multiple of the remaining five to growth in consumption in China, and is now back at its 1965 level. EM7. For example, China’s and India’s consumption is more than ten times the A. Share of energy and agricultural B. Share of metals consumption, 2016 consumption, 2016 remaining EM7 in coal, aluminum and nickel, and more than six times in copper, zinc, lead, and tin. China and India consume 50 percent more crude oil than the other five EM7, while their corn and wheat consumption is twice as high and their rice consumption five times as high. In turn, the EM7 account for four times the consumption of other EMDEs in coal and metals, and a similar amount of crude oil and grains. C. Contribution to average annual D. Contribution to average annual Evolution of the EM7 share in commodity growth in energy consumption growth in metals consumption consumption. Over the past two decades, EM7 countries have led the growth in global demand, especially of energy and metals. The EM7 accounted for 92 percent of the increase in 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— E. EM7 share of commodity F. Change in commodity intensity which had been declining prior to the 1990s— consumption of consumption growth reversed trend and started to rise rapidly by the turn of the century. This reversal largely reflected developments in China, which accounted for 83 percent of the increase in 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 Sources: BP Statistical Review, USDA, World Bureau of Metals Statistics, World Bank. line with its prior trend, supported by efficiency A. -D Other EM7 includes Brazil, Indonesia, Mexico, Russia and Turkey. A.C. Other AEs contains 4 countries. Other EMDEs is calculated as the residual of the global total. improvements as well as the shift of global B.D. Other AEs contains 10 countries. Other EMDEs contains 35 countries. F. Commodity intensity calculated as global energy and metals use (in volumes) relative to global demand towards services. GDP (in US dollars), including and excluding China. Drivers of commodities China and India are particularly prominent consumption consumers. China is the world’s largest consumer of coal, several industrial metals (aluminum, Several factors have supported the growing role of refined copper, and lead) and fertilizers. India is the EM7 in global commodity markets. This the world’s largest consumer of palm oil, and its section takes a quantitative look at the role of per second-largest consumer of coal (about one- capita income growth and slowing population EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U S 1 67 growth, as well as prices, in driving global demand FIGURE SF1.5 Consumption of industrial commodities for key commodities. This section, and the rest of and income the Special Focus, considers three energy products The relationship between per capita income and industrial commodity (crude oil, coal, and natural gas) and three metals consumption per capita shows signs of plateauing for most commodities (aluminum, copper, and zinc). These make up 85 as income rises. Notable exceptions are natural gas, likely reflecting preferences for cleaner fuels over more polluting fuels such as coal, and percent of energy and base metals consumption aluminum, which has many uses, including as a substitute for other metals. respectively. It also considers four foods (rice, wheat, maize, and soybeans), which collectively A. Oil consumption per capita vs. GDP B. Natural gas consumption per cover 70 percent of arable land.2 per capita capita vs. GDP per capita Per capita incomes and consumption. Per capita consumption of most commodities generally plateaus as per capita income rises, and may even decline at higher levels of income (crude oil, coal, copper, zinc, and rice; Figures SF1.5 and SF1.6). Aluminum shows less sign of plateauing than the other metals, which likely reflects its many uses in high-tech products, packaging and as a substitute for other metals. China has seen a much faster C. Coal consumption per capita vs. D. Aluminum consumption per capita increase than other EM7 or G7 countries in its per GDP per capita vs. GDP per capita capita use of coal and aluminum 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 South Korea, a country which underwent industrialization in the 1960s to 1980s. Growth in China’s copper and zinc per capita consumption E. Copper consumption per capita vs. F. Zinc consumption per capita vs. GDP per capita GDP per capita relative to per capita income has been broadly in line with South 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 Sources: BP Statistical Review, World Bureau of Metals Statistics, USDA, World Bank. A. -F. GDP per capita in real U.S. dollars. Lines show the evolution of income and commodity con- percent increase in commodity consumption sumption per capita over the period 1965-2016. Data for Russia are available from 1985-2016 for crude oil, natural gas, and coal, and 1992-2016 for aluminum, copper, and zinc. 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 consumption has time to adjust to shocks.3 The long-run elasticity is more relevant to the multi- decade trends described in this Special Focus. 2 is Special Focus does not consider iron ore or non-food Income elasticities can vary as per capita incomes agricultural commodities. e use of iron ore is more complex than rise and as economies mature. With rising the other metals considered here since it is an input into the incomes, consumer demand tends to shift towards production of steel. Benchmark prices are only available from 2005. 3 Dahl and Roman (2004) find a short-run income elasticity for less resource-intensive goods and services, which crude oil of 0.47 and a long-run income elasticity of 0.84. would imply a fall in income elasticities (Tilton EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 68 S P E C I AL FO C U S 1 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 FIGURE SF1.6 Food consumption and income and over time, as incomes rise (Annex Table SF1.3). The relationship between income per capita and food consumption per capita is more varied than for industrial commodities. For rice, the relationship is heterogenous between countries, which may reflect • Energy. For energy, most studies have found domestic preferences and availability. Maize and soybeans exhibit a broadly linear relationship, reflecting their use in animal feed and biofuels, an income elasticity of demand of less than which have a relatively high income elasticity. unity (Burke and Cserelykei 2016; Cserelykei and Stern 2015; Jakob et al. 2011). That A. Rice consumption per capita vs. B. Wheat consumption per capita vs. implies per capita energy consumption grows GDP per capita (1965-2016) GDP per capita (1965-2016) more slowly than per capita real GDP, consistent with a declining energy intensity of demand. Several papers find that income elasticities of demand fall as income rises (Foquet 2014; Jakob et al. 2012).5 • Metals. For metals, the elasticity of income depends on the availability of substitutes and the range of uses. Demand for aluminum, C. Maize consumption per capita vs. D. Soybean consumption per capita because of the metal’s many uses, has been GDP per capita (1965-2016) vs. GDP per capita (1965-2016) found to grow more than proportionately with rising output, i.e. with an above-unitary elasticity, while tin and lead, because of 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 Sources: BP Statistical Review, World Bureau of Metals Statistics, USDA, World Bank. below unity, with demand driven by A. -D. Due to data limitations “G7” includes all EU28 countries. GDP per capita in real U.S. dollars. Lines show the evolution of income and grains consumption per capita over the period 1965-2016. population, rather than income, beyond a subsistence income threshold (Engel 1857; Baffes and Etienne 2016; World Bank 2015b). Valin et al. (2014) find a median 1990; Radetzki et al. 2008). Consumer demand income elasticity of demand of close to 0.1 for also tends to shift towards cleaner forms of energy rice and wheat. Elasticities are generally found such as natural gas, from more polluting and to be higher for foods with higher fat and inefficient sources such as solid biomass (e.g. protein contents than carbohydrates, such as firewood) and coal (Burke and Csereklyei 2016). animal products, suggesting that consumers Consumption of food also tends to switch away switch to these types of foods as incomes rise from grains to foods with higher protein and fat (Salois, Tiffin and Balcombe 2012; Valin et al content such as meat (Salois et al. 2012).4 In 2014, World Bank 2015b). The use of maize addition, as economies mature and infrastructure and soybeans as animal feed means that their gaps narrow, demand for additional physical elasticities are driven more by demand for capital and, hence, industrial materials, slows. Estimates of long-run income elasticities. Estimates of long-run income elasticities of 5 An exception is Burke and Cserelykei (2016), who find the long-run income elasticity of demand increases as per capita real demand vary by commodity, between countries, GDP rises. is finding likely reflects their country sample which includes a number of low income countries whose long-run income elasticity of demand tends to be very low, as a result of their reliance 4 Engle (1857); Kindleberger (1958); Prebisch (1950) and Singer on non-commercial fuels (i.e. biomass). Elasticities in low income (1950) have raised this issue with respect to foodstuffs. countries may also be kept artificially low by policies such as energy subsidies (Joyeux and Ripple 2011). EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U S 1 69 meat than demand for direct consumption. Estimation results. The estimated long-run For example, 70 percent of soybeans in the elasticities differ widely across commodities and United States are used for animal feed (USDA across income levels (Table SF1.1; Figure SF1.7). 2015). As expected, for most commodities long-run elasticities decline with rising per capita income Estimates of price elasticities. Demand for (indicated by a negative coefficient on squared per commodities tends to be price inelastic. Within capita income in Table SF1.1 and Annex Table energy, price elasticities for crude oil range from SF1.5). In general, long-run income elasticities for zero to -0.4 (Huntington, Barrios, and Arora metals tend to be above those of energy and food. 2017; Dahl and Roman 2004). For metals, Stuermer (2017) finds the largest price elasticity • Metals. Elasticities of metals decline with for aluminum (-0.7), but smaller elasticities for rising incomes, but remain elevated (0.4) even copper (-0.4), tin and zinc (less than or equal to at the top quartile of 2017 per capita incomes. -0.2). As with income elasticities, price elasticities Aluminum and copper have the highest long- of demand tend to be larger in the long-run than run income elasticities (0.8 and 0.7, the short-run, as consumers have more time, and respectively; Figure SF1.7), while zinc is options, to respond to changes in prices through considerably lower at 0.3.9 the sourcing of substitutes, or efficiency gains.6 • Energy. Long-run income elasticities for crude Estimation of long-run income elasticities. The oil and coal also decline as per capita incomes remainder of this section reports estimates for the rise. At the median per capita income in 2017, long-run income elasticities of the energy, metals the income elasticity of crude oil is 0.5, while and agricultural commodities shown in Figures that of coal is 0.6.10 The elasticity for coal, SF1.5 and SF1.6. however, drops rapidly with rising per capita incomes as users switch from biomass, such as An autoregressive distributed lag model is used to wood, to more efficient coal at low incomes, estimate the logarithm of per capita commodity and subsequently from coal toward cleaner consumption (in physical units) as a function of energy sources at high incomes. At the highest per capita real GDP in U.S. dollars (Annex quartile of per capita incomes in 2017, the SF1.1).7 The sample covers up to 33 countries (21 estimated income elasticity of coal is negative. advanced economies and 12 EMDEs) for energy For natural gas, in contrast, the relationship and metals, with annual data from 1965-2016 between income and consumption appears to (Annex Table SF1.4). A different dataset, with be linear, and is estimated at 0.4. Natural gas’ predominantly EMDE representation and fewer use as fuel for electricity generation has grown advanced economies, was available for food, with rapidly, so few countries have reached the 55 countries for rice, 35 countries for wheat, 47 “plateau stage”, which accounts for the countries for maize and 32 countries for soybeans. insignificant coefficient on the quadratic term. A quadratic term for per capita real GDP was In addition, there is currently no single global included to account for non-linearities in the price for natural gas as much of it is still relationship between per capita commodity shipped through pipelines. consumption and per capita income (Meier, Jamasb, and Orea, 2013). The regression controls for real commodity prices.8 time trend to account for potential long-term productivity growth (Annex Table SF1.7). 6 For example, Dahl and Roman (2004) find a short-run price 9 e estimates for the metals commodities are weaker than elasticity of crude oil of -0.11, and a long-run price elasticity of -0.43. Stuermer (2017), which finds an elasticity of 1.5 for aluminum, 0.9 7 is methodology allows for cross-country heterogeneity in short- for copper and 0.7 for zinc. e differences likely arise from the use term coefficient estimates but imposes homogeneity in long-term of manufacturing output, rather than GDP, as the explanatory coefficient estimates. e Hausman test (Annex Table SF1.5) suggests variable. Using manufacturing output controls for changes in the that this assumption is appropriate. composition of growth in the economy over time, as the share of 8 To account for potential endogeneity, a Generalized Methods of manufacturing output tends to decline in favor of services. 10 Huntington, Barrios, and Arora (2017) also find an elasticity of Moments (GMM) model is also estimated. e results are robust (Annex Table SF1.6). ey are also qualitatively robust to including a crude oil of 0.5. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 70 S P E C I AL FO C U S 1 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 TABLE SF1.1 Estimation results it is worth noting that consumption adjusts quite slowly: the regressions imply adjustment periods Log per Squared log Income elasticity Commodity capita per capita at 2017 median to the long-run equilibrium of 3-4 years for grains, income income income 5-8 years for metals and 6 years for energy.13 Aluminum 3.50 -0.15 0.8 Zinc 2.61 -0.12 0.3 EM7 consumption growth in 2010-16. This section compares in-sample fitted growth rates Copper 2.95 -0.12 0.7 generated by the model with actual growth rates Crude Oil 2.31 -0.10 0.5 over 2010-16 (these years are at the end of the Coal 6.04 -0.31 0.6 sample period). The regressions capture well EM7 Natural Gas1 0.38 ... 0.4 consumption growth for metals (6.9 percent) and energy (3.3 percent) during these years. That said, Rice 1.39 -0.09 -0.3 across metals, actual consumption growth of zinc Wheat 1.05 -0.04 0.3 somewhat exceeds the model estimates, while that Maize1 0.85 … 0.8 of aluminum falls somewhat short (Figure SF1.7). Across energy, actual growth of crude oil and Soybeans 1 0.84 ... 0.8 natural gas was somewhat stronger than the fitted Note: Results shown are a sub-set of the estimations obtained using the pooled values and that of coal much less. The over- mean group model (see Annex SF1.1). Values for log and log squared per capita income are the coefficients for these variables as estimated by the model. prediction of coal may reflect active policy Income elasticities are calculated using these coefficients, together with median global per capita income in 2017. Annex Table SF1.5 displays the full set of measures to rein in pollution in China over this results from the estimation, including both short-run and long-run coefficients. period. The model somewhat over-estimates 1/ Indicates linear regression results for commodities which do not appear to have a non-linear relationship with income. growth of (income-inelastic) rice and wheat consumption, and slightly under-estimates growth • Food commodities. The estimated elasticity of of maize and soybeans consumption, for which rice consumption declines sharply as incomes income elasticities are high and constant. rise, turning negative even at the first income quartile in 2017. For wheat, the decline in The role of structural growth differences. One elasticities as incomes rise is less pronounced, source of a nonlinear relationship between GDP with the elasticity remaining positive, albeit and commodity use is the changing composition low, for all income levels.11 In contrast, for of output. The sectoral components of GDP differ maize and soybeans the relationship between in their use of energy, metals, and agricultural income and consumption appears to be linear, inputs. The GTAP (Global Trade Analysis and elasticities are much higher than rice and Project) input-output database allows the wheat at 0.8.12 These commodities are heavily computation of the intensity of use of agricultural used as animal feed (and also biofuels), so goods, energy and metals by different sectors of their use is closely linked to demand for meat the economy (Figure SF1.7). 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 2016. Similarly, the metals income elasticities for the EM7 countries are intensity of global investment was about seven considerably higher than for the G7. While the times that of household consumption, but focus in this Special Focus is on longer-run trends, resembled that of exports. • Energy. Differences in energy intensities 11 e elasticity at median incomes in 2017 for wheat was a little between sectors are smaller, but still higher, and for rice a little lower, than found by Vanin et al. (2014). pronounced; the energy intensity of 12 Figure 6 suggests that the relationship for soybeans and maize is clearly linear. However, the initial regressions for these foods generated significant coefficients for the quadratic term but not for 13 While the model also generates (modest, in line with the litera- the linear term. e regression cannot distinguish well between a linear and a quadratic relationship. ture) price elasticities, the emphasis here is on income elasticities. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U S 1 71 manufacturing is two-and-a half times that of FIGURE SF1.7 Estimated commodity consumption services. The energy intensity of global growth investment is much lower than that for Income elasticities of consumption decline with rising per capita incomes, household consumption and exports, but they differ widely across commodities and across income levels. however. Estimated income elasticities of consumption for EM7 countries were considerably higher than for G7 peers. For 2010-16, the regressions capture well EM7 commodities consumption growth at the aggregate level, • Agricultural commodities. Agricultural intensi- they differ for individual metals, energy, and foods. Greater reliance on industrial production instead of services may account for faster metals ties tend to be a little lower than energy and consumption growth in China than in other EM7. metals intensities across all sectors, with the highest intensity in household consumption. A. Income elasticities at 2016 income B. Income elasticities in EM7 and G7 levels countries, 2010-16 This suggests that countries with manufacturing- driven growth may experience a greater increase in energy and metals consumption for a given increase in output than economies driven more by services. Likewise, countries with investment- 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 C. EM7 consumption growth, 2010-16 D. EM7 consumption growth, 2010-16 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 one quarter of cumulative growth in India, the second-largest EM7 economy, despite both countries growing at similar average rates (7.5-8 percent) during this period. In addition, E. Sectoral use of energy, metal and F. Intensity of metals and energy manufacturing has been a more important driver agricultural inputs consumption 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). The role of policies. Policies that favor energy- intensive and industrial sectors can significantly change the commodity intensity of demand. In the 1980s, in Russia and the former Soviet Union Source: BP Statistical Review, GTAP, World Bureau of Metals Statistics, World Bank. countries, the energy intensity of output A.B. Income elasticity is defined as percent change in commodity consumption for each 1 percent (measured as energy use relative to GDP per increase in commodity price. Estimated based on regression coefficients in Annex Table SF1.5. A. Elasticities at upper, median and lower real global per capita income quartiles in 2017. capita) was much higher than their free-market B. Vertical bars are 95 percent confidence intervals. C. D. Estimated in-sample fitted values based on regression coefficients in Annex Table 1.5. peers, particularly in energy. Countries that E. Use of energy, metal, and agricultural inputs by different sectors of the economy. Calculations industrialized under central planning tended to show the gross value added of an input (e.g. energy) used by a sector (e.g. manufacturing) as a share of total gross value added of that sector. Values capture both direct and indirect use. Of the 57 exhibit high energy intensity because resource sectors included in the GTAP database, manufacturing contains sectors 19 to 42 and services con- tains sectors 47 to 57. For the inputs, agriculture includes sectors 1-12, energy includes sectors 15- allocation was not determined by market 17, 32, 43 and 44, and metals includes sectors 18, 35 and 36. F. Intensity of consumption calculated as consumption of energy or metals (in volumes) relative to mechanisms such as price or competition (Urge- output in real US dollars. Other EM7 includes Brazil, India, Indonesia, Mexico, Russia and Turkey. Toe stands for tons of oil equivalent. Vorsatz et al. 2006, Ruhl et al. 2012). Following the collapse of the Soviet Union, and coinciding EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 72 S P E C I AL FO C U S 1 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 with rapid per capita income growth, the energy natural gas, maize and soybeans), by as much intensity of GDP in these countries fell steadily, as one-third for coal. although it remains elevated. China has a similar profile, with its energy intensity extremely high in • Real commodity prices are assumed to be the 1980s and steadily declining subsequently as constant at current levels. This assumption per capita incomes rose. mitigates concerns about potential endogeneity arising from using World Bank Prospects for commodities price forecasts. demand The assumed scenario for these fundamental drivers would mean slower global and EM7 A hypothetical scenario is developed using the demand growth in 2018-27 relative to the post- model for the period 2018-27 and compared to global-crisis period 2010-16 for virtually all the estimated values over 2010-16. This enables commodities considered here. The slowdowns an assessment of the impact of changes in would be pronounced for metals, especially in population and income growth, shifts between China. Even so, the country would remain the countries with different commodity intensities of single largest consumer of energy and metals demand, and within-country shifts as their (Figure SF1.8). While per capita incomes in some incomes rise. The model is run separately for all of the other EMDEs may grow faster than in countries in the estimation sample, and sum them China, their current levels of commodity to produce a global estimate. The sample includes consumption are so much lower that they would advanced economies, the EM7, and other remain more modest contributors to aggregate EMDEs. Data limitations exclude many smaller consumption growth. emerging markets and frontier markets, with sub- Saharan Africa (SSA) and the Middle East and • Metals consumption. Global metals North Africa (MNA) particularly under- consumption growth would slow by 1.4 represented in energy and metals. percentage points to just under 3 percent on average during 2018-27. Because of still-high Baseline scenario. The baseline assumptions for EM7 income elasticities and robust growth, 2018-27 use existing estimates: the slowdown in EM7 consumption would be somewhat milder, by 0.4 percentage point to • Population growth matches UN projections. 