A World Bank Group Flagship Report JUNE 2019 Global Economic Prospects Heightened Tensions, Subdued Investment JUNE 2019 Global Economic Prospects © 2019 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. 1 2 3 4 22 21 20 19 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Summary of Contents Chapter 1 Global Outlook: Weak Momentum, Heightened Risks .......................................... 1 Special Focus 1.1 Investment: Subdued Prospects, Strong Needs .....................................................53 Special Focus 1.2 Currency Depreciations, Inflation, and Central Bank Independence ......................67 Chapter 2 Regional Outlooks ............................................................................................87 Special Focus 2.1 Growth in Low-Income Countries: Evolution, Prospects, and Policies .................131 Boxes Box 1.1 Debt: No free lunch ...........................................................................11 Box 1.2 Short-term growth prospects for LICs ..................................................22 Box 1.3 Regional perspectives: Recent developments and outlook........................27 III Table of Contents Foreword.........................................................................................................................................xi Acknowledgments ......................................................................................................................... xiii Executive Summary......................................................................................................................... xv Abbreviations ............................................................................................................................... xvii Chapter 1 Global Outlook: Weak Momentum, Heightened Risks ...........................................1 Summary ............................................................................................................3 Major economies: Recent developments and outlook ............................................... 7 United States..................................................................................................8 Euro Area ......................................................................................................8 Japan.............................................................................................................9 China ............................................................................................................9 Global trends ..................................................................................................... 10 Global trade ................................................................................................. 10 Financial markets.......................................................................................... 17 Commodity markets .................................................................................... 19 Emerging market and developing economies: Recent developments and outlook ....... 20 Recent developments..................................................................................... 21 Outlook....................................................................................................... 26 Risks to the outlook ............................................................................................ 30 Renewed trade tensions and policy uncertainty ................................................ 31 Financial stress episodes................................................................................. 32 Sharper-than-expected slowdowns in major economies...................................... 34 Region-speci c downside risks........................................................................ 35 Policy challenges................................................................................................. 36 Challenges in advanced economies.................................................................. 36 Challenges in emerging market and developing economies ................................ 38 Box 1.1 Debt: No free lunch................................................................................ 11 Box 1.2 Short-term growth prospects for LICs ....................................................... 22 Box 1.3 Regional perspectives: Recent developments and outlook ........................... 27 References.......................................................................................................... 45 V Special Focus 1.1 Investment: Subdued Prospects, Strong Needs ..................................................... 53 Recent developments and prospects ...................................................................... 55 Drivers of investment growth............................................................................... 56 Implications and policy responses ......................................................................... 60 Annex SF1.1.1 Empirical analysis ......................................................................... 62 References ......................................................................................................... 65 Special Focus 1.2 Currency Depreciations, Inflation, and Central Bank Independence ...................... 67 Introduction...................................................................................................... 69 Pass-through across countries and over time .......................................................... 70 Pass-through to in ation and underlying shocks ................................................... 73 Pass-through and country characteristics ............................................................... 76 Conclusion........................................................................................................ 78 Annex SF1.2.1 Methodology............................................................................... 79 References ......................................................................................................... 83 Chapter 2 Regional Outlooks ............................................................................................. 87 East Asia and Pacific .......................................................................................... 89 Recent developments........................................................................................ 89 Outlook.......................................................................................................... 91 Risks .............................................................................................................. 92 Europe and Central Asia .................................................................................... 95 Recent developments........................................................................................ 95 Outlook.......................................................................................................... 97 Risks ............................................................................................................. 99 Latin America and the Caribbean ...................................................................... 