4.9 percent. Growth in aluminum and copper Slowing population growth is expected to would remain high, reflecting their high dampen commodity consumption growth. income elasticity of demand, while growth in The United Nations (2017) project global zinc will remain modest, reflecting a near-zero population growth will slow slightly from 1.2 G7 income elasticity. percent on average during 2010-16, to a 1 percent on average during 2018-27 (Figure • Energy consumption. Energy consumption SF1.8). The slowdown is most pronounced in growth would remain broadly steady at 2.3 the EM7. percent globally but would slow by 0.4 percentage point to 3.1 percent in EM7 • Real output growth matches potential growth as economies.14 Rapid output growth in other estimated in World Bank (2018a). Real per EMDEs would shift the composition of global capita income growth is expected to be energy consumption towards more energy- broadly constant on average but slow by 0.2 intensive economies. Global crude oil percentage point in the EM7 countries. consumption growth would remain broadly steady. • Income elasticities are as in Annex Table SF1.5. With continued per capita income growth, 14 BP (2018) expect energy growth to remain broadly steady the elasticities of consumption of the EM7 between 2010-16 and 2017-25, while EIA (2017) expect growth will economies are expected to decline (except for slow over this period. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U S 1 73 • Food commodities. Consumption growth of the FIGURE SF1.8 Commodity consumption scenarios foodstuffs included here would slow by 1 The baseline scenario suggests that fundamental drivers would slow global percentage point to 1.8 percent over 2018-27. and EM7 commodity consumption growth between 2010-16 and 2018-27. Rice and wheat would drive the slowdown The deepest slowdowns would occur in metals consumption. Despite China’s expected output and commodity consumption growth slowdown, it because of their low-income elasticities and would remain the largest consumer of energy and metal commodities slowing population growth. In contrast, among the EM7. consumption growth of maize and soybeans would strengthen slightly.15 A. Population growth B. Per capita output growth Alternative growth paths. The baseline scenario described in the previous section depends critically on per capita income growth. The implications of upside and downside risks to the income 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). C. Income elasticities of EM7 D. Scenario forecasts of global commodity consumption commodity demand growth 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 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 E. EM7 commodity demand in F. Scenario forecasts of EM7 physical units commodity demand growth almost 3 percentage points of GDP, life expectancy by 2.5 years, enrolment and secondary school completion rate by 5-7 percentage points, and female labor force participation by 10 percentage points. Such a concerted reform push could lift global potential growth by 0.7 percentage point over the next ten years. The second is a slower-growth scenario. This could, for example, be triggered by a financial Source: United Nations, World Bank. crisis that is followed by a deep recession. Deep Note: All growth rates are annual averages. A. 2018-27 are based on UN Population Projections (2017). recessions leave lasting damage to output, as a B. 2018-27 data are forecasts of per capita potential growth based on World Bank (2018) and UN Population Projections (2017). result of hysteresis effects. The latter include the C. Predicted values based on regression coefficients in Annex Table SF1.5. Vertical lines are 95 percent confidence intervals. loss of human capital (job skills) associated with D.F. To ensure comparability, 2010-16 is model-predicted commodity demand growth. The faster long-term unemployment, and the loss of growth “reform” scenario assumes 0.7 percentage point higher output growth through 2018-27, while the slower growth “recession” scenario assumes 1 percentage point lower output growth for the first embodied technical progress implied by lower five years of 2018-27, based on World Bank (2018). E. Projected average annual commodity demand in billion tons of oil equivalent for energy and in investment. World Bank (2018b) estimates that millions of metric tons for metals. deep recessions have, on average, reduced potential 15 OECD (2017) also expect a slowing in growth of consumption of cereals of around 1 percentage point. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 74 S P E C I AL FO C U S 1 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 BOX SF1.2 Commodity consumption: Government policies and consequences 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 change considerations such as the 2015 Paris investment gaps exist at the global level, and closing Agreement could accelerate the use of policy tools these would provide both direct and indirect boosts favoring renewable energy or could discourage the to commodities consumption (World Bank 2016b; use of high-polluting fossil fuels (World Bank World Bank 2017a). The difference between 2018a). During the past five years, global expected investment needs and current actual consumption of natural gas has increased nearly 10 investment in EMDEs is estimated at US$1–US$2 percent while coal consumption has declined 2 trillion per year (1.25 to 2.5 percent of global GDP).1 percent. By sector, the investment requirements are largest in electricity generation, followed by construction and Subsidies. Although aimed at protecting consumers, upgrading of transportation networks (Figure the use of energy subsidies can encourage energy SF1.2.1). Fiscal and structural policies such as consumption, discourage investment in energy increased public investment spending, structural efficiency and renewables, and impose large fiscal governance reforms, and improved access to finance costs. The use of energy subsidies globally was equal could boost investment directly and through the to around 6.5 percent of global GDP in 2013. They crowding-in of complementary private sector are particularly prevalent in EMDEs (13-18 percent investment (World Bank 2017a). of GDP; IMF 2015; Rentschler 2018). The use of energy subsidies is high in the Middle East and China’s One Belt One 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 USD 28.6 billion in 2003 to 2018b). Additional subsidy reforms could further USD 183 billion in 2016, with most of the increase reduce energy consumption. going to countries on the BRI. The majority of FDI deals have been in manufacturing, while the Biofuels. The diversion of food commodities to the construction and infrastructure sector has seen more production of biofuels will also affect demand for rapid growth. 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 could but is supported through various forms of mandates result in shifts in demand for energy away from the and trade measures (De Gorter, Drabik, and Just decentralized use of biomass, towards centralized 2015). Biofuels come principally in the form of generation of electricity from fossil fuels and maize-based ethanol from the United States, sugar- renewable sources of energy. based ethanol from Brazil, and edible 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. In energy markets, pollution or climate- motivated by energy security and, especially, environmental benefits (Hill et al. 2006). However, interest has waned recently and biofuel production 1 Bhattacharya et al. (2012); McKinsey Global Institute (2013). EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U S 1 75 BOX SF1.2 Commodity consumption: Policies and consequences (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 One Belt, One 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, IEA, OECD, USDA, World Bureau of Metals Statistics, World Bank. A. Change in the average annual number of outward foreign direct investment (FDI) deals received by EMDEs before and after 2013. The sample covers EMDEs, and the period covered is 2003-2015. BRI stands for Belt and Road Initiative. B. CO2 emissions in kilograms (kg) per million British thermal units (mmbtu) of fuel consumed. C. Shaded area (2017-25) represents OECD (2017) projections. Units are million barrels of oil per day. growth has slowed amid evidence of the limited Trade policies and sanctions. Trade-restricting environmental and energy independence benefits of measures could have direct and indirect effects on biofuel policies (Searchinger et al. 2008; German et commodity consumption and prices. A broad-based al. 2010). For example, biofuel production growth increase in tariffs would have major adverse exceeded 20 percent per annum during 2001-10 but consequences for global trade and activity (Ossa slipped to about 4 percent during the past five years. 2014; Nicita, Olarreaga and Silva forthcoming). An Current projections by the Organization of escalation of tariffs up to legally-allowed bound rates Economic Cooperation and Development and the could translate into a decline in global trade flows Food and Agriculture Organization of the United amounting to 9 percent (Kutlina-Dimitorva and Nations (OECD/FAO) point to even lower biofuels Lakatos 2017). Such a fall in trade volumes would production growth in the next decade (Figure have a direct negative impact on oil consumption, SF1.2.1). given its use in transport fuel. A 5 percent drop in global trade could reduce international fuel oil Food wastage. Although difficult to measure, by bunker demand by at least 180 kb/d, or roughly 5 some accounts food waste may account for a quarter percent (IEA 2018). A reduction in global activity of global food production, amounting to roughly arising from trade-restricting measures would also US$680 billion in high income countries and US$ reduce commodity demand. Commodity prices are 310 billion in developing countries, according to the particularly sensitive to changes in growth in China, Food and Agriculture Organization of the United with a 1 percentage point shock to Chinese growth Nations (FAO 2018). Policy interventions and associated with a fall in prices of 5 percentage points technological improvements could significantly over two years (World Bank 2015a). Finally, the reduce food waste, which in turn would reduce imposition of sanctions could affect prices if they demand for food commodities (Bellemare et al 2017; disrupt operations by major commodity-producing Delgado, Schuster and Torero, 2017). nations or companies. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 76 S P E C I AL FO C U S 1 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 growth in the following five years by 1 percentage adoption of new technologies, including efficiency points. improvements that further reduce consumption (Arezki and Matsumoto, 2017). An accelerated These alternative growth paths make a significant uptake of more fuel-efficient technologies (e.g., difference to the projections, especially for the electric vehicles and natural gas-powered most income-elastic products (Figure SF1.8). commercial trucks) could also reduce crude oil consumption prospects (Cherif, Hasanov, and • Faster-growth scenario. In a faster-growth Pande 2017; International Energy Agency 2017). scenario, global metals consumption growth The uptake of more climate-friendly technologies could be one-third higher than under the will also lead to shifts in demand for the metals baseline scenario and remain virtually at its and minerals that are required to manufacture new post-crisis rates. Global and EM7 energy technologies. Countries that are key suppliers of consumption growth might also be 0.6-0.7 these elements could benefit from these percentage point stronger than under the developments. Low carbon energy systems are baseline scenario and could rise above post- likely to be more metal intensive than high-carbon crisis rates. Aggregate food consumption is systems, although the use of commodities varies little changed from baseline, but there is greatly between different low-carbon technologies further substitution away from rice and wheat (World Bank 2017b). (with low income elasticities) towards maize and soybeans (with higher elasticities). Policy implications • Slower-growth scenario. A slower-growth The baseline scenario outlined above suggests scenario would set back global metals consumption growth of metals and staple foods consumption growth, relative to baseline, by will likely slow over the next decade while that of one-third (1 percentage point) and global energy will remain well below pre-crisis rates. energy consumption growth by almost one- More modest commodity consumption growth, half (0.9 percentage point). Food all else equal, would dampen pressures on prices. consumption growth would, again, weaken only marginally with offsetting changes to rice Many EMDEs, especially smaller ones, are heavily and wheat compared to maize and soybeans. 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 do not allow for the more than one-quarter of revenues in four endogeneity of prices. Endogenous relative price EMDEs including Mexico and Russia (World changes would moderate the changes, in either Bank 2017a). 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 a significant diversify. Over the medium term, diversification expansion of consumption of energy and other away from resource-based production would help commodities 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. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U S 1 77 Cross-country studies underscore that greater faster growing EMDEs. Aluminum and copper diversification of exports and government revenues consumption would continue to grow steadily. bolsters long-term growth prospects and resilience Rice and wheat consumption growth is expected to external shocks (Lederman and Maloney 2007; to slow as population growth slows, while rising Hesse 2008; IMF 2016a). The successful incomes will result in a shift to foods such as meat, diversification experience of some energy which will require growing inputs of maize and producers (e.g., Malaysia, Mexico) highlight the soybeans. Slowing GDP growth and industrial benefits of both vertical diversification (e.g. in rebalancing notwithstanding, China will remain crude oil, natural gas, and petrochemical sectors) the dominant source of EM7 commodity as well as horizontal diversification. This involves consumption growth. reforms to improve the business environment, education, and skills acquisition (Callen et al. Advances in global technology, shifts in 2014). preferences, and policies to encourage cleaner fuels could trigger much steeper slowdowns in global Fiscal reforms also remain necessary in a majority use of some commodities than current trends of commodity-exporting EMDEs to establish a indicate. A rapid shift away from investment- and firmer foundation for long-term fiscal industrial production-driven growth in China sustainability (Mendes and Pennings 2017). The could sharply lower its demand for metals. establishment of well-managed strategic Similarly, tightening of environmental regulations investment funds with resource revenues can help could reduce use of coal more than in the baseline. in this regard (e.g. Chile, Norway). These funds Improved technologies including electric cars, can create opportunities for attracting private lower costs of alternative fuels, and policies investment, deepening domestic capital markets, favoring cleaner fuels, could reduce the use of and building the capacity of governments to act as petroleum in transportation. However, they could professional long-term investors (Halland et al. also increase demand for raw materials used in the 2016). production of these technologies, such as rare earths. Reforms to fiscal and monetary policy frameworks could also help reduce procyclicality and foster It is possible that demand for most commodities resilience to commodity price fluctuations will decelerate over the next decade as economies (Frankel 2017). However, such policies cannot mature, infrastructure needs are met, and GDP mitigate the real effects of commodity market and population growth slows. The risks are mainly changes discussed here. on the downside. Much of future GDP growth will come in the services sector, which is not materials-intensive, while environmental and Conclusion resource concerns and new technologies will reduce demand for traditional raw materials, as On current trends, metals and foods consumption well as encouraging substitutions between them. growth could slow by one-quarter (metals) and These trends have already become evident in one-third (foods) over the next decade. Energy advanced economies, and a similar path could be consumption growth would remain broadly expected for the major EMDEs. constant at post-crisis rates, and shift towards * * * * *   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 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  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  ij , m / (1   k 1 ij , k ) p I C( i ,WORLD , t )   ci , j , t  popi , t i 1 ci , j , t popi , t EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 80 S P E C I AL FO C U S 1 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 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, Oil World, U.S. Department of Agriculture, World Bureau of Metal Statistics. Notes: Numbers indicate shares of global consumption. Refined consumption for aluminum, copper, lead, nickel, tin, and zinc. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U 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 Congo, Dem. United Arab 7 Norway 2.3 3.0 Peru 2.5 4.4 Norway 3.3 Rep. 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, Oil World, U.S. Department of Agriculture, World Bureau of Metal Statistics. Notes: Numbers indicate shares of global production. Refined production for aluminum, copper, lead, nickel, tin, and zinc. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 82 S P E C I AL FO C U S 1 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 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 Stuermer (2017) and 3 EMDEs, annual ARDL aluminum, 0.9 for copper, 0.7 for zinc, 0.6 for tin and data, 1840-2010 0.4 for lead. Aggregate income elasticity of energy demand is estimated to be 0.74. Income elasticity is found to rise with higher incomes, in contrast to other studies. This OLS with panel data, 132 countries, annual results from the inclusion of low income countries, Burke and Csereklyei (2016) in levels and growth data, 1960-2010. which typically have a much lower income elasticity of rates. demand for energy 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 93 countries, annual Csereklyei and Stern (2015) OLS in growth rates. estimated to be between 0.6 to 0.8. As income rises, data, 1971-2010. the rate of growth of energy use per capita declines. Review of 38 papers providing 258 estimates Huntington, Barrios and Arora Review of existing Income elasticity of oil demand is found to be 0.5 on of 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 Roger Fouquet (2014) VECM transport peaks at 3 before declining to around 0.3 as data, 1700-2000. income rises. 30 OECD and 26 non- ECM with pooled For OECD countries, income elasticity estimated to be Joyeux and Ripple (2011) OECD countries, annual mean group 1.1, for non-OECD countries, income elasticity of data, 1973-2007 estimators. energy demand estimated to be 0.9. 30 EMDEs and 21 Difference-in- Find income elasticity of primary energy demand of Jakob, Haller and Marschinski advanced economies, differences estimator 0.63 for EMDEs and 0.18 for advanced economies (2011) annual data, 1971-2005. on panel data. (although statistically insignificant). Review of 10 global Review of different Find median income elasticities for rice and wheat Vanin et al (2014) economic models for modelling close to 0.1. First and third quartile range of estimates agricultural commodities approaches range from 0 to 0.2. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U S 1 83 ANNEX TABLE SF.1.4 Country samples, by commodity modelled 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 Burma China China Denmark Brazil Brazil Cameroon Canada Hong Kong SAR, Finland Finland Burkina Canada Canada Chile China Denmark France France Cameroon Chile Chile China Finland Germany Germany Chad China China Colombia France Greece Greece Chile Colombia Colombia Ecuador Germany India India China Ecuador Cote d'Ivoire Egypt Greece Italy Ireland Colombia Egypt Cuba Guatemala India Japan Italy Congo, Rep. Guatemala Ecuador India Indonesia Mexico Japan Costa Rica India Egypt Indonesia Ireland Netherlands Mexico Cote d'Ivoire Iran Ghana Iran Italy Portugal Netherlands Cuba Japan Guatemala Japan Japan South Africa New Zealand Dominican Rep. Kenya Honduras Mexico Mexico Korea, Rep. Norway Ecuador Lesotho India Morocco Netherlands Spain Portugal Egypt Mexico Indonesia Nigeria New Zealand Sweden South Africa El Salvador Morocco Iran Pakistan Norway Switzerland Korea, Rep. Gambia, The Nepal Japan Paraguay Portugal Taiwan, China Spain Ghana New Zealand Kenya Peru Singapore Turkey Sweden Guatemala Nigeria Lesotho South Africa South Africa United Kingdom Switzerland Guyana Norway Madagascar Korea, Rep. Korea, Rep. United States Taiwan, China Honduras Pakistan Malawi Switzerland Spain Turkey India Paraguay Mexico Taiwan, China Sweden United Kingdom Indonesia Peru Morocco Thailand Switzerland United States Iran South Africa Nepal Turkey Taiwan, China Japan Sudan Nicaragua United States Thailand Kenya Taiwan, China Nigeria Uruguay Turkey Liberia Tunisia Pakistan Venezuela United Kingdom Madagascar Turkey Panama Zambia United States Malawi Uruguay Paraguay Zimbabwe Malaysia Zambia Peru Mali Zimbabwe Philippines Mexico Senegal Morocco South Africa Nepal Korea, Rep. Nigeria Taiwan, China Pakistan Thailand Panama Turkey Paraguay United States Peru Uruguay Philippines Venezuela Senegal Vietnam Sierra Leone Zambia Korea, Rep. Zimbabwe Sri Lanka Taiwan, China Thailand Togo Turkey United States Uruguay Venezuela Note: 1 indicates metals exporter; 2 indicates energy exporter, 3 indicates agricultural exporter. A country is defined as an exporter if exports of the commodity account for 20 percent or more of their total exports. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 84 S P E C I AL FO C U S 1 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 ANNEX TABLE SF.1.5 Estimation results for pooled mean group estimation Soybeans Aluminum Zinc Copper Oil Coal Gas 1/ Gas Rice Wheat Maize 1/ Maize Soybeans 1/ Long run Log per capita 3.50*** 2.61*** 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*** -0.18*** -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*** -0.27*** -0.14*** -0.07*** -0.10*** -0.18*** -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** 10.56 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) (14.33) (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** -0.43 0.07 -0.17 0.70*** -1.51 0.08 0.07 0.15 1.33 change in per (0.47) (0.72) (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) (0.01) (0.01) (0.02) (0.15) (0.02) (0.10) (0.10) -4.56*** -3.32*** -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 10.02 3.26 3.66 4.53 3.02 6.98 1.45 6.98 1.62 5.43 5.86 2.31 test-statistic p-value 0.15 0.02 0.35 0.30 0.21 0.39 0.03 0.69 0.03 0.66 0.07 0.12 0.32 log likelihood 886.27 690.46 743.02 3065.46 1557.88 1191.57 1141.82 1647.65 1141.82 1534.65 1462.82 85.70 47.73 Observations 1,668 1,680 1,275 1,683 1,428 1,443 1,443 2,692 1,781 2,372 2,372 1,500 1,500 Number of 33 33 25 33 28 33 33 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 2018 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. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U S 1 85 ANNEX TABLE SF.1.6 Estimation results under GMM 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. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 86 S P E C I AL FO C U S 1 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 ANNEX TABLE SF.1.7 Estimation results including trend Aluminum Zinc Copper Oil Coal Gas Maize Rice Soybeans Wheat 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 -0.26*** 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) (0.20) (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 2,692 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, DC: World Bank Stuermer, M. 2018. “150 Years of Boom and ———. 2015c. How important are China and Bust: What Drives Mineral Commodity Prices?” India in global commodity consumption? Macroeconomic Dynamics 22 (3): 702-717. Commodity Markets Outlook, July 2015. Washington, DC: World Bank Tilton, J. 1990. World Metal Demand: Trends and Prospects. Washington, DC: Resources for the ———. 2016a. Global Economic Prospects: Future Press. Divergences and Risks Washington, DC: World Bank Urge-Vorsatz, D., G. Miladinovab and L. Paizs. 2006. “Energy in transition: from the iron curtain ———. 2016b. Global Economic Prospects: to the European Union.” Energy Policy 34 (15), Spillovers amid Weak Growth. Washington, DC: 2279–2297 World Bank United Nations, Department of Economic and ———. 2017a. Global Economic Prospects: Weak Social Affairs, Population Division. 2017. World Investment in Uncertain Times. Washington, DC: Population Prospects: The 2017 Revision. 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Washington, DC: World Bank EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) SPECIAL FOCUS 2 Corporate Debt: Financial Stability and Investment Implications EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U S 2 93 Corporate Debt: Financial Stability and Investment Implications Corporate debt in emerging market and developing economies (EMDEs) has, on average, risen over the past decade. This trend raises concerns for these economies’ 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 via By 2017, corporate debt in emerging market and investment, especially in the context of rising developing economies (EMDEs) had reached corporate debt coinciding with a period of levels that significantly exceeded the average prior subdued post-crisis private investment growth to the Global Financial Crisis as well as the longer- (World Bank 2017). A corporate debt overhang term average (1995-2007; Figure SF2.1). EMDE could dampen investment and the expansion of corporate debt now also rivals the size of productive capacity necessary for healthy growth, government debt. While the increase in corporate as a disproportionate amount of corporate indebtedness among EMDEs partly reflects revenues would need to be paid to creditors rather improved and deeper access to capital markets, it than equity investors. This channel can adversely raises two concerns. impact the growth prospects of EMDEs, and is the primary topic addressed in this Special Focus. First, excessive corporate debt can threaten financial stability, leading to distress in the non- The Special Focus first discusses trends in EMDE financial corporate sector and systematic balance corporate debt and associated financial stability sheet difficulties in the banking sector. Most risks. It subsequently assesses empirical linkages directly, as policy interest rates rise and the cost of between corporate debt and investment activity debt service increases, incidence of corporate based on firm-level data, with a focus on the “debt distress tends to intensify. Firms may also become overhang channel.” The analysis is on nonfinancial more vulnerable to balance sheet shocks, such as corporations, as they are foremost in private through currency mismatches associated with U.S. capital investment activity and thus are most dollar appreciation.1 Deterioration in nonfinancial germane to the linkage between corporate debt corporate balance sheets may transmit to the and investment. banking sector as well. Previous episodes of rapid corporate debt build-up have at times coincided More specifically, this Special Focus addresses four with episodes of financial stress, which can have questions: adverse macroeconomic consequences.2 • How have corporate debt and private investment evolved in emerging market and developing economies (EMDEs)? Note: This Special Focus was prepared by Eduardo Borensztein and Lei Sandy Ye. Research assistance was provided by Miyoko Asai. 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. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 94 S P E C I AL FO C U S 2 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 FIGURE SF2.1 Corporate debt in EMDEs: General trends • What are the main policy implications associated with elevated corporate debt? Corporate debt ratios in EMDEs have risen over the past decade, and are now substantially above long-term averages. The increase in corporate debt has occurred in both commodity exporters and importers. Credit This Special Focus shows the rise in corporate growth has slowed in recent years, especially in a few large commodity debt over the past decade in EMDEs, and that a exporters. The increase in corporate debt has been especially pronounced among several large EMDEs across diverse regions. increasing share of debt is held by firms with higher risk (e.g., lower interest coverage ratio). A. Corporate debt B. Corporate debt: EMDEs ex China Moreover, elevated corporate debt has been associated with weaker investment growth. At both the country and firm level, private investment growth has been negatively correlated with corporate debt levels. Moreover, the adverse effect of debt overhangs on investment is particularly strong on large and highly-levered firms. This investigation studies this medium- term channel that may impact investment for an extended period of time even absent the C. Corporate debt: EMDE commodity D. Corporate credit growth occurrence of a crisis. importers vs exporters This analysis contributes to the literature on corporate debt overhangs by analyzing the reaction of investment to debt overhang by large and small private firms for a diverse sample of large EMDEs. It subsequently explores a number of cross-sectional dimensions, such as firm size, that may affect the sensitivity of investment to debt overhang across firms. The literature on this linkage has thus far focused on stock exchange E. Corporate debt: pre and post-crisis F. Corporate debt in EMDE regions listed firms, which may not fully reflect the state of the corporate sector in EMDEs. The analysis points to both cyclical and structural policy priorities. • From a cyclical perspective, the financial stability risks argues for the build-up of fiscal buffers to enable support in the event that Sources: Bank for International Settlements, Institute for International Finance. corporate defaults surge and begin to have A-C. GDP-weighted averages for 16 EMDEs (7 commodity importers and 9 commodity exporters) systemic consequences. Prudential regulations and 27 advanced economies (AE). E. Average annual corporate debt to GDP ratio. Each blue dot denotes an economy. Excludes that monitor liquidity and currency risks in outlier. Pre-crisis and post-crisis denote 2003-07 and 2010-17, respectively. Dotted line denotes 45 degree line. large firms’ debt would also be appropriate, F. East Asia and Pacific (EAP, ex China), Europe and Central Asia (ECA), Latin America and the especially since the boom in corporate debt Caribbean (LAC), Middle East and North Africa (MNA), South Asia (SAR), and Sub-Saharan Africa (SSA) include 4, 8, 11, 8, 4, and 7 economies, respectively (includes expanded sample with IIF data). has been concentrated among large (and likely GDP-weighted averages. systemically important) firms. • Which financial stability risks are associated • From a structural policy perspective, in cases with elevated corporate debt? where debt overhangs are slowing private investment over an extended period, policy • Does a “debt overhang” dampen capital measures to curb debt bias, such as thin investment in the EMDE corporate sector? capitalization rules or promoting equity EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U S 2 95 market development, are warranted. Policies most pronounced in the East Asia and Pacific to encourage equity financing and promote (EAP) and Europe and Central Asia (ECA) debt/equity balance are especially relevant for regions.5 Corporate debt ratios also rose in small firms. Similarly, policies to strengthen most other regions of the world over the past bankruptcy regimes may both improve decade, and tend to range between 30 to 40 investment activity by increasing investor percent of GDP. confidence and by mitigating the macroeconomic costs of bankruptcies when • Corporate versus other sectors. Corporate they occur. debt is, on average, substantially higher than household and financial sector debt in Corporate debt landscape EMDEs. By 2017, corporate debt is now comparable in magnitude to sovereign debt in in EMDEs EMDEs (Figure SF2.2). Corporate debt has, on average, risen from about • Domestic versus foreign currency. The rise in 60 percent of GDP in 2006 to 86 percent of GDP corporate debt has been supported by both in 2017 (Figure SF2.1). This increase has been borrowing in local and foreign currency.6 especially pronounced in China, where corporate Outside of China, the contribution of foreign debt reached more than 160 percent of GDP by currency debt has been more substantial, 2017. Outside of China, corporate debt has risen constituting more than half of the increase in by more than 10 percentage points of GDP over the corporate debt ratio over 2010-2017. 2006-2017.3 Trends in EMDE corporate debt are quite • External versus domestic sources. More than heterogeneous across countries, and their rise has one-tenth of outstanding corporate debt in been concentrated in larger EMDEs. In 2016-17, EMDEs is financed by cross-border sources.7 a number of large emerging economies, especially Outside of China, about one-third of in Latin America and the Caribbean and Europe corporate debt is financed by cross-border and Central Asia, experienced lower credit growth, sources, consistent with the trends for partly due to higher credit risks associated with currency composition of corporate debt. higher debt built-up in earlier years. • Bond versus bank debt. Bond debt remains a A number of other features characterize recent modest, but increasing fraction, of total developments in corporate debt among EMDEs: corporate debt, as corporates have shifted from bank loans to bond issuances over the • EMDEs versus advanced economies. By past decade (Ohnsorge and Yu 2017; Feyen et 2017, China’s corporate debt to GDP ratio al. 2015; Ayala et al. 2017; World Bank has far exceeded the average of advanced 2016). As of 2017, debt securities are economies. For other EMDEs, corporate debt estimated to be about one-fifth of EMDE levels are still substantially below that of corporate debt. Bond issuances in EMDEs advanced economies.4 • Regional dimensions. The increase in 5 In the Sub-Saharan Africa (SSA) region, growing public debt corporate debt ratios over the past decade was burdens of low-income countries are of particular concern. Please see Chapter 2 (Sub Saharan Africa) for more details. 6 The increase in foreign currency debt is not driven by nominal exchange rate valuation. Over the period 2006-2017, the average real 3 In China, the decline in corporate the debt-to-GDP ratio over the effective exchange rate in the sample EMDE economies has past two years has been primarily driven by slowing credit growth. depreciated by about 5 percent. Outside of China, while credit growth has also slowed, faster nominal 7 Based on BIS data, external sources of corporate funding can be GDP growth in 2017 has also contributed to the decline in the proxied by the sum of the stock of outstanding corporate debt-to-GDP ratio. cross-border bank claims and amount of outstanding international 4 The benchmark sample of 16 EMDEs with BIS data consists of debt securities in each country. The residual would be domestic mostly large EMDEs that comprise four-fifth of EMDE GDP. funding. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 96 S P E C I AL FO C U S 2 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 FIGURE SF2.2 Corporate debt in EMDEs: Composition enterprises. This was mostly financed domestically through the banking system as well as nonbank Corporate debt in EMDEs has reached levels comparable to, if not exceeding, that of government debt. Outside of China, foreign currency financial intermediaries. The increase in the debt has contributed substantially to the rise in EMDE corporate debt in corporate debt-to-GDP ratio was spurred by the recent years. economy’s investment-intensive growth model over most of the post-crisis period, and has A. Debt across sectors: including B. Debt across sectors: excluding China China contributed to overcapacity in some industries (Maliszewski et al. 2016). Corporate investment growth has slowed sharply since 2012, both in state-owned enterprises and 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 C. Corporate debt increase: domestic D. Corporate debt increase: domestic vs foreign currency contribution, inc vs foreign currency contribution, ex associated with a deterioration of corporate China China financial performance. Policies that were adopted to address the associated vulnerabilities include macroprudential measures to tighten lending conditions for real estate, capacity reduction targets for heavy industries, and restructuring for weak state-owned enterprises. Use of bankruptcy procedures has also increased (IMF 2017a; Maliszewski et al. 2016). Source: Bank for International Settlements, Institute for International Finance. A.B. GDP weighted averages for 15 EMDEs plus China (A). Corporate debt and financial C.D. Percentage contribution of foreign and local currency-denominated corporate debt to total change in corporate debt to GDP ratio over the period denoted. stability Over the past decade, increased access to debt, tend to be fixed rate, as opposed to floating especially non-bank credit, has partly reflected rate bonds (Gozzi et al. 2015). development of EMDE financial markets.8 However, as EMDE corporate debt has risen, risks • Maturity. Maturity of bonds and syndicated to financial stability have grown in several loans in EMDEs have remained stable over dimensions, both external and domestic. the past decade (averaging about 7 years). Large firms were able to issue longer-term External dimensions. During most of the post- bonds, especially in the international capital crisis period, debt service and financing costs were markets (Cortina, Didier, and Schmukler contained by low global interest rates and Forthcoming). For smaller firms, the use of compressed risk premiums. Global, rather than long-term finance remains limited compared firm- and country-specific factors, have been more to advanced economies (World Bank 2015). important drivers of the increase in corporate debt Corporate debt in China has risen sharply, from 8 For example, credit registry coverage has increased in EMDEs 107 to 163 percent of GDP from 2006-2017 from an average of 4 percent of adults to 13 percent from 2006-2017, (Figure SF2.3). Although the stock of corporate and has helped expand financial access (Love, Martínez Pería, and debt has declined in the past two years, it remains Singh 2013). These economies were also increasingly able to issue debt in the home currency (Hale, Jones, and Spiegel 2016). Other elevated by international standards. The rise has capital market developments in EMDEs are highlighted in Cortina, been concentrated in the real estate, mining and Didier, and Schmukler (Forthcoming); Didier and Schmukler construction sectors, and in state-owned (2014); and Didier, Montanes, and Schmukler (2017). EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U S 2 97 (IMF 2015; Feyen et al. 2015; Ayala et al. 2017). FIGURE SF2.3 Corporate debt in China Countries that had experienced a higher rise in Corporate debt in China has risen sharply over the past decade, although corporate debt also tended to have more open it has stabilized in the past two years. Leverage has been particularly capital accounts. Higher debt is also associated pronounced in heavy-industry sectors, such as mining and utilities. The increase in corporate debt coincided with a deceleration in investment with riskier corporate balance sheets (Figure growth and business conditions. SF2.4). A. Corporate debt B. Firm leverage across industries There is a risk of a disorderly tightening of global financing conditions as monetary policy normalizes among the advanced economies (Chapter 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 US dollar may C. Investment growth D. Business confidence also weaken balance sheets to the extent that foreign currency liabilities are not matched by assets. Many EMDE multinationals have issued bonds for intracompany financial intermediation across subsidiaries, channeling external financial conditions into the domestic financial system (Bruno and Shin 2017; Shin 2013). Domestic dimensions. Although moderate levels Source: Bank for International Settlements, Haver Analytics, Orbis. of corporate debt can be benign, excessive levels of B. Percent of sales. Medians across firms in 2015. Based on Orbis data sample for mostly non-state- debt for individual corporations may affect bank owned private firms. C. Period average annual nominal growth in fixed asset investment. “SOE” stands for state -owned balance sheets and banks’ ability to extend credit, enterprises. “Private” stands for private enterprises. D. China industrial enterprise survey of 5000 leading enterprises to rate their perception on selected given bank debt still constitutes about four-fifth of topics. Index higher than 50 indicates improvement. Period averages of quarterly data. outstanding EMDE corporate debt. The potential impact on loan supply could subsequently lower aggregate demand and collateral values. Higher corporate debt also has implications for the public longer average maturity, it bears other sector balance sheet, given the contingent liability vulnerabilities. These include weaker monitoring it may pose, especially during periods of crisis standards associated with the more dispersed (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 EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 98 S P E C I AL FO C U S 2 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 FIGURE SF2.4 Corporate debt in EMDEs: coverage ratios and an interest rate shock may Macroeconomic vulnerabilities boost the share of risky debt from 25 to 31 In the majority of EMDEs, the increase in the corporate debt ratio has been percent (Chow 2015; Beltran et al. 2017). These in tandem with an increase in foreign currency debt. The increase in the vulnerabilities may be mitigated to some extent, corporate debt ratio has been more pronounced in economies that had however, by the rise in corporate profitability in more open capital accounts, and are associated with higher corporate vulnerability. Given a growing amount of international bonds is expected to 2017. mature in EMDEs over the next three years, rollover risks may rise if financial conditions tighten abruptly. Leverage in the EMDE corporate sector is highly heterogeneous and has been concentrated in a A. Change in corporate debt: total vs B. Change in corporate debt: financial foreign, 2006-post-crisis peak openness number of industrial sectors, such as construction 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, C. Coprorate vulnerability index: high D. International corporate bonds even if corporate debt were moderate in and low debt maturing in one year: EMDEs aggregate. 