103 Recent developments...................................................................................... 103 Outlook........................................................................................................ 105 Risks ............................................................................................................ 106 Middle East and North Africa ........................................................................... 109 Recent developments...................................................................................... 109 Outlook........................................................................................................ 110 Risks ............................................................................................................ 111 South Asia ....................................................................................................... 115 Recent developments...................................................................................... 115 VI Outlook ........................................................................................................ 117 Risks ............................................................................................................ 118 Sub-Saharan Africa ..........................................................................................121 Recent developments...................................................................................... 121 Outlook ........................................................................................................ 123 Risks ............................................................................................................ 124 References........................................................................................................ 128 Special Focus 2.1 Growth in Low-Income Countries: Evolution, Prospects, and Policies ................ 131 Introduction.....................................................................................................133 What has supported growth in LICs since 2001? ..................................................135 How have these factors affected LIC progression to MIC income levels? .................139 Prospects for further LIC progression .................................................................141 Conclusion.......................................................................................................143 References ........................................................................................................146 Statistical Appendix ....................................................................................................................... 149 Selected Topics .............................................................................................................................. 157 Figures 1.1 Global growth prospects ....................................................................... 5 1.2 Global risks and policy challenges .......................................................... 6 1.3 Advanced economies ............................................................................ 7 1.4 United States ...................................................................................... 7 1.5 Euro Area ........................................................................................... 8 1.6 China ................................................................................................. 9 1.7 Global trade ...................................................................................... 10 1.1.1 Government debt, deficits, and multipliers ........................................... 13 1.1.2 Borrowing costs and fiscal positions ..................................................... 15 1.8 Global finance................................................................................... 18 1.9 Commodity markets .......................................................................... 19 1.10 Activity in EMDEs ............................................................................ 20 1.2.1 Short-term economic prospects for LICs .............................................. 23 1.11 EMDE growth prospects .................................................................... 26 1.3.1 Regional growth ................................................................................ 27 1.12 EMDE per capita income growth and poverty ...................................... 30 1.13 Balance of risks.................................................................................. 31 VII 1.14 Risk of renewed trade tensions and policy uncertainty............................ 32 1.15 Risk of renewed financial stress............................................................ 33 1.16 Risk of sharp slowdowns in major economies ........................................ 35 1.17 Climate risks and poverty ................................................................... 36 1.18 Monetary and fiscal policies in advanced economies .............................. 37 1.19 Structural policies in advanced economies ............................................ 38 1.20 EMDE monetary policy ..................................................................... 39 1.21 EMDE fiscal policy............................................................................ 41 1.22 EMDE structural policies ................................................................... 42 SF1.1.1 Investment trends and prospects.......................................................... 55 SF1.1.2 Decomposition of EMDE investment trends ....................................... 57 SF1.1.3 Drivers of investment growth in EMDEs ............................................. 59 SF1.1.4 Implications of weak investment growth in EMDEs ............................. 60 SF1.2.1 EMDE exchange rates, monetary policy rates, and inflation in 2018........ 70 SF1.2.2 Correlation between inflation and effective exchange rate changes ........... 71 SF1.2.3 Pass-through during significant currency depreciations .......................... 72 SF1.2.4 Variance decompositions of exchange rate movements, 1998-2017 ......... 74 SF1.2.5 Shock-specific pass-throughs, 1998-2017 ............................................. 75 SF1.2.6 Average pass-through ......................................................................... 76 SF1.2.7 Global economic integration and pass-through ..................................... 77 SF1.2.8 Monetary policy frameworks and pass-through ..................................... 78 Annex Figure SF1.2.1.1 Robustness of pass-through estimates: One- versus two-quarter sign restrictions ................................................................................. 80 Annex Figure SF1.2.1.2 Robustness of pass-through estimates: Additional sign restriction to identify domestic demand shocks..................................................... 81 2.1.1 EAP region excluding China: Recent developments .............................. 90 2.1.2 China: Recent developments............................................................... 91 2.1.3 EAP region: Outlook and risks ............................................................ 92 2.2.1 ECA: Recent developments................................................................. 96 2.2.2 ECA: Outlook and risks ..................................................................... 97 2.3.1 LAC: Recent developments................................................................104 2.3.2 LAC: Outlook and risks ....................................................................105 2.4.1 MENA: Recent developments ............................................................110 2.4.2 MENA: Outlook and risks.................................................................111 2.5.1 SAR: Recent developments ................................................................116 2.5.2 SAR: Outlook and risks.....................................................................117 VIII 2.6.1 SSA: Recent developments.................................................................122 2.6.2 SSA: Outlook and risks .....................................................................123 SF2.1.1 LIC growth since 2001......................................................................134 SF2.1.2 Cyclical and structural factors supporting LIC growth ..........................135 SF2.1.3 Domestic factors supporting LIC growth.............................................137 SF2.1.4 Factors supporting LIC progression to MIC income levels.....................139 SF2.1.5 Features of today’s LICs ....................................................................141 SF2.1.6 Challenges LICs face in reducing poverty ............................................143 Tables 1.1 Real GDP ........................................................................................... 4 1.2.1 Low-income country forecasts ............................................................. 25 1.2 Emerging market and developing economies......................................... 44 SF1.1.1 Economies in sample.......................................................................... 61 Annex Table SF1.1.1.1 Correlates of investment growth ........................................ 64 SF1.2.1 Countries and sample periods ............................................................. 83 2.1.1 East Asia and Pacific forecast summary................................................. 94 2.1.2 East Asia and Pacific country forecasts.................................................. 94 2.2.1 Europe and Central Asia forecast summary ......................................... 100 2.2.2 Europe and Central Asia country forecasts .......................................... 101 2.3.1 Latin America and the Caribbean forecast summary ............................ 107 2.3.2 Latin America and the Caribbean country forecasts ............................. 108 2.4.1 Middle East and North Africa forecast summary ................................. 113 2.4.2 Middle East and North Africa economy forecasts ................................ 114 2.5.1 South Asia forecast summary............................................................. 119 2.5.2 South Asia country forecasts.............................................................. 120 2.6.1 Sub-Saharan Africa forecast summary................................................. 126 2.6.2 Sub-Saharan Africa country forecasts ................................................. 127 SF2.1.1 Low-income countries ...................................................................... 144 IX Foreword Global growth has continued to weaken and the effectiveness of macroeconomic policy, and momentum remains fragile. As this edition of the weighing on investment and growth. Global Economic Prospects report documents, investment is sluggish. Downside risks to growth Unsustainable debt levels have become increasingly predominate, including rising trade barriers, a troublesome in the last few years, with incentives build-up of government debt, and deeper-than- often working against transparency. As this report highlights, EMDE government debt is higher than expected slowdowns in several major economies. before the global financial crisis by an average of 15 Substantial challenges are clouding the global percentage points of GDP. The bottom line is that economic outlook in both the near and long term. EMDEs need to strike a careful balance between For emerging market and developing economies acquiring debt to promote investment growth and (EMDEs), lackluster investment is particularly avoiding risks associated with excessive levels and concerning. Investment growth in these economies hidden forms of debt. is expected to remain weak and below historical averages, held back by sluggish global growth; This report also details the difficulties low-income limited fiscal space; and structural constraints that countries face in the effort to improve living misallocate or discourage investment such as poor standards. A number of these countries achieved business environments, labor and product market middle-income status between 2000 and 2018, but controls, and weak governance. Subdued current low-income countries face a steeper road to investment weakens the foundations for the deliver the same progress. Relative to countries that sustained growth that is needed to alleviate extreme made the earlier leap to middle-income ranks, poverty and advance shared prosperity. many of today’s low-income countries are poorer, more fragile, constrained geographically, and In an era of low interest rates, government heavily reliant on subsistence agriculture. It will borrowing might appear to be an attractive option take comprehensive policy changes to tackle these to finance growth-enhancing investment projects. difficulties. Debt is often an important tool for development and poverty reduction, and sustainable borrowing Policymakers have a wide range of options to can help countries finance investments in bolster investment and growth. In light of the infrastructure, health, education, and other formidable challenges, big policy adjustments are essential areas. To be additive to growth, however, urgently needed, including decisive action to debt has to be transparent and well managed. undertake structural reforms for growth that will Otherwise, it becomes more of a burden than a lead to stronger development outcomes for benefit by increasing vulnerability to crises, eroding countries. David Malpass President The World Bank Group XI Acknowledgments This World Bank Group Flagship Report is a product of the Prospects Group in the Equitable Growth, Finance and Institutions (EFI) Vice Presidency. The project was managed by M. Ayhan Kose and Franziska Ohnsorge, under the general guidance of Ceyla Pazarbasioglu. Global and regional surveillance work was editorial support, with contributions from coordinated by Carlos Arteta. The primary Adriana Maximiliano. authors of this report were Jongrim Ha, Patrick Kirby, Rudi Steinbach, Marc Stocker, Naotaka Regional projections and write-ups were produced in coordination with country teams, country Sugawara, Temel Taskin, Ekaterine Vashakmadze, Dana Vorisek, Collette M. Wheeler, and Lei directors, and the offices