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 Source: Bank for International Settlements, Chinn-Ito Index, Feyen, et al. (2017), Institute for Interna- tional Finance, Haver Analytics, World Bank. dampening investment and long-term growth.10 A. Post-crisis peak is country and indicator-specific and denotes the highest corporate/foreign curren- cy corporate debt-to-GDP ratio in each country over 2010-2017. Each dot refers to an economy. The increase in China’s corporate debt has raised Excludes outlier. B. Median corporate debt change from 2006-postcrisis peak year, which is country-specific. High/low concerns regarding investment efficiency, financial openness cutoff is based on the median capital account restrictiveness index of Chinn and especially among state-owned enterprises Ito (2006, updated to 2015), and for each country is measured over the average of 2010-15. Includes 16 EMDEs. (Maliszewski et al. 2016). In India, the rise in C. 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, corporate leverage has been evident in a number of 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 7 indicators) to 1 (i.e., all firms in a particular country are financially vulnera- industries (mining, transportation, construction), ble in all 7 indicators). Y-axis denotes medians. Includes 16 EMDEs for 2010-17. High/low debt cutoff is based on medians. and may have been a significant factor behind D. Denotes amount of international bonds outstanding with remaining maturity of 12 months as of weak private investment growth (Das and Tulin Q12018. Includes 64 EMDEs. 2017). In Brazil, high corporate leverage also such firms can harm macroeconomic conditions, affect lenders (via reduced borrowing demand and 9 Large firms are defined as those with assets greater than $50 million, similar to the criteria used by the European Union. Results higher losses and NPLs) and impact government are not sensitive to alternative measures of large firms, such as those finances via cyclical revenue weakness. This defined by the IFC (larger than $15 million). In robustness checks of suggests that higher corporate leverage can make the empirical analysis, the sample was broken into small, medium, and large firms based on the IFC criteria, but there is no significant the corporate sector more vulnerable to weaker differences between small and medium-sized firms. growth or higher debt service costs. Stress tests on 10 See Acharya et al. (2015); World Bank (2016); IMF (2015); EMDE corporates have shown that a combination Feyen et al. (2017); Mooij and Hebous (2017); Demirgüç-Kunt, Martinez-Peria, and Tressel (2015); Alter and Elekdag (2016); Brown of exchange rate shocks and weaker-than-expected and Lane (2011); Beltran, Garud, and Rosenblum (2017); Corsetti et growth could significantly erode firms’ interest al. (2015); and Alfaro et al. (2017). EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U S 2 99 contributed to weak investment growth during FIGURE SF2.5 Corporate debt riskiness in EMDEs 2014-early 2017 (IMF 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 experienced weak private investment growth. is also significantly higher in domestic firms as compared to multinationals, 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 is a firm’s debt, the greater is the extent to which equity holders need to share the fruits of that investment with debt holders. This reduces the C. Industry leverage (ex China) D. Leverage: Domestic vs foreign ownership attractiveness 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 E. Debt-to-sales ratio F. Net investment rate bonded and bank debt, and is developed to conform to the basic insight of the seminal theory of Myers (1977) – a firm is more likely to experience debt overhang when its debt relative to earnings is high. The measure of debt overhang used here may be more appropriate than a simple measure of leverage, because it accounts for a firm’s debt relative to earnings capacity.12 The analysis confirms that firms with high debt Sources: Feyen et al. (2017), Haver Analytics, Orbis, World Bank (2018). A. The Corporate Vulnerability Index (CVI) tracks financial conditions of the non-financial corporate overhang tend to have lower net investment rates sector in 69 EMDEs. The CVI uses firms' balance sheet information covering seven indicators: inter- (Figure SF2.6). est 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 7 indicators) to 1 (i.e., all firms in a particular country are financially vulnerable in all 7 indicators). The CVI is calculated using data from 14,207 firms. For more details, see Feyen et al. (2017). Vertical lines indicate interquartile range. 11 This relationship does not appear to have been driven by B. Denotes share of total debt held by firms with interest coverage ratio less than 2 (threshold for differences in cross-country growth, as countries with a higher “risky” firms). Based on a balanced sample of 25,905 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 data in Orbis for 13 EMDEs. efficiency,” also experienced lower private investment growth. A E.F. Sales-weighted averages of debt to sales ratio and net investment rate based on a fully bal- similar metric was used to assess investment efficiency for China by anced sample of firms over 2008-2015. Maliszewski et al. (2016). 12 This analysis draws on Borensztein and Ye (2018). Other works that have used this measure to proxy for debt overhang include IMF (2018); Chen and Lu (2016); and Kalemli-Ozcan, Laeven, and While the theory that corporate debt overhang Moreno (2015). In the baseline specification, results on leverage are consistent with literature that uses leverage as a proxy for a debt dampens investment dates back several decades, constraint and finds a negative relationship between leverage and the empirical literature on the linkage in EMDEs investment (Das and Tulin 2017; Magud and Sosa 2015). is more recent. A few papers report that leverage EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 100 S P E C I AL FO C U S 2 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 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 Elevated 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 level. 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, 2011-2017 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, this 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/EBIT ratio in low and high that include both large, publicly-traded and and low corporate-debt-to-real-GDP investment firms smaller, privately-owned firms for a diverse group growth ratio, 2011-17 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 13 EMDEs for 2007-2015 is modelled as function Sources: Bank for International Settlements, International Monetary Fund, Institute for International Finance, Haver Analytics, Oxford Economics. of the ratio of EBIT to total debt, in addition to a A. GDP-weighted average of 12 EMDEs (available data among BIS corporate debt sample coun- number of standard correlates that are associated tries). Data for 2016-2017 are estimates for some EMDEs. Long-term average refers to 1995-2008. Period average of annual growth rates. with investment (e.g., sales growth, cash flows). B. High-low denotes country-year observations of corporate debt to GDP ratio above/below the median. Data are not available for 2016-17 for 5 economies. Includes 16 EMDEs. Y-axis denotes The analysis includes fixed effects at the firm-level average private investment growth. C. High-low denotes country-year observations of (corporate debt GDP ratio to real GDP growth) and the country-industry-year level, which further above/below the median. Includes 16 EMDEs. Data are not available for 2016-17 for 5 economies. Y-axis denotes average private investment growth. control for other observed and unobserved factors D. Low and high investment rates denote the bottom and top one-thirds, respectively, of the invest- that may impact investment activity, such as ment rate distribution. Medians in 2015. Investment denotes net investment. Based on all available data in Orbis for 13 EMDEs. macroeconomic shocks (See Annex SF2.1 for more details on the data and empirical methodology). In the baseline specification, the analysis examines the relationship between debt contributes to weak investment growth in EMDEs service capacity and investment, conditional upon (e.g., World Bank 2017, IFC 2016, Magud and leverage. Sosa 2015, Das and Tulin 2017). At the firm Linkage between corporate debt and investment. The level, Magud and Sosa (2015) and IFC (2016) results suggest that debt overhangs are negatively introduce a debt variable for a cross section of associated with investment across EMDE firms. In listed firms in various EMDEs, and found a other words, debt service capacity is positively 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. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U S 2 101 (and significantly) associated with net investment FIGURE SF2.7 Debt overhang-investment linkage across (Table SF2.1). This relationship is robust for firms samples that include and exclude China, although Investment is more sensitive to corporate debt service capacity among the sensitivity is smaller for the China sample.14 large firms and firms that are highly indebted. Furthermore, the relationship is not sensitive to the inclusion of cash flow or leverage as A. Small vs large firms B. High and low leverage firms 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 capacity from the 10th percentile to the 90th Sources: Orbis, World Bank. percentile is associated with about 1.5 percentage A. Denotes sensitivity of net investment to debt service capacity (in response to one-percentage point increase in debt service capacity), based on the specification in eq. (1) for small and large firms. point higher net investment to sales ratio. In the Large firms are defined as firms with assets greater than $50 million and include one fifth of the China and non-China samples, this interquartile sample. See section IV for more details. B. Denotes sensitivity of net investment on debt service capacity (in response from one-percentage increase is associated with about 1 percentage point change in debt service capacity) based on the specification in eq. (1), under low and high leverage. High-low leverage cutoff is based on the median within a country-industry pair, and thus the point and 2 percentage points higher investment share of highly leveraged firms is 50 percent. See section IV for more details. rates, respectively. These sensitivities amount to about one-third of the average level of net investment-to-sales ratio in both the non-China they hold. Large firms may also be more exposed and China sample. to international financial and goods markets, and thus be more sensitive to debt service costs In aggregate, debt overhang is estimated to be associated with fluctuations in global financing associated with 17 percent of the decline in the net conditions. Focusing on large firms is also investment-to-sales ratio in the sample from 2011- warranted for policy implications, as a growing 2015. This effect was concentrated in the China literature has shown that large firms’ performance sample, however, where deterioration in debt can have a systemic impact and is more correlated service capacity is higher than the non-China with aggregate growth of an economy (Gabaix sample and is associated with about half of the 2011), can be more sensitive to macroeconomic decline in investment from 2011-15. shocks (Alfaro et al. 2017), and serve as a key channel for foreign shocks transmission (di Small and large firms. The analysis also examines Giovanni, Levchenko, and Mejean 2018, 2014). whether the debt overhang-investment sensitivity varies across small and large firms, as a large By estimating the baseline equation for small and literature in macroeconomics and finance has large firms separately, the analysis finds that the established the importance of size for determining debt overhang effect is present among both groups a firm’s access to credit (e.g., Chodorow-Reich (Figure SF2.7). The coefficients for large firms in 2014; Gertler and Gilchrist 1994). Large firms, both the overall and non-China sample are larger are defined as firms with assets above $50 million, than those of smaller firms, although the tend to enjoy wider access to both bank credit and coefficient is not significant for China’s large bond markets, and thus may be more likely to firms. Estimates of the full regression show that increase their liabilities and run into a debt the debt overhang impact on investment among overhang when a serious shock hits. This is large firms is twice that of small firms. This evident by the disproportionate amount of debt suggests that larger firms are more sensitive to debt overhang, and that the consequences from their 14 The firm-level data for China contained only a limited number disproportionate undertaking of leverage may of state-owned enterprises. Thus, the data are more reflective of the outweigh the advantage they have in terms of effect of debt overhang on investment among firms in the non-state owned private sector. better access to finance. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 102 S P E C I AL FO C U S 2 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 FIGURE SF2.8 Policy implications suggest that the sensitivity of investment to debt overhang can vary significantly, conditional upon Fiscal space has deteriorated in EMDEs since the crisis, which may increase the costs of financial support in cases of systemic corporate pre-existing leverage levels. At high levels of debt, distress. Policies to promote equity market development in EMDEs, the debtor-equity holder conflict becomes more including strengthening corporate shareholder rights, can help achieve a more balanced debt/equity mix. Strengthening bankruptcy protection, prominent, as a greater proportion of positive Net- which lags behind global best practices in EMDEs, may help contain Present-Value (NPV) projects needs to be paid corporate distress costs from debt overhang. back to creditors. This means that debt service capacity becomes more binding, and causes higher A. Fiscal sustainability gap: EMDEs B. Equity market concentration cutbacks in investment when debt is high.15 Overall, the results suggest that the debt overhang channel is a vulnerability for investment across EMDE firms. This linkage is especially pronounced in large firms and highly leveraged firms.16 Policy implications C. Bankruptcy rights protection: D. Corporate shareholder rights: This Special Focus points to both financial EMDEs EMDEs stability and growth-related challenges facing policymakers in countries where corporates exhibit high debt levels. To reduce financial stability risks associated with elevated corporate debt, cyclical and prudential policies need to be the primary lever. To lift investment activity and mitigate the medium-term consequences of corporate debt overhang, structural policies geared toward promoting financial development are appropriate. Sources: International Monetary Fund, World Bank. A. Simple averages. A sustainability gap is defined as the difference between the actual fiscal bal- ance and the debt-stabilizing balance. Sustainability gaps are measured under current conditions. Cyclical policies The year of global recession (2009) is shaded in gray. B. Number of listed companies per 1,000,000 people. C. Denotes year 2017. Distance to frontier score for strength of insolvency resolution. EAP, ECA, Fiscal policy. Corporate distress, such as defaults LAC, MNA, SAR, SSA include 20, 19, 28, 16, 8 and 44 economies, respectively. Advanced economies (AE) includes 37 economies. Based on World Bank Doing Business report. arising from debt overhang, can provoke the D. Denotes year 2017. Distance to frontier score for strength of shareholder rights protection. EAP, government to provide sizable financial support ECA, LAC, MNA, SAR, SSA include 20, 21, 29, 16, 8 and 44 economies, respectively. AE includes 37 economies. Based on World Bank Doing Business report. and contribute to larger public debt burdens (World Bank 2016). This can cause public borrowing costs to rise and fiscal space to shrink, Low and highly indebted firms. Since the effect of and can force governments to tighten fiscal policy debt overhangs may be nonlinear, the analysis during times of weak growth. Fiscal space in examines whether the sensitivity varies across high EMDEs has deteriorated during the post-crisis and low-leverage firms. The threshold for high and low levels of debt is defined as the median within a country-industry pair, given that leverage 15 An alternative to exogenously-specified debt thresholds is to allow for endogenous thresholds in the relationship between debt levels may be to some extent driven by the overhang and investment. Threshold regressions following Hansen business structure and operational needs of an (1999) based on a balanced sample also suggests a similar nonlinear industry. The debt overhang sensitivity is found to relationship between debt overhang and investment. The threshold of debt under which debt overhang effect rises is estimated to fall in the be larger for firms with high debt levels, and 67-97th percentile of the debt to sales distribution. moreover, the effect of debt overhang is nearly 16 The analysis also experiments with sensitivity of debt overhang to three times higher in high-debt firms than low- investment across countries of varying financial development, creditor rights protection, and public debt levels. The analysis does not find debt firms (Figure SF2.7). This effect appears to consistent evidence that debt overhang sensitivity varies significantly be less strong for China, however. These results along these lines. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U S 2 103 period, even as corporate debt ratios have risen improve credit-relevant information flows and (Figure SF2.8). This suggests that the risk of break down information asymmetries, and corporate debt distress is an additional argument thereby help channel more credit to those for boosting or at least maintaining fiscal buffers firms that lack access to credit, especially in the present environment as insurance against among small and medium-sized enterprises corporate distress. (SMEs). Macroprudential policy. The analysis suggests • Many EMDEs have not developed their that large firms have taken on a disproportionate equity markets to full potential in part because share of aggregate debt stock, raising the of regulatory burdens that discourage new possibility that there could be financial stability listings and weaknesses in corporate implications if these firms faced balance sheet governance and shareholder rights that distress. This argues for increased stress testing of undermine the integrity and liquidity of stock corporate balance sheets and greater monitoring of markets. Equity financing helps increase firms’ the largest firms, especially their foreign exchange resilience, improves their creditworthiness, hedging and liquidity management. These types of and lessens the risk of large-scale, broad-based, policies—by increasing the scope for adequate and correlated corporate retrenchments. preparation for possible corporate distress—can Addressing these shortcomings would help to reduce the potential disruptions that could strengthen equity markets and mitigate debt result from tightening advanced economy biases. Promoting more balanced debt/equity financial conditions and an increased volatility of mix and incentivizing equity financing may be international financial flows. Preemptive policies particularly relevant for small firms, which that improve bank risk management and lending tend to rely mostly on bank and internal practices, such as liquidity requirements in Basel financing. III accords or caps on foreign currency exposure on bank balance sheets, would help constrain bank • An excessive accumulation of corporate debt risky borrowing (BIS 2013). These policies help can occur when explicit or implicit state prevent EMDE corporates from taking on guarantees are too generous, and when excessive debt under benign financing conditions bankruptcy regimes do not allow quick and and periods of high corporate profitability. fair debt workouts for companies. Overall, EMDE bankruptcy protection law lags Structural policies international best practices, implying scope for policy reforms in this area. Historical The analysis above illustrates the potential for experience suggests strengthening bankruptcy excessive corporate debt to dampen private protection can boost investment activity and investment, and there are a number of structural reduce corporate risk-taking, helping to relieve policy options that can help reduce this risk: the costs of debt overhang (e.g., Gopalan, Mukherjee, and Singh 2016; Acharya, • Most tax systems favor the use of debt over Amihud, and Litov 2011). For small firms, equity by providing tax deductibility for these policies should also promote long-term interest payments. Policies that curb these financing, which has been limited in EMDEs biases, such as thin-capitalization rules, have (World Bank 2015). Recent reforms in been found to be effective in lowering debt bankruptcy procedures have occurred in ratios and reducing financial distress under several EMDEs, including the introduction of certain conditions (Mooij and Hebous 2017). a new bankruptcy law in the Arab Republic of • The quality of debt could be increased by Egypt, strengthening of secured creditors’ improving credit information and collateral rights in India, and setting up new registries to shorten collateral recovery times restructuring mechanisms in Poland (IMF and reduce default losses. These policies help 2017c, World Bank 2018b). EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 104 S P E C I AL FO C U S 2 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 TABLE SF.2.1 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 0.021*** 0.019*** 0.019*** 0.018*** 0.035*** 0.029*** 0.032*** 0.028*** 0.011*** 0.010*** 0.009*** 0.008*** (inverse) (0.003) (0.002) (0.003) (0.003) (0.006) (0.006) (0.006) (0.006) (0.002) (0.002) (0.002) (0.002) 0.060** 0.026 0.037 0.006 0.119*** 0.098** Cash flows (0.025) (0.026) (0.031) (0.031) (0.040) (0.040) -0.014*** -0.014*** -0.014*** -0.014*** -0.019*** -0.018*** Leverage (0.002) (0.002) (0.002) (0.002) (0.004) (0.004) -0.079*** -0.065*** -0.080*** -0.066*** -0.105*** -0.086*** -0.106*** -0.087*** -0.043*** -0.036*** -0.044*** -0.037*** Maturity (0.012) (0.012) (0.012) (0.012) (0.019) (0.019) (0.019) (0.019) (0.012) (0.012) (0.012) (0.012) 0.012*** 0.012*** 0.013*** 0.012*** -0.001 -0.002 -0.001 -0.002 0.022*** 0.022*** 0.023*** 0.023*** Sales growth (0.001) (0.001) (0.001) (0.001) (0.003) (0.003) (0.003) (0.003) (0.001) (0.001) (0.001) (0.001) -0.055*** -0.081*** -0.056*** -0.081*** -0.049*** -0.080*** -0.051*** -0.080*** -0.054*** -0.075*** -0.052*** -0.072*** Size (0.005) (0.005) (0.005) (0.005) (0.007) (0.007) (0.007) (0.007) (0.005) (0.005) (0.005) (0.005) 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 0.362 0.364 0.363 0.364 0.354 0.356 0.354 0.356 0.390 0.391 0.390 0.391 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: Debt overhang (inverse) denotes the ratio of earnings before interests 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. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U S 2 105 Annex SF2.1 Data and methodology: firm-level analysis Data e dataset comprises those firms in the ORBIS database that have available data on fixed assets, e firm-level analysis is based on data from long-term corporate debt, earnings before interest ORBIS, produced by Bureau van Dijk Electronic and taxes (EBIT), and total assets (above 5 million Publishing (BvD). e sample contains firm-level USD) in at least one year over the sample period. balance sheet information in 13 large EMDEs A cleaning procedure similar to Kalemli-Ozcan et across Asia, Latin America, and Africa. e al. (2015) is conducted to generate a usable countries include Brazil, China, Colombia, dataset, including the following procedures: Hungary, India, Malaysia, Mexico, Philippines, Poland, the Russian Federation, South Africa, 1. drop company-years that simultaneously lack ailand, and Turkey. e balance sheet data on total assets, sales, and employment. information in Orbis comes from regulatory as well as other sources, such as local chambers of 2. drop entire company for all years if total assets, employment, sales, tangible fixed assets, commerce. or fixed assets is negative in any given year. e sample is an unbalanced panel spanning 3. drop companies denoted as non-profit 2007-2015. In contrast to most other major firm- level databases (e.g., Worldscope), the vast organizations majority of the firms in the sample are non-public 4. replace value to be missing if any of the firms. Less than 3 percent of the firms are listed following variables is negative: long-term debt firms, and about 90 percent of firms in the sample and current liabilities. have an asset size below $50 million (the cutoff for “large firm”). Industry-level information is yields an unbalanced sample of 434,256 is available based on the NACE Rev. 2 firms. In the non-China sample, the number of classification). 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 at the 1 percent level to prevent the comprise the full universe of firms in the EMDE impact of extreme outliers. sample considered, and hence may not be necessarily reflective of the entire corporate sector Methodology in these economies. Nevertheless, compared to other 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. us, 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). Total debt is defined as the sum of long-term debt e primary aim of the firm-level analysis is to plus current liabilities. e primary debt overhang take advantage of the dataset’s highly granular variable is measured as the ratio of a rolling three- cross-sectional structure and employ a rich set of year average of earnings before interest and taxes interactive fixed effects and control for factors that (EBIT) to current total debt, which is an indicator are intrinsic to industry operations or demand, as well as to explore heterogeneity in corporate debt behavior across firms. 18 The sample comprises 6,758 firms in Brazil, 225,699 firms in 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 Philippines, 19,487 firms in Poland, 87,402 firms in 17 Based on a balanced sample for the sample as a whole, however, 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. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 106 S P E C I AL FO C U S 2 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 of the size of accumulated debt relative to expected standard control variables in the corporate finance profits (Myers 1977). In the regression framework, literature. cijt is the error term. e standard this variable is expressed as the ratio of EBIT to errors in the benchmark specification are clustered total debt rather than its reciprocal to avoid at the firm level, but the results are robust to problems in cases where EBIT may be equal to or clustering at the country-industry-level. Given that close to zero. the debt overhang measure includes EBIT as well as total debt, it may be correlated to some extent To examine the impact of debt overhang on with cash flows and leverage. us, these two investment, the baseline estimating equation is as variables are included sequentially to check the follows: robustness of the debt overhang effect. = cijt + 0 + 1Overhangcij,t -1 Xcij,t-1´ + i + cjt + cijt (1) Given the well-known volatility of EBIT, a three- where cijt denotes the net investment rate of firm i, year rolling average is used in calculating this industry j, country c, and year t. Overhangcijt variable. e result is also robust to a measure of denotes the benchmark measure of firm debt debt overhang where each firm’s sample average overhang as described earlier. In other words, EBIT is used for all years. All variables on the right Overhangcijt will measure the debt-service capacity -hand side are lagged by one period. e of a firm. A higher value of 1 thus implies a specification also includes firm fixed effects, i, and higher sensitivity of investment to debt-service country-industry-year fixed effects, cjt , to control capacity. Xcij,t-1 denotes a vector of control for firm-level time invariant heterogeneity and a variables, which include firm size (log of total sales rich set of unobserved and observed in U.S. dollars), sales growth, cash flows (EBIT to time-varying factors at the country-industry level, sales ratio), leverage (debt-to-sales ratio), and debt respectively. ese factors may include, maturity (ratio of long term debt to total debt). for example, industry demand effects or Long-term debt is defined in the dataset as debt macroeconomic shocks. e estimations are also held by each firm with residual maturity greater conducted for China and non-China separately. than one year. ese variables are considered EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U S 2 107 References Brown, M., and P. 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Losses During the Great Recession.” The Quarterly 2015. “Debt Overhang, Rollover Risk, and Journal of Economics 132 (1): 271–316. Investment in Europe.” Mimeo, University of Maryland. Gopalan, R., A. Murkherjee, and M. Singh. 2016. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 P E C I AL FO C U S 2 109 Kalemli-Ozcan, S., B. Sorensen, C. Villegas- Occhino, F., and A. Pescatori. 2015. “Debt Sanchez, V. Volosovych, and S. Yesiltas. 2015. Overhang in a Business Cycle Model.” European “How to Construct Nationally Representative Economic Review 73 (January): 58-84. Firm Level data from the ORBIS Global Database.” NBER Working Paper 21558, Ohnsorge, F., and S. Yu. 2017. “Recent Credit National Bureau of Economic Research, Surge in Historical Context.” Journal of Cambridge, MA. International Commerce, Economics and Policy 8 (1): 1-22. Love, I., M. S. Martínez Pería, and S. Singh. 2013. “Collateral Registries for Movable Assets: Shin, H. 2013. “The Second Phase of Global Does Their Introduction Spur Firms' Access to Liquidity and its Impact on Emerging Bank Finance?” Policy Research Working Paper Economies.” Proceedings of the Asia Economic 6477, World Bank, Washington, DC. Policy Conference, November, Federal Reserve Bank of San Francisco. Magud, N., and S. Sosa. 2015. “Investment in Emerging Markets: We Are Not in Kansas World Bank. 2015. Global Financial Development Anymore...Or Are We?” IMF Working Paper Report: Long-term Finance. World Bank: 15/77, International Monetary Fund, Washington, DC. Washington, DC. _________. 2016. Global Economic Prospects: Maliszewski, W., S. Arslanalp, J. Caparusso, J. Divergences and Risks. World Bank: Washington, Garrido, S. Guo, J. S. Kang, W. R. Lam, et al. DC. 2016. “Resolving China’s Corporate Debt _________. 2017. Global Economic Prospects: Problem.” IMF Working Paper 16/203, Weak Investment in Uncertain Times. World Bank: International Monetary Fund, Washington, DC. Washington, DC. Mooij, M., and S. Hebous. 2017. “Curbing _________. 2018a. Global Economic Prospects: Corporate Debt Bias: Do Limitations to Interest Broad-based Upturn, but for Hong Long? World Deductibility Work?” IMF Working Paper 17/22, Bank: Washington, DC. International Monetary Fund, Washington, DC. _________. 2018b. Doing Business 2018: Myers, S. 1977. “Determinants of Corporate Reforming to Create Jobs. World Bank: Borrowing.” Journal of Financial Economics 5 Washington, DC. (November): 147-175. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) CHAPTER 2 REGIONAL OUTLOOKS EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) Growth in the East Asia and Pacific region is expected to remain solid, slowing only 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. Although risks to the forecast now appear more balanced, reflecting the possibility of stronger and longer- lasting growth in large economies than currently expected, they remain tilted to the downside, including those of intensified trade restrictions and an abrupt tightening of global financing conditions. Recent developments Growth across the region remains solid. Exports continue to surge both in volume and value terms, Growth in the region accelerated slightly to 6.6 benefiting from the ongoing recovery in global percent in 2017, reflecting solid exports and investment and trade, as well as stronger trade and strong domestic demand (World Bank 2018a; investment integration within Asia and between Figure 2.1.1). Conditions for the most part have Asia and Eurasia (Chapter 1). Private remained favorable for the region in 2018, consumption remains supported by strong including robust global trade, mostly contained consumer confidence and rising household wealth, borrowing costs, and sustained capital inflows. amid stronger currencies, firming asset prices, and Regional financial markets have generally moderate inflation. While inflation has generally remained buoyant, despite some volatility in early picked up among commodity importers, it has and mid-2018 related to the prospects of faster been on a downward trend in commodity monetary policy tightening in advanced exporters as the impact of past currency economies and escalating trade tensions. Bond depreciations wane. Output gaps have generally spreads in some countries have increased modestly, closed, but economic slack remains in several following bouts of volatility in stock markets, but commodity exporters (e.g., Mongolia, Papua New remain close to the low levels that prevailed in Guinea). With the exception of China, where 2017, pointing to continued strong investor investment continues its policy-guided confidence. Domestic monetary conditions have deceleration, investment spending in the region also been supportive amid subdued price pressures has remained strong, partly reflecting improved and continued capital inflows, even as tighter business confidence, sustained capital inflows, and prudential policies have kept credit growth in higher earnings (e.g., Cambodia, Lao PDR, and check. This favorable environment has allowed Vietnam). several major economies to renew their fiscal In China, a solid rebound of exports amid robust consolidation efforts in 2018 (e.g., China, consumption growth helped output to expand in Indonesia, Lao People’s Democratic Republic, 2017 at a slightly faster-than-expected pace Malaysia, 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 EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 114 C H A P TE R 2. 1 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 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 strong this year. Regional The stock of corporate debt, which peaked in financial markets have generally remained buoyant despite some volatility 2016 at 167 percent of GDP, has continued to in 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, partly reflecting improved business confidence. 2018, but remains high by international standards Inflation is generally in line with targets. (BIS 2018). Tighter enforcement of capital flow management measures helped ease capital outflows A. Growth B. Export growth 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 investment-led cyclical recovery has continued in response to higher commodity prices, improved confidence, and low financing costs. That said, the C. Emerging market bond spreads D. Equity prices pace of growth is increasingly reflecting country- specific factors. In Indonesia, the strength observed last year has continued so far in 2018, led by a continued rebound of 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 E. Investment F. Inflation moderating after a strong rebound last year, but remains robust and broad-based and exports have continued to surge 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 continued to be solid in the first half of the year, following a sharp cyclical recovery in Sources: Haver Analytics, International Monetary Fund, Oxford Economics, World Bank. 2017, supported by firming exports (World Bank Note: EAP stands for East Asia and Pacific. Commodity importers ex. China include Cambodia, Philippines, Solomon Islands, Thailand, Vietnam, and Vanuatu. Commodity exporters include 2018b). Growth in Vietnam and the Philippines Indonesia, Lao PDR, Mongolia, and Malaysia. GDP-weighted averages. A. E. Data in shaded area are estimated. remains robust, but capacity constraints (e.g., high B. Data include only goods and reflect contributions to year-on-year 12-month moving average growth. Last observation February 2018. capacity utilization rates) limit further C. Measures the average spread of a country’s sovereign debt (as measured by J.P. Morgan’s acceleration—especially in the Philippines (World Emerging Markets Bond Index) over their equivalent maturity U.S. Treasury bond. Last observation is May 9, 2018. Bank 2017d). D. Last observation is May 9, 2018 E. Investment refers to total fixed investment. F. Average year-on-year growth. The figure shows the mid-points of targeted ranges in 2018 in Overall, the region benefits from strong Indonesia (2.4-4.5 percent), Philippines (2-4 percent), Vietnam (4 percent), China (3 percent), and fundamentals, including moderate domestic and Thailand (1-4 percent). For Malaysia, the mid-point of Bank Negara’s 2018 forecast of 2-3 percent is used. Last observation is March 2018. external imbalances and significant policy buffers (World Bank 2018a). However, some countries in the region continue to face vulnerabilities in their financial sectors, with high levels of debt (e.g., China, Lao PDR, Malaysia, Mongolia, and EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 E A S T A S I A A N D P A C IF I C 115 Thailand), still fast credit growth (e.g., China, the FIGURE 2.1.2 China Philippines, Vietnam), and high foreign In China, a strong rebound of exports amid robust consumption growth participation in local-currency sovereign bond helped output to expand in 2017 at a slightly faster-than-expected pace. markets (e.g., Indonesia, Malaysia). Limited policy Tighter macroprudential policies have continued to reduce housing price growth and moderate credit growth in 2018. China recorded its first current buffers are a concern in smaller economies, owing account deficit since 2001 in the first quarter of 2018, consistent with to high levels of public debt and large financing ongoing external rebalancing. needs (e.g., Mongolia, Papua New Guinea). A. Contributions to growth B. Credit growth Outlook 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 the January forecasts (Tables 2.1.1 and 2.1.2; Figure 2.1.3). The modest slowdown in regional growth is largely due to the gradual structural slowdown in China, the region’s largest economy. C. Housing prices D. Balance of payments Activity in the rest of the region is expected to peak in 2018 and remain steady around its potential rate in 2019 and 2020. The outlook is predicated on broadly stable commodity prices in the next two years, strong but gradually 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 Sources: Haver Analytics, World Bank. 2019-20. Policy support is expected to ease, led by A. Investment refers to gross capital formation, which includes change in inventories. A. D. f = forecast. regulatory and macroprudential policy tightening. B. Total social financing by uses. e = estimate. Fiscal policies are expected to become less C. The National Bureau of Statistics of China surveys house prices in 70 cities and divides them into three tiers. The first tier includes Shanghai, Beijing, Guangzhou, and Shenzhen. The second tier accommodative over time to contain financial includes 31 provincial capital and sub-provincial capital cities. The third tier includes 35 other cities. Last observation is March 2018. risks and encourage a continued rebalancing of the D. Last observation is Q1 2018. Current account balance is based on seasonally adjusted data. Net capital flows and change in reserves are estimates. economy from investment to consumption and from industry to services. Growth in the rest of the region is projected to reach 5.4 percent in 2018 and remain broadly unchanged at 5.3 to low commodity prices runs its course and percent in both 2019 and 2020, as the cyclical investment growth stabilizes around its long-term recovery in these economies matures. trend. Growth in commodity exporters is expected to Growth in commodity importers is projected to remain broadly stable at around 5.3 percent in moderate slightly and converge with its potential 2019, in line with its potential, with significant rate of around 5.3 percent in 2019 and 2020. In cross-country divergence. Relative to previous commodity importers excluding China, an projections, this forecast is slightly above that of upgrade to growth projections in 2018 reflects an January, reflecting an upward revision to a upward revision to Thailand due to stronger number of commodity exporters (e.g., Malaysia, exports, which are nevertheless projected to Mongolia), which is more than offset by a remain below the regional average. For both downgrade in some other economies (e.g., Papua commodity exporters and importers, capacity New Guinea, Timor-Leste). Output gaps in most constraints and price pressures are expected to commodity exporting economies are expected to intensify over the forecast horizon, leading to close over the forecast horizon, as the adjustment tighter monetary policy in some countries. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 116 C H A P TE R 2. 