of the regional chief Sandy Ye. economists. The print publication was produced by Maria Other contributors included John Baffes, Csilla Hazel Macadangdang, Adriana Maximiliano, and Lakatos, Peter Nagle, Franz Ulrich Ruch, and Quinn Sutton, in collaboration with Luiz H. Hakan Yilmazkuday. Almeida, Andrew Charles Berghauser, Adam Broadfoot, Aziz Gökdemir, Michael Harrup, and Research assistance was provided by Liu Cui, Jewel McFadden. Ishita Dugar, Mengyi Li, Maria Hazel Macadangdang, Claudia Marchini, Julia R.R. The analysis benefited from comments and Norfleet, Jinxin Wu, and Heqing Zhao. Modeling suggestions by staff members from World Bank and data work were provided by Rajesh Kumar Group country teams and other World Bank Danda and Julia R.R. Norfleet. Group Vice Presidencies as well as Executive Directors in their discussions of the report on The online publication was produced by Graeme May 23, 2019. However, both forecasts and Littler and Mikael Reventar. Mark Felsenthal analysis are those of the World Bank Group staff managed media relations and dissemination. and should not be attributed to Executive Mark Felsenthal and Graeme Littler provided Directors or their national authorities. XIII Executive Summary Global growth has continued to soften this year. Momentum remains weak and policy space is limited. A subdued recovery in investment growth in emerging market and developing economies (EMDEs) dampens potential growth prospects and hampers progress toward achieving the Sustainable Development Goals. Risks remain firmly on the downside, including the possibility of escalating trade tensions, sharper-than-expected slowdowns in major economies, and renewed financial stress in EMDEs. Meanwhile, rising debt constrains the ability of EMDE governments to support economic activity in the event of adverse developments, as well as finance growth-enhancing investments. This highlights the need for policy actions to undertake reforms to boost private investment and productivity growth. These reforms are particularly urgent in low-income countries, which face more significant challenges today than they did in the early 2000s. Global Outlook. Global growth in 2019 has been growth prospects. Well-designed social safety nets downgraded to 2.6 percent, 0.3 percentage point and active labor market policies are key to below previous forecasts, reflecting weaker-than- managing risks and protecting vulnerable groups. expected international trade and investment at This edition of Global Economic Prospects includes the start of the year. Growth is projected to analytical essays on the benefits and risks of gov- gradually rise to 2.8 percent by 2021, predicated ernment borrowing, recent investment weakness on continued benign global financing conditions, in EMDEs, the pass-through of currency as well as a modest recovery in emerging market depreciations to inflation, and the evolution of and developing economies (EMDEs) previously growth in low-income countries (LICs). affected by financial market pressure. However, EMDE growth remains constrained by subdued Debt: No Free Lunch. Government debt has investment, which is dampening prospects and risen substantially in EMDEs, by an average of 15 impeding progress toward achieving development percentage points of GDP since 2007 to 51 goals. Risks are also firmly on the downside, in percent of GDP in 2018. The current part reflecting the possibility of destabilizing environment of low global interest rates and weak policy developments, including a further growth may appear to mitigate concerns about escalation of trade tensions between major elevated debt levels. Considering currently economies; renewed financial turmoil in EMDEs; subdued investment additional government borrowing might also appear to be an attractive and sharper-than-expected slowdowns in major option for financing growth-enhancing initiatives economies. It is therefore urgent for EMDEs to such as investment in human and physical reinforce policy buffers and build resilience to capital. However, history suggests caution: the possible negative shocks, and to implement cost of rolling over debt can increase sharply reforms that promote private investment and during periods of financial stress and result in improve public sector efficiency. Efforts to financial crises; high debt levels can limit the strengthen access to markets and technology ability of governments to provide fiscal stimulus while boosting the quality of infrastructure and during downturns; and high debt can weigh on governance should be prioritized and be investment and long-term growth, especially at a implemented through cost-effective and private- time when investment momentum is already sector-led solutions. Structural reforms aimed at weak. Hence, EMDEs need to strike a careful improving the business climate would also boost balance between taking advantage of low interest XV rates and avoiding the potentially adverse exchange rate pass-through to inflation associated consequences of excessive debt accumulation. with different shocks and with different country This is particularly critical at present given the set characteristics. The pass-through to inflation of risks facing the global economy, which will tends to be largest when currency movements are require EMDEs to have adequate fiscal policy triggered or amplified by monetary policy action. space and build resilience to financial market In contrast, the pass-through is significantly disruptions. smaller when central banks pursue a credible inflation target, operate in a flexible exchange rate Investment: Subdued Prospects, Strong Needs. regime, and are independent from fiscal Investment growth in EMDEs over the next three authorities. This highlights the critical importance years is expected to be subdued and below of central bank credibility, given the self- historical averages. This continues a prolonged, reinforcing feedback loop between credibility, broad-based slowdown after the global financial the exchange rate and price stability. These crisis, notwithstanding a modest recovery between episodes also serve as a reminder of the risks posed 2016 and 2018. During the forecast period, by excessive levels of foreign currency debt, and EMDE investment growth is expected to be held EMDEs can foster resilience to periods of back by weak global growth, limited fiscal space financial stress by issuing debt contracted at against the backdrop of elevated debt, and the longer maturities, at fixed interest rates, and presence of several structural constraints. Weak denominated in local currency, where possible. investment is a concern because it will further dampen potential growth, and make achieving the Growth in Low-Income Countries: Evolution, Sustainable Development Goals more difficult. Prospects and Policies. There are currently 34 Depending on country circumstances, the use of countries classified as low-income, about half the appropriate fiscal and structural reforms could number in 2001. Rapid growth in low-income generate upside potential for investment in the countries from 2001-18 allowed many to progress medium and long term. For EMDEs with limited to middle-income status, supported by a pre-crisis fiscal space, institutional reforms to improve commodity price boom, the MDRI and HIPC business conditions could help attract private debt relief initiatives, increased investment in investment. In light of elevated debt levels, human and physical capital, improved economic policymakers should also ensure resources are policy frameworks, and recoveries from the deep allocated to high quality investment projects and recessions in transition economies during the improve the transparency and efficiency of public 1990s. However, the prospects for today’s LICs investment management systems where necessary. appear much more challenging. Compared to the LICs in 2001 that became middle-income Currency Depreciations, Inflation and Central countries, today’s LICs are further below the Bank Independence. Financial market turbulence middle-income threshold and more often fragile in 2018 illustrated, once again, that EMDEs than were LICs in 2001. Their heavy reliance on continue to face the risk of destabilizing exchange agriculture makes them vulnerable to climate rate movements. These stress episodes often change and extreme weather events, and their compel central banks to tighten policy to lessen scope to boost external trade is limited by currency pressures and fend off inflationary geography. Coordinated and multi-pronged pressures despite slowing growth. To design policy efforts are required to address these appropriate policies it is important to quantify the challenges. XVI Abbreviations ACP African, Caribbean and Pacific Group of States AE advanced economy CDS credit default swap CPTPP Comprehensive and Progressive Agreement for Trans-Pacific Partnership DR-CAFTA Central America-Dominican Republic Free Trade Agreement EAP East Asia and Pacific ECA Europe and Central Asia ECB European Central Bank ECI Economic Complexity Index EMBI Emerging Market Bond Index EMDE emerging market and developing economies ERPTR exchange rate pass-through ratio EU European Union FAVAR Bayesian factor-augmented vector autoregression FCV fragility, conflict, and violence FDI foreign direct investment GCC Gulf Cooperation Council GDP gross domestic product GEP Global Economic Prospects GMM generalized methods of moments GNFS goods and nonfactor services GNI gross national income GST goods and services tax GVCs global value chains HIPC Heavily Indebted Poor Countries ICE Intercontinental Exchange ICRG International Country Risk Guide IMF International Monetary Fund IT inflation targeting LAC Latin America and the Caribbean LFPR Labor force participation rate LIC low-income country LSAP Large-Scale Asset Purchase MDRI Multilateral Debt Relief Initiative MENA Middle East and North Africa MEP Maturity Extension Program MIC middle-income country XVII NEER nominal effective exchange rate NPL nonperforming loan ONI Oceanic Niño Index OPEC Organization of the Petroleum Exporting Countries PMI Purchasing Managers’ Index PPP purchasing power parity REER Real Effective Exchange Rate RHS right-hand side (in figures) RMB renminbi SAR South Asia Region SSA Sub-Saharan Africa SSE Shanghai Stock Exchange TFP total factor productivity TiVA Trade in Value Added USMCA United States-Mexico-Canada Agreement VAT Value-added tax WAEMU West African Economic and Monetary Union WGI World Governance Indicators WTO World Trade Organization XVIII CHAPTER 1 GLOBAL OUTLOOK Weak Momentum, Heightened Risks G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 3 Global growth in 2019 has been downgraded to 2.6 percent, 0.3 percentage point below previous forecasts, reflecting weaker-than-expected international trade and investment at the start of the year. Growth is projected to gradually rise to 2.8 percent by 2021, predicated on continued benign global financing conditions, as well as a modest recovery in emerging market and developing economies (EMDEs) previously affected by financial market pressure. However, EMDE growth remains constrained by subdued investment, which is dampening prospects and impeding progress toward achieving development goals. Risks are also firmly on the downside, in part reflecting the possibility of destabilizing policy developments, including a further escalation of trade tensions between major economies; renewed financial turmoil in EMDEs; and sharper-than-expected slowdowns in major economies. It is therefore urgent for EMDEs to reinforce policy buffers and build resilience to possible negative shocks, and to implement reforms that promote private investment and improve public sector efficiency. Efforts to strengthen access to markets and technology while boosting the quality of infrastructure and governance should be prioritized and be implemented through cost-effective and private-sector-led solutions. Structural reforms aimed at improving the business climate would also boost growth prospects. Well-designed social safety nets and active labor market policies are key to managing risks and protecting vulnerable groups. Summary partially recovered because of tightening supply conditions. EMDE growth momentum continues Global economic activity continued to soften at to be generally subdued, as slowing global trade the start of 2019, with trade and manufacturing and persistent policy uncertainty in key economies showing signs of marked weakness (Figures 1.1.A are only partially offset by recent improvements in and B). Heightened policy uncertainty, including external financing conditions. a recent re-escalation of trade tensions between Global growth in 2019 has been downgraded to major economies, has been accompanied by a 2.6 percent—0.3 percentage point below previous deceleration in global investment and a decline in projections—reflecting the broad-based weakness confidence (Figure 1.1.C). Activity in major observed during the first half of the year, advanced economies—particularly in the Euro including a further deceleration in investment Area—as well as in some large emerging market amid rising trade tensions. In particular, global and developing economies (EMDEs) has been trade growth in 2019 has been revised down a full weaker than previously expected. Recent high- percentage point, to 2.6 percent—slightly below frequency indicators suggest this period of the pace observed during the 2015-16 trade weakness may be receding; however, global slowdown, and the weakest since the global activity remains subdued. financial crisis. Amid low global inflation and a deterioration of As recent softness abates, global growth is the growth outlook, the prospect that the U.S. projected to edge up to 2.7 percent in 2020 and Federal Reserve and other major central banks will to 2.8 percent in 2021. Slowing activity in tighten monetary policy in the near term has advanced economies and China is expected to faded, leading to an easing in global financing be accompanied by a modest cyclical recovery conditions and a recovery of capital flows to in major commodity exporters and in a number EMDEs. However, weakening external demand of EMDEs affected by recent pressure related has weighed on export growth across EMDE to varying degrees of financial market stress regions. Although demand for industrial or