1 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 FIGURE 2.1.3 EAP: Outlook and risks EMDEs, which could generate larger-than- Regional growth is expected to gradually moderate from 6.3 percent in expected spillovers through global trade and 2018 to 6.1 percent on average in 2019-2020, largely due to the gradual confidence channels (Chapter 1). A further structural slowdown in China. Activity in the rest of the region is projected strengthening of investment in major advanced to pick up slightly as the cyclical rebound matures. Growth in commodity importers is projected to converge with its potential rate of around 5.2 economies could stimulate trade and reinforce percent and remain around this level in 2019-20. Domestic vulnerabilities, activity across the region. related to elevated domestic debt and external financing needs in some countries, would amplify the impact of external shocks, especially where However, there are substantial downside risks. policy buffers are limited. Increased protectionist tendencies in some large A. Growth B. Growth by groups economies continue to create uncertainty about the future of established trading relationships. The imposition of trade restrictions by advanced economies would disproportionately affect the more open economies in the region. The economic impact of tariffs on imports to China, including on steel, aluminum, and other products, that have been announced by the U.S. administration will likely be modest, provided they do not lead to escalation (Chapter 1; World C. Total debt D. Fiscal balances of 2018 Bank 2018a). However, there is a risk that these measures, which have already triggered some retaliatory action by China, could intensify and lead to broader trade restrictions. A significant 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 Sources: Bank of International Settlements, Haver Analytics, International Monetary Fund, World Bank. Bank 2018a). Note: EAP stands for East Asia and Pacific. A. B. Commodity importers ex. China include Cambodia, Philippines, Solomon Islands, Thailand, Vietnam, and Vanuatu. Commodity exporters include Indonesia, Lao PDR, Mongolia, and Malaysia. In addition, a faster-than-expected tightening of Shaded areas are forecasts. C. The highest debt-to-GDP ratio since 1995Q1. The peak is identified to have occurred in 1997Q4 in global financing conditions and associated fi- Thailand, 1998Q4 in Malaysia, 2001Q4 in Indonesia, and 2016Q4 in China. Last observation is nancing stress—triggered, for instance, by changes 2017Q3. D. Data are World Bank estimates. in market expectations of advanced-economy monetary policy—could reduce capital inflows, heighten financial market volatility, and place Despite the projected robust activity in the region pressure on regional exchange rates and asset in the near term, underlying potential growth— prices. Rising borrowing costs could substantially which has fallen considerably over the past increase the burden of debt servicing, which was decade—appears likely to decline further over the compressed in recent years by low global interest long term, reflecting increasingly adverse rates and risk premiums. If a combination demographic patterns and a projected slowing of downside risks were to materialize, it could pace of capital accumulation, which is needed to trigger a sharper-than-expected slowdown in rein in credit growth (World Bank 2018a, 2018b). regional growth. Domestic vulnerabilities— elevated domestic debt and large external Risks financing needs in some countries—would amplify the impact of external shocks, especially Risks to the outlook have become more balanced, where policy buffers are limited, and dampen reflecting the possibility of stronger and longer- growth. lasting growth in major advanced economies and EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 E A S T A S I A A N D P A C IF I C 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 20 2018f 2019f 2020f 1 EMDE EAP, GDP 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 7.2 7.0 7.0 0.1 0.0 0.1 Public consumption 8.9 9.3 7.5 8.7 7.9 7.8 0.9 1.3 1.3 Fixed investment 6.5 6.6 5.8 5.7 5.5 5.6 -0.1 -0.3 -0.1 Exports, GNFS3 0.5 3.2 7.3 5.0 5.5 5.4 0.9 1.0 0.7 Imports, GNFS3 0.8 5.4 5.7 6.6 6.6 6.4 1.4 1.3 1.1 Net exports, contribution to growth -0.1 -0.6 0.5 -0.4 -0.3 -0.3 -0.2 -0.1 -0.2 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 5.3 5.3 5.4 0.0 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. 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 American Samoa and Democratic People’s Republic of Korea. 2. Sub-region aggregate excludes American Samoa, Democratic People’s Republic of Korea, Fiji, Kiribati, the Marshall Islands, the Federated States of Micronesia, Myanmar, Palau, Papua New Guinea, Samoa, Timor-Leste, Tonga, and Tuvalu, for which data limitations prevent the forecasting of GDP components. 3. Exports and imports of goods and non-factor services (GNFS). For additional information, please see www.worldbank.org/gep. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 118 C H A P TE R 2. 1 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 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 5.3 5.3 5.4 0.0 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 0.1 3.6 3.0 -2.4 1.2 -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 -Leste2 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 6.5 6.5 6.5 0.0 0.0 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. Excludes American Samoa and Democratic People’s Republic of Korea. 2. Non-oil GDP. Timor-Leste’s total GDP, including the oil economy, is roughly four times the non-oil economy, and highly volatile, sensitive to changes in global oil prices and local production levels. For additional information, please see www.worldbank.org/gep. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) Growth in the Europe and Central Asia region is anticipated to ease to 3.3 percent in 2018, down from 4.0 percent in 2017, as one-off support 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 broadly stable commodity prices. Regional risks remain tilted to downside. Stronger-than-expected external demand could surprise on the upside, while downside risks could stem from a disorderly tightening of financing conditions, lower-than-projected oil prices, or renewed policy uncertainty. Recent developments 2018d). The effect of supportive fiscal measures in Romania fueled a strong pickup in growth in Regional growth was strong in 2017, reaching 4.0 2017 has gradually faded in 2018. Meanwhile, percent, with broad-based recovery across both activity is improving in commodity importers with commodity importers and commodity exporters weak growth in 2017 from domestic issues, such (Figure 2.2.1).1 Despite robust activity in late as rising political tensions (e.g., FYR Macedonia) 2017 and early 2018, momentum has eased amid and weaker public investment (e.g., Serbia). moderating export growth and less accommo- Commodity exporters in the region continue to dative policies. experience a cyclical upturn, supported by higher For commodity importers, the significant pickup oil prices, a pickup of domestic demand, and in activity in 2017 was driven by strengthening strengthening export growth. In Russia, growth demand from the Euro Area and disbursements of turned positive in 2017 after two years of EU structural funds in Central Europe—but these contraction, reaching 1.5 percent. The factors have started to wane.2 In Turkey, growth improvement was marked by robust real wage sharply accelerated to 7.4 percent in 2017 from gains, which supported a recovery in private 3.2 percent in 2016, as it rebounded from the consumption amid declining inflation and 2016 coup attempt and benefited from tax cuts, stabilizing labor markets. Rising confidence public transfers, and credit support measures for encouraged a significant rebound in investment small and medium-sized enterprises—all of which growth—especially in the mining, transport, and have started to dissipate in 2018 (World Bank manufacturing sectors—following four years of contraction. The recovery in Russia generated positive spillovers to neighboring economies in Central Asia, South Caucasus, and Eastern Note: The author of this section is Yoki Okawa. Research assistance was provided by Ishita Dugar. Europe.3 New U.S. sanctions announced in April 1 Commodity importers are Bulgaria, Belarus, Bosnia and against Russian organizations and individuals led 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. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 120 C H A P TE R 2. 2 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 FIGURE 2.2.1 ECA: Recent developments to a depreciation of the Russian ruble and to increasing bond spreads. Growth in the region strengthened in 2017, but high-frequency indicators suggest a slowing momentum in 2018. Economic sanctions on Russia led to some increase in bond spreads, as in the previous episode in 2014. In Kazakhstan and Azerbaijan, activity also Investment in commodity-importing economies was particularly strong in rebounded in 2017, supported by expanding oil 2017, but is expected to moderate in 2018. Fiscal policy is loosening across the region, while inflation expectations have risen in many production and recovering activity in the non-oil commodity importers, and current account positions have deteriorated in sector (World Bank 2018e). Growth in some cases. Kazakhstan was further boosted by rising output from the new Kashagan oil field, which is exempt A. Contribution to regional growth B. Bond spread for Russia after sanction from the production cuts agreed to between some Organization of the Petroleum Exporting Countries (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 expectations are trending upward in the largest E. Inflation expectations F. Current account balances countries in Central Europe (e.g., Bulgaria, Croatia, Hungary, Poland, Romania), as well as in Turkey. Current account deficits either have worsened or remain persistently large, while fiscal policy continues to be procyclical in some commodity importers (e.g., Romania, Turkey) and public debt dynamics further deteriorate (e.g., Hungary, Poland). Sources: Consensus Forecasts, Haver Analytics, International Monetary Fund, World Bank. Among commodity exporters, inflation has A.-C. 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 8, 2018. C. Shaded area indicates forecasts. Kazakhstan, Russia). Current account positions D. Values are general government structural balance as a percent of GDP. Median for each sub- have improved and the stabilization of inflation region. E. Average one-year-ahead inflation forecasts for given time from consensus forecasts. and exchange rates have allowed monetary policy F. Current account balance as a percent of GDP for selected countries. to ease in some countries. In contrast, Uzbekistan, which devalued its currency in September 2017, subsequently tightened its monetary policy. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 E U R OP E A N D CE N T R A L A S I A 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 and elevated corporate debt levels leave from 4.0 percent in 2017—which was the region vulnerable to external shocks. significantly above potential—to 3.3 percent in 2018 and 3.1 percent in 2020. The modest A. Actual and potential growth B. Growth forecast recovery continues among commodity exporters and only partially offsets a slowdown in commodity importers (Figure 2.2.2). 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 geopolitical tensions. C. Output gap D. Population growth Growth for commodity importers is expected to moderate from 5.9 percent in 2017 to 4.4 percent in 2018. Monetary and fiscal policies are expected to tighten as economies operate above capacity. Tighter labor market conditions are expected to lead to higher inflation and tighter monetary policy, while past fiscal stimulus measures are expected to gradually unwind. External conditions are expected to become less supportive as well. E. Trade openness F. Corporate debt 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. In Turkey, delays in fiscal consolidation and the extension of the credit support program is Sources: Haver Analytics, Institute of International Finance, International Monetary Fund, United expected to temper the expected slowdown in Nations, World Bank. 2018-19, following a strong cyclical recovery in A. Blue bars refer to GDP weighted average actual growth and vertical orange line show minimum- maximum range of potential growth estimates based of five different methodologies (production 2017. Inflation continues to be above target. In function approach, multivariate filter, IMF World Economic Outlook estimate, Consensus Forecasts, and estimates in OECD Economic Outlook and Long-Term Baseline Projections). Central Europe, the positive effects from the A. B. Shaded areas indicate forecasts. B. C. Aggregate growth rates calculated using 2010 U.S. dollar GDP weights. accelerated disbursement in 2017 of EU structural D. E. Blue bars indicate 25th and 75th percentiles. funds—which are equivalent to more than 4 D. Annual working age population growth given period. Forecasts are taken from the medium fore- cast by the United Nations. percent of GDP for some countries—are expected E. Value of trade over GDP in 2016 for each region. EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the Caribbean, MNA = Middle East and North Africa, to wane in 2018. Procyclical fiscal measures in SAR = South Asia, and SSA = Sub-Saharan Africa. Romania are projected to continue in 2018. F. Corporate debt over GDP from the Institute of International Finance. Among commodity exporters, the recovery from weak or negative growth in 2014-16 is expected to continue in 2018-20. In Russia, growth is projected to remain unchanged in 2018 at 1.5 EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 122 C H A P TE R 2. 2 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 percent as the effects of rising oil prices and positive spillover effects for the region given its monetary policy easing are offset by oil production high dependence on trade, with a particularly large cuts and heightened uncertainty associated with exposure to the Euro Area. A stronger and longer the latest sanctions. As dampening factors wane, lasting recovery in the Euro Area could support a growth in Russia is anticipated to strengthen to further strengthening of growth across Central 1.8 percent in 2019-20, providing some support Europe and the Western Balkans through both to activity in Central Asia, the South Caucasus trade and foreign direct investment (World Bank region, and Eastern Europe (World Bank 2018f). 2018g). Assuming an easing of geopolitical tensions and A disorderly tightening of global financial progress in structural reforms, growth is projected conditions could trigger a sharp deterioration of to pick up in Ukraine. Azerbaijan is projected to external financing conditions and lead to a reversal emerge from two years of subdued growth in of capital flows and weakening activity, 2018-19, mainly in response to fiscal stimulus particularly in countries with growing measures supported by higher oil prices. However, vulnerabilities. Current account deficits remain in Kazakhstan, growth is expected to slow in substantial in a number of countries (e.g., 2018, as the effect of the opening of the Kashagan Georgia, Kazakhstan, Kyrgyz Republic, Romania, oil field fades. Turkey, Ukraine), and are financed by volatile portfolio investment flows in some cases (World Over the long term, potential growth in the region Bank 2018h, 2018i). Filling external financing is expected to decline further. Slower growth in needs could become challenging, while currency the working-age population is expected to weigh pressures could intensify. Despite recent progresses on potential growth across the region. Delays or in reforms, banking sectors remain vulnerable to reversals to needed structural reforms have affected these external shocks (e.g., Azerbaijan, long-term growth prospects in a number of Kazakhstan, Moldova, Tajikistan). countries (e.g., Azerbaijan, Croatia, Russia, Ukraine). In Uzbekistan, far-reaching structural An escalation of policy uncertainty and reforms—including exchange rate liberalization, geopolitical tensions could also negatively affect tax reform, privatization of state owned activity in the region. Moreover, intensification of enterprises, and banking sector reform—are policy disagreements between some EU members expected to improve long-term growth prospects. and EU institutions—including in areas such as immigration policy and constitutional issues— Risks could deter international investors. The region is also vulnerable to a rise in global protectionism, The outlook continues to be subject to given its openness to trade and integration in considerable risks. While the possibility of global supply chains. stronger-than-expected external demand poses an upside risk to the regional growth outlook, risks A weaker-than-expected energy price outlook remain tilted to the downside. Downside risks would undermine the recovery in large energy- include disorderly tightening of financing exporting countries, including Kazakhstan, Russia, conditions, renewed geopolitical tensions and and Uzbekistan (World Bank 2018d). e policy uncertainty, and lower-than-expected slowdown could generate negative spillovers to commodity prices. neighboring countries, such as Armenia, Belarus, Stronger-than-expected growth among the large Georgia, Kyrgyz Republic, Moldova, and advanced economies and EMDEs could have Tajikistan. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 E U R OP E A N D CE N T R A L A S I A 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 3.2 3.1 0.3 0.2 0.1 EMDE ECA, GDP excl. Russia 3.6 2.9 5.5 4.2 4.0 3.8 0.6 0.2 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 3.2 3.0 0.3 0.2 0.1 GDP per capita (U.S. dollars) 0.6 1.2 3.6 2.8 2.9 2.8 0.3 0.2 0.1 PPP GDP 0.8 1.6 3.9 3.2 3.2 3.0 0.3 0.2 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 5.4 4.8 5.0 1.7 0.9 1.2 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 4.4 4.0 3.7 0.7 0.3 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 3.0 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 Asia10 3.3 3.3 4.7 3.8 4.0 4.2 0.0 -0.1 -0.1 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 4.7 4.4 4.0 1.2 0.4 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. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 124 C H A P TE R 2. 2 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 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 0.0 0.0 Hungary 3.1 2.0 4.0 4.0 3.2 3.0 0.2 0.1 0.1 Kazakhstan 1.2 1.1 4.0 2.8 3.0 3.2 0.2 0.2 0.2 Kosovo 4.1 3.6 4.4 4.8 4.8 4.8 0.0 0.0 0.1 Kyrgyz Republic 3.9 3.8 4.5 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 4.7 4.4 4.0 1.2 0.4 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. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) Growth in Latin America and the Caribbean is projected to accelerate from 0.8 percent in 2017 to 1.8 percent in 2018 and 2.4 percent in 2019. The recovery will be supported largely by 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 include an escalation of domestic policy uncertainty and the possibility of negative spillovers from international finance and trade channels. Stronger-than-expected growth in the United States is an upside risk in the near term. Recent developments a result net exports still contribute negatively to regional growth. Growth in Latin America and the Caribbean is In Brazil, Argentina, and Chile—three of the accelerating, driven by generally favorable largest commodity-exporting economies— domestic and external financing conditions, industrial production and retail sales growth were strengthening growth in the United States, and considerably higher in the first half of 2018 than a higher prices of key commodities relative to a year year before, supporting activity. However, a ago. Except in Brazil and, to a lesser degree, drought has disrupted agricultural production in Colombia, negative output gaps are nearly closed.1 Argentina. In República Bolivariana de Venezuela, Private consumption was the main contributor to an economic and humanitarian crisis continues, regional growth of 0.8 percent in 2017, and is and an increasing number of Venezuelans are expected to have strengthened further in the first migrating to neighboring countries. half of 2018, in part due to the effect of previous In Mexico, the largest commodity-importing interest rate cuts and improved labor market economy in the region, high-frequency indicators conditions in some major economies. Regional have been mixed. Trade is becoming more investment is recovering after a deep, prolonged supportive of growth, and the contraction in contraction, supported by a strong recovery in investment growth observed in 2017 is fading, but commodity prices last year (Figure 2.3.1). falling retail sales and flat consumer confidence Robust global demand has boosted goods exports point to more subdued private consumption. and has contributed to narrowing current account In the Caribbean, strong external demand is deficits as a share of GDP in some countries (e.g., benefiting most services-exporting economies (e.g., Brazil, Colombia, El Salvador, Mexico, Peru). At the Dominican Republic, Jamaica, St. Lucia, the regional level, however, import growth is Grenada). Despite the hurricanes in the autumn of outpacing export growth, owing to the recovery of 2017, tourist arrivals to the Caribbean reached an domestic demand in commodity exporters, and as 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 1 Output gaps are calculated, using a multivariate filter, for seven Venezuela. Median inflation in commodity LAC economies: Argentina, Bolivia, Brazil, Chile, Colombia, Mexico, and Peru. exporters is well below its historical average. Policy EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 126 C H A P TE R 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 FIGURE 2.3.1 LAC: Recent developments suggest that the easing cycle may be coming to an end. Among commodity importers, inflation has Growth in LAC is accelerating, driven in large part by a cyclical recovery in Brazil and improving conditions in other large commodity-exporting eased somewhat since early 2018 (e.g., in Mexico, economies. Investment is picking up after an extended period of El Salvador, Jamaica), after accelerating rapidly in contraction, while private consumption is strengthening amid broadly improving labor market conditions and the effect of previous interest rate 2017 on fuel and food price increases. cuts. Net exports in the region are still contributing negatively to growth, in part due to rapid import growth as domestic demand rises. Although external financing conditions remain supportive, sovereign bond yields have risen modestly in the large economies in the region A. GDP growth B. Investment growth since the start of 2018—and by larger amounts in Argentina, where the central bank hiked interest rates sharply in April and May to counter currency pressures. Capital inflows to the region are stable, following a large uptick in debt in flows in 2017. Other than in Chile, where corporate debt is high, the stock of total debt in large economies in LAC (Argentina, Brazil, Colombia, Mexico) is predominantly government debt. C. Unemployment rate D. Confidence Fiscal deficits in the region have narrowed slightly relative to levels seen during the commodity price plunge. Yet the need for fiscal consolidation remains elevated, 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 administration takes office in early 2019. Government debt is also high in El Salvador, E. Inflation F. Export and import volume growth 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 the forecast horizon, to 1.8 percent in 2018 and to Sources: CPB Netherlands Bureau for Economic Policy Analysis, Haver Analytics, International Labor Organization, Oxford Economics, World Bank. 2.5 percent by 2020, still below the long-term A. 2010 GDP-weighted averages. Sample includes 13 commodity exporters and three commodity (1990–2017) average of 2.7 percent. This growth importers. Last observation is 2017Q4. B. Investment is gross fixed capital formation. 