idiosyncratic headwinds such as sanctions commodities has generally softened, prices have (Figure 1.1.D). Note: This chapter was prepared by Carlos Arteta, Patrick Kirby, EMDE growth is projected to pick up from a and Marc Stocker, with contributions from Ekaterine Vashakmadze four-year low of 4 percent in 2019—0.3 and Collette M. Wheeler. Additional inputs were provided by John percentage point below previous projections—to Baffes, Csilla Lakatos, Peter Nagle, Franz Ulrich Ruch, and Rudi Steinbach. Research assistance was provided by Liu Cui, Ishita 4.6 percent in 2020-21. This recovery is Dugar, Claudia Marchini, Julia R.R. Norfleet, and Jinxin Wu. predicated on the waning impact of earlier 4 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 TABLE 1.1 Real GDP1 Percentage point differences (Percent change from previous year) from January 2019 projections 2016 2017 2018e 2019f 2020f 2021f 2019f 2020f 2021f World 2.6 3.1 3.0 2.6 2.7 2.8 -0.3 -0.1 0.0 Advanced economies 1.7 2.3 2.1 1.7 1.5 1.5 -0.3 -0.1 0.0 United States 1.6 2.2 2.9 2.5 1.7 1.6 0.0 0.0 0.0 Euro Area 2.0 2.4 1.8 1.2 1.4 1.3 -0.4 -0.1 0.0 Japan 0.6 1.9 0.8 0.8 0.7 0.6 -0.1 0.0 0.0 Emerging market and developing economies 4.1 4.5 4.3 4.0 4.6 4.6 -0.3 0.0 0.0 Commodity-exporting EMDEs 1.5 2.1 2.2 2.1 3.1 3.0 -0.4 0.1 0.0 Other EMDEs 6.0 6.1 5.8 5.2 5.5 5.5 -0.3 -0.1 -0.1 Other EMDEs excluding China 5.1 5.4 4.9 4.2 4.8 5.0 -0.5 -0.1 -0.1 East Asia and Pacific 6.3 6.5 6.3 5.9 5.9 5.8 -0.1 -0.1 0.0 China 6.7 6.8 6.6 6.2 6.1 6.0 0.0 -0.1 0.0 Indonesia 5.0 5.1 5.2 5.2 5.3 5.3 0.0 0.0 0.0 Thailand 3.4 4.0 4.1 3.5 3.6 3.7 -0.3 -0.3 -0.2 Europe and Central Asia 1.9 4.1 3.1 1.6 2.7 2.9 -0.7 0.0 0.0 Russia 0.3 1.6 2.3 1.2 1.8 1.8 -0.3 0.0 0.0 Turkey 3.2 7.4 2.6 -1.0 3.0 4.0 -2.6 0.0 -0.2 Poland 3.1 4.8 5.1 4.0 3.6 3.3 0.0 0.0 0.0 Latin America and the Caribbean -0.3 1.7 1.6 1.7 2.5 2.7 -0.4 -0.2 0.0 Brazil -3.3 1.1 1.1 1.5 2.5 2.3 -0.7 0.1 -0.1 Mexico 2.9 2.1 2.0 1.7 2.0 2.4 -0.3 -0.4 0.0 Argentina -2.1 2.7 -2.5 -1.2 2.2 3.2 0.5 -0.5 0.1 Middle East and North Africa 5.1 1.2 1.4 1.3 3.2 2.7 -0.6 0.5 0.0 Saudi Arabia 1.7 -0.7 2.2 1.7 3.1 2.3 -0.4 0.9 0.1 Iran 13.4 3.8 -1.9 -4.5 0.9 1.0 -0.9 -0.2 -0.1 Egypt2 4.3 4.2 5.3 5.5 5.8 6.0 -0.1 0.0 0.0 South Asia 8.1 6.7 7.0 6.9 7.0 7.1 -0.2 -0.1 0.0 India3 8.2 7.2 7.2 7.5 7.5 7.5 0.0 0.0 0.0 Pakistan2 4.6 5.4 5.8 3.4 2.7 4.0 -0.3 -1.5 -0.8 Bangladesh2 7.1 7.3 7.9 7.3 7.4 7.3 0.3 0.6 0.5 Sub-Saharan Africa 1.3 2.6 2.5 2.9 3.3 3.5 -0.5 -0.3 -0.2 Nigeria -1.6 0.8 1.9 2.1 2.2 2.4 -0.1 -0.2 0.0 South Africa 0.6 1.4 0.8 1.1 1.5 1.7 -0.2 -0.2 -0.1 Angola -2.6 -0.1 -1.7 1.0 2.9 2.8 -1.9 0.3 0.0 Memorandum items: Real GDP1 High-income countries 1.7 2.3 2.1 1.8 1.6 1.6 -0.2 -0.1 0.0 Developing countries 4.4 4.8 4.6 4.2 4.7 4.8 -0.3 -0.1 0.0 Low-income countries 4.8 5.6 5.6 5.4 6.0 6.1 -0.5 -0.2 -0.2 BRICS 4.6 5.3 5.4 5.1 5.3 5.3 -0.1 0.0 0.0 World (2010 PPP weights) 3.3 3.7 3.7 3.3 3.5 3.6 -0.3 -0.1 0.0 World trade volume4 2.8 5.5 4.1 2.6 3.1 3.2 -1.0 -0.4 -0.2 Commodity prices5 Oil price -15.6 23.3 29.4 -3.4 -1.5 0.7 -0.5 -1.5 0.7 Non-energy commodity price index -2.8 5.5 1.7 -2.1 -0.1 1.4 -3.1 -1.3 0.2 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. Due to lack of data, the World Bank has ceased producing a growth forecast for Venezuela and has removed Venezuela from all growth aggregates in which it was previously included. 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 2019 refers to FY2018/19. 3. The column labeled 2018 refers to FY2018/19. 4. World trade volume of goods and non-factor services. 5. Oil is the simple average of Brent, Dubai, and West Texas Intermediate. The non-energy index is comprised of the weighted average of 39 commodities (7 metals, 5 fertilizers, 27 agricultural commodities). For additional details, please see http://www.worldbank.org/en/research/commodity-markets. Click here to download data. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 5 financial pressure currently weighing on activity in FIGURE 1.1 Global growth prospects some large EMDEs, and on more benign global Global growth softened further in the first half of the year, as trade and financing conditions than previously expected. It manufacturing decelerated. Amid heightened policy uncertainty, also assumes no further escalation in trade confidence has declined. A more dovish stance by major central banks has led to some easing in financing conditions. After weakness in 2019, restrictions between major economies and stability EMDE growth is expected to recover in 2020-21, as headwinds in key in commodity prices. Despite this projected economies fade. In many EMDEs, this recovery will not be enough to recovery, per capita growth in a large number of narrow per capita income gaps with advanced economies. Subdued investment will continue to weigh on EMDE growth prospects. EMDEs will remain insufficient to narrow income gaps with advanced economies—including in Sub- A. Global growth B. Global manufacturing and new Saharan Africa, a region with a high concentration export orders of poverty (Figure 1.1.E). Moreover, EMDE investment growth will remain soft, particularly in commodity exporters and countries affected by recent pressures (Figure 1.1.F). Factors contributing to the weak pace of EMDE investment growth include elevated debt levels, limited fiscal space, lack of clarity about policy direction, and inadequate business climates. Subdued investment will weigh on EMDE growth C. Global business confidence D. Growth in EMDEs prospects directly through slower capital deepening and indirectly through its dampening impact on productivity, which will make achieving the Sustainable Development Goals more difficult. Amid a low probability of substantial near-term policy improvements in major economies, risks remain firmly on the downside (Figure 1.2.A). Confidence and investment could be markedly impacted by a sudden rise in policy uncertainty— E. Per capita growth and share of F. Investment growth in EMDEs EMDEs with widening income gaps triggered, for instance, by substantial new trade in 2019 barriers between major economies resulting in cascading trade costs and a lack of clarity about future trading rules (Figure 1.2.B). If this rise is persistent, the impact on global investment and activity could be severe. An increase in uncertainty could also be related to a heightened possibility of a disorderly exit of the United Kingdom from the European Union (EU). Similarly, a sustained dissipation of these uncertainties—for instance, Source: Haver Analytics, J.P. Morgan, Organisation for Economic Co-operation and Development, World Bank. due to a comprehensive resolution of trade Note: EMDEs = emerging market and developing economies. tensions between the United States and China— A.D.F. Shaded areas indicate forecasts. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. Data for 2018 are estimates. could significantly buttress global growth B. Manufacturing and new export orders are measured by Purchasing Managers’ Index (PMI). PMI readings above 50 indicate expansion in economic activity; readings below 50 indicate contraction. prospects. The potential gains associated with such Black horizontal line indicates expansionary threshold. Last observation is April 2019. a resolution highlight the large opportunity costs C. Average business confidence across major advanced economies and EMDEs, including Brazil, Canada, France, Germany, Italy, Japan, Russia, Turkey, the United Kingdom, and the United States. that additional trade tensions would entail. Last observation is April 2019. D.F. EMDEs under recent pressure include: a) countries that have had an increase in their J.P. Morgan EMBI credit spread of at least one standard deviation above the 2010-19 average at any time A weakening of financial market sentiment could since April 2018 (Argentina, Brazil, Egypt, Gabon, Jordan, Lebanon, Mexico, Nigeria, South Africa, Sri Lanka, Tunisia, Turkey); or b) countries that have been subject to recent sanctions (Iran, Russia). lead to sudden increases in risk premiums and be E. EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the Caribbean, MNA = Middle East and North Africa, SAR = South Asia, SSA = Sub-Saharan Africa. amplified by high and rising debt levels, corporate Countries with widening income gaps are those with per capita GDP growth at least 0.1 percentage point lower than advanced-economy per capita GDP growth. sector vulnerabilities, and increasing refinancing Click here to download data and charts. 6 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE 1.2 Global risks and policy challenges pressures in many EMDEs (Figure 1.2.C). The Downside risks continue to dominate. A further escalation of trade tensions risk of a sharper-than-expected deceleration in involving major economies could lead to a sharp increase in trade barriers major economies—such as the Euro Area, the and weigh on confidence and investment. The risk of financial stress in United States, or China—would result in EMDEs could be exacerbated by increasing debt-refinancing needs. A sharp deceleration in major economies would have large spillover effects considerably weaker global and EMDE growth for EMDEs and increase the probability of a marked global downturn. (Figure 1.2.D). Meanwhile, climate change poses Rising public debt levels are reducing the effectiveness of fiscal policy in EMDEs. Structural reforms, such as improvements in institutional quality, ever-growing risks to various EMDE regions. can help boost growth and reduce poverty. Moderating global activity and heightened A. Probability distribution around B. Average import tariffs in G20 downside risks highlight the need for policymakers global growth forecasts countries in advanced economies and EMDEs to reinforce policy buffers against possible negative shocks, and to shore up both short-term and long-term growth prospects. For advanced economies, the associated challenges include the appropriate use of automatic fiscal stabilizers and discretionary spending, when feasible, as well as clear and credible monetary C. International bond redemptions in D. Impact of 1 percentage point policy guidance that reduces the risk of abrupt EMDEs growth slowdown in the United market adjustments. Productivity-enhancing States, Euro Area, and China reforms are also crucial to deal with slowing labor force growth. In EMDEs, policymakers need to use the opportunity provided by still benign financing conditions to rebuild fiscal and monetary policy buffers to confront future shocks. Even if borrowing costs are currently low, countries with constrained fiscal positions may find that rising E. Fiscal multipliers in EMDEs F. Poverty, by regulatory quality debt levels limit the effectiveness of public spending and make them more vulnerable to crises (Box 1.1; Figure 1.2.E). Amid adverse debt dynamics and narrowing fiscal space, authorities need to urgently strengthen domestic resource mobilization, prioritize growth-enhancing spending, and improve debt management and transparency. Source: Bloomberg; Dealogic; International Monetary Fund; World Bank. While growth prospects are subdued, there is a A. 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 substantial upside potential from the imple- factors: Oil price futures, S&P 500 equity price futures, and term spread forecasts. Each of the risk factor’s weight is derived from the model described in Ohnsorge, Stocker, and Some (2016). Values mentation of structural reforms that improve the for 2019 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 2020 are based on 18-month-ahead business climate and encourage job creation. forecast distributions. Last observation is May 21, 2019. Increased public sector efficiency and measures to B. Blue bars are the trade-weighted averages for 2017 tariffs. “Considered” reflects announcements of possible tariffs as of May 23, 2019, including an additional 25 percent tariff on U.S. imports from foster private sector investments will be key to China not subject to 2018 tariff hikes and on selected U.S. imports of motor vehicles and parts. C. Data are as of May 22, 2019. meet large infrastructure needs in electricity, D. Bars are impulse responses to a 1 percentage point decline in the United States, Euro Area, and China. Yellow lines are 16-84 percent confidence intervals. Based on the vector autoregression transport, water supply and sanitation, and climate model in World Bank (2016). Sample includes 22 advanced economies and 19 EMDEs. change prevention and mitigation. Estimates of E. Bars are the median conditional fiscal multipliers after two years. Fiscal multipliers are the cumulative change in output relative to cumulative change in government consumption to a 1-unit the infrastructure spending required to meet the government consumption shock. Orange lines are 16-84 percent confidence bands. F. Poverty rate is the unweighted average in each group. “Best” indicates quartile of EMDEs with the Sustainable Development Goals in those areas by strongest regulatory quality (2017 or for year with latest poverty data); “Worst” indicates the weakest regulatory quality. The back data for regulatory quality are from the World Governance Indicators. 2030 range between 4.5 to 8.2 percent of EMDE Click here to download data and charts. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 7 GDP, depending on policy choices. Improving FIGURE 1.3 Advanced economies access to reliable and affordable electricity, Trade and investment in advanced economies have lost momentum. In enhancing the quality of logistics and transport contrast, rising real wages are supporting consumption in most countries. infrastructure, leveraging digital technologies, and improving institutional quality could help unlock A. Trade and investment growth, B. Wage growth and inflation in early volumes 2019 a large untapped growth potential and contribute to poverty alleviation (Figure 1.2.F). Raising agricultural productivity could also help boost development opportunities and increase resilience to extreme weather events in regions with large exposed populations. Strengthening the role of social safety nets and active labor market policies is also key to manage risks and promote Source: Haver Analytics, World Bank. access to productive employment. A. Trade calculated as the average of imports and exports of goods and services. Shaded area