2010 investment-weighted averages. Last observation outlook is lower than that produced in January, is 2017Q4. C. Regional average weighted by size of labor force in 2014. Sample includes Argentina, Belize, largely due to large downward revisions to growth Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Mexico, Peru, and Uruguay. projections for Venezuela (Tables 2.3.1 and D. Last observation is April 2018. E. Lines show medians of 14 commodity exporters and eight commodity importers, and dotted lines 2.3.2). Regional growth through 2020 will come the averages from January 2000 to present. Last observation is March 2018. F. Last observation is February 2018. Sample includes 13 economies. almost exclusively from private consumption and investment (Figure 2.3.2). In the outer years of the forecast horizon, regional growth is expected to be interest rates in almost all commodity exporters above potential. have been cut during the first half of 2018. Brazil, Colombia, and Peru have cut rates repeatedly. Accelerating private consumption growth in the Recent monetary policy statements, however, region reflects improvements in labor market EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 L A T I N AM E RI C A A N D C A R I B BE A N 127 conditions and rising household borrowing in FIGURE 2.3.2 LAC: Outlook and risks some large economies. Investment growth in LAC Growth in Latin America and the Caribbean is projected to continue to is expected to reach 3.9 percent in 2018, and to accelerate during the forecast horizon, driven almost exclusively by firm to 4.5 percent in 2020. The investment domestic demand—in particular, private consumption and investment. Although per capita GDP growth is projected to rise after a long period of recovery will be supported by a broad-based contraction, it will only marginally exceed that in advanced economies by cyclical recovery in Brazil, higher copper prices 2020, resulting in stalled convergence. Significant downside risks to the than in recent years and fading disruptions in the growth outlook remain, including an abrupt tightening of external financing conditions, policy uncertainty, increased trade protectionism, and the mining industry (e.g., Chile, Peru), large effects of natural disasters. infrastructure projects (e.g., Argentina, Colombia, Panama, Peru), and supportive 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 decelerate in 2018 as fiscal C. Per capita GDP growth and D. Economic policy uncertainty and monetary tightening, together with the effects potential growth of the drought on the agricultural sector, 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. Growth in commodity importers, which are geographically concentrated in the Mexico and Central America and the Caribbean subregions, is E. Primary balance adjustment F. Export losses in case of tariff hikes also expected to strengthen in 2018, in part due to needed to stabilize government debt to WTO bound rates 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 agricultural exporters (Costa Rica, Guatemala, Honduras) expected to accelerate Sources: Baker, Bloom, and Davis (2015); Haver Analytics; Institute of International Finance; International Monetary Fund; Kutlina-Dimitrova and Lakatos (2017); Végh et al. (2018); World Bank. moderately through 2020 and that in commodity A. Bars show contribution of each of the components of GDP to regional growth. A. C. GDP-weighted averages. importers (El Salvador, Nicaragua, Panama) B. Sample includes Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela. Estimates as of May expected to stabilize or decelerate after generally 2018. C. Bars show annual per capita growth and lines average average potential growth during 2016–20. recovering in 2018. 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 denote 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 prices F. Based on simulations using the GDyn computable general equilibrium model. Results show cumulative decline by 2020, relative to a business-as-usual scenario, assuming that tariff hikes start are expected to lift growth in 2018. Some in 2018. The scenario is defined as a worldwide increase in tariffs up to legally allowed bound rates coupled with an increase in the cost of traded services of 3 percent. World Trade Organization (WTO) commodity-reliant economies (Suriname, bound tariffs are the maximum tariffs under WTO commitments. LAC = Latin America and Trinidad and Tobago) are expected to register the Caribbean, SAR = South Asia, SSA = Sub-Saharan Africa, EAP = East Asia and Pacific, MNA = Middle East and North Africa, ECA = Europe and Central Asia, AEs = Advanced economies, highest growth rates since before the 2014–16 and EU = European Union. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 128 C H A P TE R 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 drop in oil and metals prices. Rapid development Downside risks also emanate from international of an offshore oil industry is expected to boost trade channels. Adverse outcomes of the NAFTA growth sharply in Guyana in 2020. renegotiations could hold back growth in Mexico. Additional trade-restricting actions by the United Despite the cyclical growth recovery underway in States and China would result in spillovers the region, potential growth is expected to through trade, confidence, financial, and moderate in the medium term averaging 2.3 commodity market channels, and may encourage percent in 2018–22, compared to an estimated 2.7 policy support for increased protectionism percent in 2013–17 (World Bank 2018c). This (Huidrom, Kose, and Ohnsorge 2017; Kose et al. projection reflects slower labor force growth and 2017). Protectionism in the form of increases in capital accumulation, as well as continued actual tariffs to bound tariffs would reduce exports weakness in total factor productivity, and raises from LAC significantly (Kutlina-Dimitrova and doubts about the region’s ability to deliver Lakatos 2017). However, for some specific goods, sustained progress on economic well-being and per such as soybeans, maize, and other agricultural capita income convergence with advanced products, tariff increases by China on U.S. exports economies. Per capita GDP growth in the region could raise demand for LAC exports. is projected to match that in advanced economies Furthermore, the region has recently become more only in 2020, following a long stretch of active in pursuing new trade agreements, most contraction, but remain well below the EMDE prominently between Mercosur and the European average. This outlook reinforces the need for Union. reforms to counter less favorable demographics, boost investment growth after the extended period On the domestic front, a key downside risk is an of weakness, and raise persistently low escalation of policy uncertainty. The medium- productivity (World Bank 2018c). term policy environment in the two largest economies in the region, Brazil and Mexico, could Risks shift following presidential and legislative elections in the second half of the year. Significant delays in The outlook for the region continues to face key reforms could lead to sudden changes in significant domestic and external downside risks. investor sentiment and derail a still-fragile However, the balance of risks seems less negative investment recovery. than at the start of 2018. Recent years have also demonstrated the Externally, an abrupt tightening of financing vulnerability of the region to floods, droughts, conditions or changes in investor sentiment hurricanes, earthquakes, and wildfires, and these regarding EMDEs as advanced economies unwind threaten to become more common in the medium monetary policy accommodation could set back to long term as climate conditions change (Bello capital inflows and growth in the region, which is 2017). a particular risk for countries with significant fiscal An upside risk to the regional outlook is the financing requirements (e.g., Argentina, Brazil), possibility of stronger-than-expected favorable large current account deficits (e.g., Argentina, spillovers from the United States as it implements Bolivia), significant foreign participation in fiscal stimulus. This would tend to benefit Mexico domestic financial markets (e.g., Mexico), or and Central America the most. However, this where credit quality has deteriorated. A marked benefit would likely be short-lived given that U.S. tightening of the external financing environment fiscal stimulus is slated to fade later in the forecast or a deterioration in global commodity prices horizon. could also contribute to a growth slowdown, which may not be sufficiently addressed with countercyclical fiscal policy given the lack of fiscal space (Végh et al. 2018). EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 L A T I N AM E RI C A A N D C A R I B BE A N 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 1.8 2.4 2.5 -0.2 -0.2 -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 1.8 2.4 2.5 -0.2 -0.2 -0.2 GDP per capita (U.S. dollars) -1.5 -2.6 -0.3 0.7 1.4 1.5 -0.3 -0.2 -0.2 PPP GDP 0.2 -0.9 1.1 2.0 2.5 2.6 -0.2 -0.2 -0.2 Private consumption -0.3 -1.7 1.4 2.1 2.5 2.6 0.0 -0.2 -0.3 Public consumption 0.9 0.0 -0.4 -0.1 0.3 0.7 -0.1 -0.6 0.0 Fixed investment -5.5 -6.0 -0.9 3.9 4.2 4.5 1.3 0.6 0.8 Exports, GNFS3 4.3 1.3 2.0 3.2 3.7 3.8 -0.7 -0.3 0.0 Imports, GNFS 3 -2.0 -2.9 4.8 4.3 4.1 4.5 0.8 -0.1 0.5 Net exports, contribution to growth 1.3 0.9 -0.6 -0.2 -0.1 -0.1 -0.3 -0.1 -0.1 Memo items: GDP South America4 -1.7 -3.2 0.2 1.4 2.2 2.4 -0.5 -0.3 -0.3 Mexico and Central America5 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 2.6 0.2 -0.1 0.0 Argentina 2.7 -1.8 2.9 2.5 2.7 3.0 -0.5 -0.3 -0.2 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, Venezuela, and Uruguay. 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. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 130 C H A P TE R 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 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 2.5 2.7 3.0 -0.5 -0.3 -0.2 Belize 3.8 -0.5 0.9 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 3.1 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 2.6 0.2 -0.1 0.0 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, unless indicated otherwise. 2. GDP growth rate at constant prices is based on production approach. For additional information, please see www.worldbank.org/gep. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 remains positive and growth is expected to increase slightly in both 2019 and 2020. Continued reconstruction efforts and higher-than-expected Euro Area growth could further improve 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 is improving in 2018. Oil Arabia and the United Arab Emirates in 2018. exporters are recovering following a year of Non-oil sectors showed modest growth, including declining oil production and fiscal tightening in services and construction. In 2018, a number of (Figure 2.4.1)1. Oil importers’ growth was robust oil exporters have eased fiscal adjustment plans, in in 2017, and high-frequency data indicate that response to somewhat more buoyant oil prices and this momentum is continuing into 2018. Many improved terms of trade, including by expanding countries in the MENA region are pursuing capital expenditure plans in Algeria and Saudi broad-based reforms that should eventually Arabia. improve productivity, including diversifying their Growth in large oil importers has been supported revenues, but growth continues to be challenged by broad-based improvements in domestic and by geopolitical tensions and fiscal adjustment. external demand in 2018, as policy reforms Low oil production led to slow growth for oil progress, business confidence strengthens, and the exporters in 2017, as members and non-members global economy improves. In the Arab Republic of of the Organization of the Petroleum Exporting Egypt, the region’s largest oil importer, investment Countries (OPEC) adhered to agreement on and net exports have improved, supported by the production limits intended to support global oil stability of the exchange rate and stronger prices. Generally subdued oil revenues since 2014 domestic demand. Morocco and Tunisia have also further benefited from more favorable agricultural production. International reserves have grown Note: This section is prepared by Lei Sandy Ye. Research assistance is provided by Julia Roseman. significantly in Egypt and Morocco, aided by 1 World Bank’s Middle East and North Africa aggregate includes capital inflows, although they have declined in 16 economies. Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the Tunisia due to a rising current account deficit, United Arab Emirates comprise the Gulf Cooperation Council (GCC); all are oil exporters. Other oil exporters in the region are depressed foreign direct investment (FDI), and Algeria, the Islamic Republic of Iran, and Iraq. Oil importers in the central bank interventions in the foreign exchange region are Djibouti, the Arab Republic of Egypt, Jordan, Lebanon, market. Other smaller oil importers still face Morocco, Tunisia, and West Bank and Gaza. Syrian Arab Republic, the Republic of Yemen, and Libya are excluded from regional growth sluggish growth that hinders progress on their aggregates due to data limitations. labor market challenges. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 132 C H A P TE R 2. 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 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 2018, response to subdued oil prices. As oil prices firm, terms of trade improved despite edging upwards recently due to VAT in large GCC oil exporters in the past year. Among the oil importers, industrial production has markedly improved, boosted by enhanced introduction in its two largest economies. In competitiveness and external conditions. Inflation in the region has been Egypt, inflation has subsided substantially in generally well-contained. 2018, falling to 13 percent in March 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 March from 10 percent at the end of last year, as declining food prices have offset upward pressure from currency depreciation. 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 have also supported FDI inflows, even in E. International reserves: oil importers F. Inflation the face 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 continuing their recovery from the collapse of oil prices, and oil importers experiencing a smaller Sources: Bank for International Settlements, International Monetary Fund, Haver Analytics, World acceleration. The outlook assumes continued Bank. A. Weighted average growth rates of real GDP. policy reforms and firming oil prices after 2017. B. Non-GCC include Algeria, Iraq, and the Islamic Republic of Iran. GCC includes Bahrain, Kuwait, Qatar, Oman, Saudi Arabia, and the United Arab Emirates. Unweighted averages. C. CPI-based broad indices for Saudi Arabia and the United Arab Emirates. PPI-based index for In 2018, growth in oil exporters is expected to rise Kuwait. Latest observation is March 2018. substantially to 2.7 percent due to additional D. Industrial production indexes of Egypt, Tunisia, Jordan, and West Bank and Gaza. Unweighted averages. Monthly 3 month moving average year-on-year growth rates. government spending, enabled by increased E. International reserves including gold. Latest observation is March 2018. F. Year-on-year growth rates. Unweighted averages. Latest observation is March 2018. domestic revenues and firm oil prices. In the GCC, 2018 growth will be further supported by higher fixed investment, bolstered by public investment programs and improved demand. Growth will remain stable during 2019-20, propelled by steady growth in private EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 M I D D LE E AS T A N D N O R T H A F R I C A 133 consumption, infrastructure investment programs FIGURE 2.4.2 MENA: Outlook and risks like those related to the Dubai Expo 2020 or The short-term outlook in MENA is positive. Public-private partnerships are Qatar’s World Cup 2022, and the expiration of expected to support private sector participation in infrastructure OPEC+ agreement. Growth in non-GCC investment. However, geopolitical tensions may deter the recovery of tourism in oil importers. Upside risks are associated with the possibility of exporters is expected to be supported by higher higher-than-expected activity in the Euro Area. capital expenditures. Fiscal balances in oil exporters are expected to improve as oil prices are A. Public-private partnership B. Tourism: oil importers forecast to stay firm and revenue-enhancing investment: MENA measures, such as VAT and energy subsidies reforms, are implemented. These measures are expected to improve the non-oil share of government revenue in oil exporters. Firm oil prices are also expected to support remittance flows (World Bank 2018j). 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 C. Exports exposure to the Euro Area D. Euro Area activity expectations: 2018 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 2016). Tourism growth is also expected to improve upon stable security conditions. However, fiscal consolidation is expected to be an important headwind for growth of oil importers. Sources: Consensus Economics, Haver Analytics, International Monetary Fund, World Bank. A. Denotes Public-Private Partnership physical investment in infrastructure projects. Sum of In smaller oil importers (e.g., Jordan, Lebanon), investments from 2015-16 based on available data. B. Growth of tourism arrivals for Egypt, Jordan, external and fiscal imbalances remain a constraint and Morocco. 6mm y-on-y. C. Denotes share of exports to the Euro Area as a ratio to total exports in each country group. Data are for goods exports as of 2017. D. Dates in legend denote year-month in to higher growth in the short-term. which Consensus Forecast is generated. Columns denote growth rates in respective indicators. Reform programs, such as World Bank-supported initiatives to improve urban investment capacity Area and recovery in war-torn areas could be or electricity performance, are expected to improve stronger than expected. Key downside risks growth potential (World Bank 2017, 2018k). include renewed volatility in oil prices, an Similarly, public-private partnerships and bilateral intensification of geopolitical tensions, and a agreements within the region are expected to slower-than-expected pace of reforms. support private sector participation in infrastructure investment, which benefits On the upside, stronger-than-expected economic economic activity (Figure 2.4.2, Arezki and activity in the Euro Area would provide an Mottaghi, et al. 2018; Calderon and Serven important support to growth in MENA, especially 2004). Additional plans in energy subsidies for oil-importing economies in the Maghreb reforms or tax revenue enhancement across oil region that are heavily dependent on the Euro importers will support further fiscal adjustment. Area for trade, remittances, or financial flows, and that have recently concluded additional trade pacts Risks with the European Union. Stronger-than-expected external demand could also mitigate headwinds to Risks to the outlook are diverse, but tilt to the growth associated with domestic policy downside. On the upside, activity in the Euro uncertainty in smaller oil importers, or from potential spillovers associated with reduced FDI EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 134 C H A P TE R 2. 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 and remittance flows from GCC economies to oil policy in oil exporters may lead to spillovers to oil importers. importers via external linkages (e.g., FDI and remittances). Volatility in oil prices may also affect Stronger-than-expected impacts from reconstruc- oil importers through their current account tion programs and rising infrastructure investment exposure to higher oil prices. in war-torn countries, such as Iraq, could lead to a sustained economic recovery. Associated spillover The possibility of higher security concerns or effects could unlock the potential for higher intensified geopolitical tensions may cloud oil growth among other countries in the region. This importers’ tourism prospects, which have would also allow the restoration of access to strengthened considerably in the past year. Intra- health, water, or food (Devarajan and Mottaghi and interregional tensions in the region may also 2017a; World Bank 2018l) to these economies, affect investor confidence and access to finance, and improve the conditions of neighboring host such as through higher sovereign spreads. economies (e.g., Djibouti, Jordan, Lebanon) by providing more resources for public services for Continued progress in reforms could face both host residents and refugees (Devarajan and challenges to implementation. Among oil Mottaghi 2017b). importers, potential social discontent about higher energy prices may lead to delayed implementation On the downside, the recent rise in oil prices may of fiscal adjustments. This issue may be further not be sustained in the short term, potentially due compounded by the high debt levels (in some to higher-than-expected U.S. shale production cases exceeding 100 percent of GDP) among (Chapter 1). This would reduce fiscal space in oil several economies in the region. The loss of exporters and complicate fiscal management momentum in these reforms could negatively reform across many economies. Tighter fiscal impact longer-term growth in the region. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 M I D D LE E AS T A N D N O R T H A F R I C 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, GDP1 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, GDP 2 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 1.2 1.6 1.5 1.9 0.0 -0.4 0.1 Fixed investment 1.6 -2.1 0.8 5.0 3.6 4.6 -0.1 -2.5 -1.4 Exports, GNFS 3 2.5 10.0 3.3 3.7 4.1 4.0 0.0 0.5 0.3 Imports, GNFS3 -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, Islamic Rep. -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, Arab Rep. 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, the Syrian Arab Republic, and the Republic of 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; Iraq; the Islamic Republic of Iran; 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; e.g., the column labeled 2017 reflects the fiscal year ended June 30, 2017. For additional information, please see www.worldbank.org/gep. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 136 C H A P TE R 2. 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 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, Arab Rep. 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, Islamic Rep. -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 2.0 2.7 3.3 3.7 0.0 0.0 -0.3 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 2.7 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, the Syrian Arab Republic, and Republic of 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. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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. Risks to the forecast have become more balanced, with the possibility of further upside surprises to global activity. However, risks are still tilted to the downside, mostly related to domestic factors, especially policy slippages amid sizable fiscal adjustment needs. External risks include the possibility of a faster-than-expected tightening of global financial conditions and increased global trade tensions. Recent developments growth (e.g., Bangladesh, Pakistan); however, State Bank of Pakistan recently hiked its policy Growth in South Asia remains strong despite rate to reduce the growing external pressure. slowing to an estimated 6.6 percent in 2017 Inflation has been increasing in the region (Figure 2.5.1). Growth in the region has recently, and is close to or above targets in some improved markedly since mid-2017 and countries (e.g., India, Sri Lanka). In many continued to firm in early 2018, reflecting countries, budget deficits continue to be sizable or improved consumer and investor sentiment, have widened further in 2018 reflecting both higher investment, and recovering exports (e.g., weaker-than-expected revenues and expansionary India, Bangladesh, Sri Lanka). Growth in South policies (e.g., Bangladesh, Nepal) with fiscal Asia continues to rely on domestic demand, with policies being generally pro-cyclical in the region. firming but modest support from export growth India’s GDP growth bottomed out in the middle (e.g., Bangladesh, India). Import growth is of 2017 after slowing for five consecutive quarters, accelerating amid strengthening domestic and has since improved significantly, with demand, while higher energy prices are also momentum carrying over into 2018 on the back contributing to a further deterioration of trade of a recovery in investment. Although investment and current account balances (e.g., India, growth was still moderately lower in 2017 than in Pakistan, Nepal). 2016, high-frequency indicators suggest that it Domestic and external financial market accelerated into 2018. The temporary disruptions conditions have been generally supportive, but caused by the implementation of the Goods and sovereign bond spreads have increased in 2018 Services Tax dissipated by mid-2017, and amid rising inflation expectations and monetary manufacturing output and industrial production policy normalization in advanced economies. have continued to firm since then (World Bank Monetary policy in the region has remained 2018m.)1 broadly accommodative and supported fast credit Growth in the region excluding India has been mixed in the first half of 2018. In Bangladesh, Note: This section was prepared by Temel Taskin with contributions from Ekaterine Vashakmadze. Brent Harrison 1India Development Update (2018) presents a comprehensive provided research assistance. section on the structure of Goods and Services Tax. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 138 C H A P TE R 2. 5 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 FIGURE 2.5.1 SAR: Recent developments 2018 has been supported by a recovery in investment, especially in the construction, Growth in South Asia moderated in 2017 to an estimated 6.6 percent. Economic activity continues to rely mainly on domestic demand, with agriculture and related sectors, following a improved but modest support from export volume growth, despite a strong slowdown in 2017 driven in part by adverse rebound in global trade. Current account balances have deteriorated due to higher imports. Strong domestic demand has supported credit growth, weather conditions. and inflation is above or close to central bank targets. China’s investment has been rising in the region, especially through the China-Pakistan Pakistan’s GDP growth rose in FY2017/18, Economic Corridor. supported by infrastructure projects funded by the China Pakistan Economic Corridor (CPEC), A. GDP growth B. Exports improvements in energy supply, and persistent private consumption growth. In Bhutan growth has also 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 the 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). E. Inflation F. FDI, Pakistan The baseline 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, Pakistan Board of Investment, World Bank. A. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. Shaded area growth will remain stable at around 5.6 percent in indicates forecasts. Data for 2018 are forecasts. SAR stands for South Asia Region. B. Data refers to trade volume of goods and non-factor services. Shaded area indicates forecasts. 2018 and throughout the forecast horizon as Data for 2018 are forecasts. Data for Bangladesh, India, and Pakistan are based on fiscal year. Data for Sri Lanka are based on calendar year. ongoing recoveries in Bangladesh, Pakistan, and C. Shaded area indicates forecasts. Data for 2018 are forecasts. Data for Bangladesh, India, and Sri Lanka are offset by slower growth in Pakistan are based on fiscal year. Data for Sri Lanka are based on calendar year. D. Last observation is February 2018 for India and Bangladesh, and March 2018 for Pakistan. Afghanistan, Bhutan, and Maldives. In Pakistan, E. Last observation is March 2018. F. 2018 (FY2017/18) figures are from July through February. GDP growth is estimated to rise to 5.8 percent in 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 EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 O U TH A S I A 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 4.5 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. Per capita growth rates in the region are strong, C. Fiscal balances D. Debt 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 of International Settlements, Emergency Events Database (www.emdat.be, Brussels, Belgium), Haver Analytics, Institute of International Finance, International Monetary Fund, World Risks to the forecast have become more balanced, Bank. A. SAR stands for South Asia Region. with the possibility of further upside surprises to 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. global activity, but remain tilted to the downside D. The peak is defined as the highest debt-to-GDP ratio since 2005Q1. It is identified to have oc- curred in 2009Q3 in India, 2017Q2 in Pakistan, in 2017Q3 in Bangladesh, and 2017Q3 in Sri Lanka. and include domestic policy slippages, renewed 2017 data reflects 2017Q3. Total debt comprised of credit to non-financial corporations, households, security challenges, and natural disasters. The and general government debt. All data are based on calendar year. 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 build-up 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). EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 140 C H A P TE R 2. 5 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 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 5.5 5.6 5.7 -0.3 -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 (CY) 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 0.4 7.5 4.6 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 (CY). 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. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) The economic recovery in Sub-Saharan Africa is strengthening. Growth in the region 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. Stronger-than-expected activity in advanced economies could provide positive spillovers to the region. Tighter global financing conditions and weaker-than-expected commodity prices are the main external downside risks to the outlook. Domestic risks include heightened conflicts, delayed fiscal adjustment, and weak implementation of structural reforms. Recent developments oil production is moderating in some oil exporters due to maturing oil fields (e.g., Angola). The economic recovery in Sub-Saharan Africa (SSA) is strengthening, 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 continue to improve. Nevertheless, Nigeria could commitment to critical macroeconomic and see its current account surplus decline, as import governance reforms in Angola, South Africa, and growth rebounds. In metals exporters, current Zimbabwe has boosted investor confidence. account deficits are narrowing moderately, Mining production is rising in metals exporters, reflecting the effects of a pickup in import- with new mines coming on stream and investment intensive mining investment in some countries. into existing mines increasing, encouraged by Among non-resource-intensive countries, current higher 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. Global financial market conditions (e.g., Mozambique, Sierra Leone). Among non- continue to be favorable and are helping to finance resource-intensive countries, the pickup in current account deficits. While foreign direct economic activity is supported by improving investment flows are rebounding moderately, agricultural conditions and infrastructure portfolio inflows are continuing at a solid pace, investment in some (e.g., Rwanda, Uganda); in helped by several large sovereign-bond issuances others, it reflects rising consumer spending, helped (e.g., Angola, Côte d’Ivoire, Kenya, Nigeria). by low inflation and a rebound in remittances Exchange rates are broadly stable in real effective (e.g., The Gambia, Kenya). However, growth in terms, reflecting reduced exchange market pressures due to improving trade balances, tight Note: The author of this section is Gerard Kambou. Research domestic policies in some countries, and rising assistance was provided by Xinghao Gong. foreign financing. Foreign reserve levels are EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 142 C H A P TE R 2. 6 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 FIGURE 2.6.1 SSA: Economic activity helped by declining food prices and stable exchange rates, prompting central banks in some Economic activity in Sub-Saharan Africa rebounded in 2017, helped by a turnaround in the region’s largest economies, and has continued to countries to further cut interest rates (e.g., strengthen. Recent indicators suggest that metals production and fixed Uganda, Zambia); and, in others, to signal a investment growth are picking up in the region, as commodity prices stabilize. However, oil production is rising at a slower pace in some oil return to an easing cycle (e.g., Kenya). producers, partly due to maturing fields. While current account deficits are Nevertheless, inflation is in high double digits in increasing, due to a pickup in import growth, fiscal deficits are narrowing several countries, owing to currency depreciation helped by higher oil prices and an increase in domestic revenue in some cases. (e.g., Angola, Ethiopia), and high food inflation due to supply disruptions (e.g. Nigeria, Sudan). In A. GDP growth B. Oil production these countries, policy remains tight. Fiscal deficits are narrowing. Among oil exporters, the improvement reflects the recovery in oil prices and expenditure adjustments in some countries (e.g., Chad, Republic of Congo). Progress in boosting non-oil revenue remains limited (e.g., Angola, Nigeria). In non-resource-intensive countries, where commodity revenues represent a small share of total revenues, domestic revenue has C. Metals production D. Investment growth 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 2018e). Median debt levels among metals exporters are rising, reflecting previously undisclosed borrowing in some cases (e.g., Mozambique) and high public E. Current account balance F. Fiscal balance 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 reached unsustainable levels in some countries (e.g., Chad, Republic of Congo). Debt levels are relatively low in Nigeria, but high and rising in Angola, due in part to exchange rate depreciation. Low public saving rates and high public Sources: Haver Analytics, International Energy Agency, IMF Regional Economic Outlook, World investment are contributing to an increase in debt Bank, Bureau of Metal Statistics, World Economic Outlook. A. GDP-weighted averages. levels in some non-resource-intensive countries B. Last observation is February 2018. (e.g., Ethiopia); in others, governance issues are an C. Index rebased on metric ton measurement. D.-F. Median of country groups. Non-resource intensive countries consist of agricultural exporters important contributory factor (e.g., The Gambia). and commodity importers. Countries in the region are increasingly shifting away from traditional multilateral and bilateral increasing, boosted by portfolio inflows in some sources of debt toward bond issuances and non- cases (e.g., Nigeria, South Africa); however, Paris Club bilateral creditors, which are resulting reserve coverage is below the three-months-of in higher debt service costs in some countries (e.g., imports benchmark in many countries, especially Ghana, Nigeria, Zambia). International bonds those that have been hit hard by the decline in have started to mature, and large repayments are commodity prices. Inflation continues to fall, expected over the period 2020-25, which is likely EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 U B- S A H A R A N A F R IC A 143 to pose a significant refinancing challenge to the FIGURE 2.6.2 SSA: Outlook and risks region. To contain further increases in Growth in the region is expected to pick up this year, and firm in 2019-20, government debt, sustained fiscal consolidation, reflecting a gradual recovery in the region’s largest economies, and higher domestic revenue mobilization, and continued robust growth in non-resource-intensive countries. Per capita income growth will remain below its long-term average, and also below the stronger growth will be necessary in many EMDE average, reflecting the slow pace of per capita growth in oil and countries. metals exporters. Excessive reliance on commercially-priced debt 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 implement reforms to tackle macroeconomic C. Composition of public and publicly D. Share of countries where droughts imbalances and boost investment. guaranteed external debt over time starting after 2015 persist • 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 sectors is also likely to remain subdued as Sources: Emergency Events Database (www.emdat.be, Brussels, Belgium), Université Catholique de structural constraints slow efforts to attract Louvain, World Bank. A. B. Shaded areas represent forecasts. long-term investments. The growth forecasts for Angola and South Africa were revised upward. In Angola, the revisions reflect the expectation that a more efficient allocation of remain solid in Ghana, as the effects of high foreign exchange, rising natural gas oil production gradually dissipate. However, production, and improved business sentiment the recovery will be slower than anticipated would help support the rebound in economic among oil exporters in the Central African activity. In South Africa, the pickup in Economic and Monetary Community business confidence is expected to help sustain (CEMAC), reflecting the need for continued the ongoing recovery in investment. fiscal consolidation to stabilize debt levels. • Elsewhere, rising mining output as new • In non-resource-intensive countries, growth is projects come on line, combined with stable expected to remain robust, supported by metals prices, are expected to boost activity in improving agricultural conditions, some metals exporters (e.g., Democratic infrastructure investment, and household Republic of Congo, Zambia); in others, demand. Low inflation, a rebound in private growth is expected to remain subdued as high sector credit growth, and rising remittance government debt levels weigh on the private flows are expected to boost consumer sector (e.g., Mozambique). Among oil spending. The larger countries will continue exporters, growth is projected to moderate but to grow faster (e.g., Côte d’Ivoire, Ethiopia) EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 144 C H A P TE R 2. 6 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 than the smaller ones, due to their stronger tightening of monetary policy among advanced policies and institutional capacity. In Malawi, economies could diminish investor appetite for for instance, growth is expected to be lower higher risk assets in frontier markets, which would than anticipated, reflecting the adverse impact be particularly difficult for countries that rely on of a dry spell and the spread of the fall foreign debt financing to support large current armyworm—a pervasive agricultural pest—on account deficits. A sharp decline in commodity food production. prices would have a significant adverse impact on the region, given the heavy dependence of many Although per capita income growth in the region economies on commodity exports. A possible will turn positive, it will remain well below its trigger could be a slowdown in Chinese growth long-term average, and also below the emerging given the risks posed by interest rate hikes or trade market and developing economy (EMDE) tensions with the United States. A collapse in oil average. The weak convergence of per capita and metals prices would severely undermine income toward EMDE levels reflects the slower efforts at fiscal consolidation, derail progress in pace of per capita growth among oil and metals reining in the region’s debt burden, and exporters. The region’s poverty headcount, at the undermine investor confidence. international poverty line ($1.90/day in 2011 purchasing power parity exchange rates), is On the domestic front, political transitions have projected to decline only slightly over the 2018-20 opened opportunities for reforms in several major period, and decrease more slowly among metals Sub-Saharan African countries that, if exporters and fragile countries. Renewed progress implemented, could bolster the long-term growth on poverty reduction will require a sustained outlook (Angola, South Africa, Zimbabwe). acceleration in per capita income growth. However, the risk of worsening political Structural reforms that increase productivity and instability, and a concurrent weakening of needed support export diversification would be critical to reforms, remains high. Indeed, some of the these efforts. (Chapter 1; Bhorat and Tarp 2016; region’s largest economies, such as Ethiopia and Fosu 2018). Nigeria, are particularly vulnerable to an uptick in social unrest. Risks to debt sustainability are also Risks high in the region. Excessive reliance on commercially-priced debt could lead to debt While risks to the outlook have become more service difficulties in some countries, including balanced, downside risks predominate. On the Ghana, Nigeria, and Zambia. The recurrence of upside, economic activity could strengthen more drought is a further significant downside risk. than envisaged in the near term in the United Droughts that started after 2015 have lasted States and Euro Area—among the region’s largest longer in Sub-Saharan Africa than in other EMDE trade partners—which could generate positive regions. A sudden return of drought conditions spillovers that would help boost growth in the could severely disrupt the ongoing economic region. On the downside, a faster-than-expected recovery in the region. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 U B- S A H A R A N A F R IC A 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 1.5 2.6 2.5 2.9 3.0 0.0 0.2 0.3 Fixed investment 1.5 -0.1 6.1 6.8 7.4 7.6 0.0 0.3 0.4 Exports, GNFS3 2.7 3.5 3.1 3.2 3.5 3.8 0.0 0.1 0.3 Imports, GNFS 3 2.0 -1.2 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 Angola, Nigeria, 4.6 4.3 4.7 4.9 5.3 5.5 -0.1 0.2 0.3 and South Africa 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 South Africa 1.3 0.6 1.3 1.4 1.8 1.9 0.3 0.1 0.2 Nigeria 2.7 -1.6 0.8 2.1 2.2 2.4 -0.4 -0.6 -0.4 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; Congo, Democratic Republic; Congo, Republic; Gabon; Ghana; Nigeria; and Sudan. 5. Includes Benin; Burkina Faso; Cameroon; Central African Republic; Chad; Congo, Republic; Côte d’Ivoire; Equatorial Guinea; Gabon; Mali; Niger; Senegal; and Togo. For additional information, please see www.worldbank.org/gep. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 146 C H A P TE R 2. 6 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 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 5.8 4.8 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 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. EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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 1 References Crisis in MENA. Meeting the Development Challenge.” MENA Economic Monitor. Arezki, R., L. Mottaghi, A. Barone, Andrea; R. Y. Washington, DC: World Bank. Fan, Y. Kiendrebeogo, and D. 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Washington, DC: World Bank. ———. 2018h. “Making the Recovery Sustainable.” Georgia Country Economic Update. ———. 2017b. “Decentralization that Delivers.” February. Washington, DC: World Bank. Indonesia Economic Quarterly. December. Washington, DC: World Bank. ———. 2018i. “A Robust Recovery with Underlying Weaknesses.” Kyrgyz Republic ———. 2017c. “Turmoil to Transformation, 20 Economic Update. Washington, DC: World Bank. Years after the Asian Financial Crisis.” Malaysia Economic Monitor. December. Washington, DC: ———. 2018j. “Migration and Development World Bank. Brief 29.” World Bank, Washington, DC ———. 2017d. Philippines Economic Update. ———. 2018k. "West Bank and Gaza Electricity Washington, DC: World Bank. Sector Performance Improvement Project." World Bank, Washington, DC. ———. 2017e. 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EMBARGOED: NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JUNE 5, 2018 AT 4:01 PM EDT (8:01 PM UTC) 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.