indicates forecasts. B. Last observation is April 2019 for U.S. wages and Consumer Price Index, and Euro Area Finally, amid soft growth prospects and Harmonized Index of Consumer Prices; March 2019 for Japan wages and Consumer Price Index; and heightened risks, both advanced economies and 2018Q4 for Euro Area wages. Wages are average hourly earnings of private nonfarm employees for the United States, average monthly earnings for Japan, and nominal hourly wages and salaries for EMDEs need to be prepared to undertake the Euro Area. Click here to download data and charts. coordinated policy action in the event of a severe global slowdown that threatens to inflict major FIGURE 1.4 United States economic losses and set back progress on poverty U.S. activity is still being bolstered by government spending and corporate alleviation. International coordination would tax cuts, but the boost is fading. Unemployment recently reached its lowest magnify the effectiveness of available fiscal and level in nearly five decades. Amid heightened trade tensions, exports have monetary policy buffers. International financial slowed, especially those to Europe and Asia. Rising productivity and labor force participation are supporting activity. institutions and the G20 can play an important role in fostering such coordination. A. Private investment and government B. Unemployment rate and previous spending troughs Major economies: Recent developments and outlook Activity in advanced economies is slowing, especially in the Euro Area, in part due to weakening exports and investment. Amid subdued inflation and decelerating activity, major central banks have signaled a more dovish stance. In the United States, the effects of recent fiscal stimulus are waning. In C. Contribution to export growth, by D. Productivity and labor force trading partner participation China, growth appears to be stabilizing following weakness at the start of the year, but it faces heightened risks. Recent data for advanced economies point to decelerating activity, especially in the Euro Area. Investment has lost momentum and trade growth has declined markedly (Figure 1.3.A). Private consumption has so far been resilient, however, Source: Bureau of Economic Analysis, Federal Reserve Bank of St. Louis, Haver Analytics, U.S. supported by ongoing job creation and higher real Census Bureau, World Bank. wages (Figure 1.3.B). In response to subdued A. Government spending is government consumption and investment spending. Last observation is 2019Q1. inflation and decelerating activity, monetary B. Data for civilian unemployment rate are seasonally adjusted. Last observation is April 2019. C. EU = European Union, EAP = East Asia and Pacific. Last observation is 2019Q1. policy has become more accommodative. D. LFPR = Labor force participation rate. LFPR refers to civilian labor force participation rate of people aged 25 to 54 years. Data for 2019 are Q1 for Productivity and April for LFPR. Click here to download data and charts. 8 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE 1.5 Euro Area (Figure 1.4.B). Export growth has slowed further, Euro Area economic conditions have deteriorated rapidly since early 2018, with an especially acute deceleration in goods particularly in manufacturing and industrial activity. Exports have fallen going to the European Union and the East Asia sharply. Domestic demand has also slowed, but to a lesser degree. Fiscal policy is expected to be modestly stimulative in coming years. and Pacific region (Figure 1.4.C). By raising costs on a variety of goods, recent tariff increases have so far modestly weighed on U.S. real incomes A. Industrial production growth and B. Contribution to export growth, by manufacturing PMI trading partner (Fajgelbaum et al. 2019; Amiti et al. 2019). In light of muted inflation, heightened risks from the external environment, and unresolved policy issues, the Federal Reserve has signaled a more gradual pace of tightening. U.S. growth is expected to slow to 2.5 percent in 2019 and further decelerate to 1.7 percent in 2020 and 1.6 percent in 2021, as the effects of recent fiscal stimulus wane. These projections are C. Domestic demand contribution to D. Fiscal impulse in the Euro Area unchanged from the previous forecast due to GDP growth offsetting factors. On the one hand, recent tariff increases and associated retaliatory actions are expected to weigh on activity. On the other, growth is being supported by more accommodative monetary policy than previously assumed and by sustained increases in productivity growth and labor force participation (Figure 1.4.D). A continuation of these positive structural trends could result in higher medium- and long- Source: Eurostat, Haver Analytics, International Monetary Fund, World Bank. term growth than currently predicted. In contrast, A. PMI = Purchasing Managers’ Index. Readings above 50 indicate expansion in economic activity; readings below 50 indicate contraction. Last observation is April 2019 for PMI and March 2019 for further increases in trade restrictions or policy industrial production. B. ECA = Europe and Central Asia, EAP = East Asia and Pacific. Data are seasonally and working uncertainty could hinder activity. day adjusted. Last observation is 2019Q1. C. Final domestic demand is GDP less net exports of goods and services, less changes in inventories. Last observation is 2019Q1 for GDP growth and 2018Q4 for consumption and Euro Area investment. D. Changes versus previous year. A positive (negative) number indicates expansionary (contractionary) fiscal policy. Country contributions are calculated using nominal GDP weights. Fiscal impulse indicates the change in cyclically adjusted primary balance, namely the estimate of the Economic conditions in the Euro Area have fiscal balance that would apply under current policies if output were equal to potential. Data on the deteriorated rapidly since mid-2018, particularly general government cyclically adjusted primary balance are published in the April 2019 edition of the Fiscal Monitor (IMF 2019). in the manufacturing sector (Figure 1.5.A). This Click here to download data and charts. slowdown mainly reflects a decline in exports, especially to China and the Europe and Central Aggregate activity in advanced economies is Asia region (Figure 1.5.B). Domestic demand has expected to decelerate over the forecast horizon. also softened, albeit to a lesser degree, as it remains buoyed by declining unemployment and solid real United States wage growth (Figure 1.5.C). Growth in the United States remains solid. The In response to slowing activity, Germany, France, Tax Cuts and Jobs Act of late 2017 and the and Italy have announced plans for limited tax Bipartisan Budget Act of early 2018 are cuts and spending increases, equivalent to a supporting near-term growth, but their combined 0.2 percent of Euro Area GDP per year contribution is diminishing (Barro and Furman during 2019-21 (Figure 1.5.D). In addition, the 2018; Figure 1.4.A). Unemployment is at its European Central Bank (ECB) has announced it lowest level in nearly five decades, and inflation is will provide banks with additional low-cost credit, hovering slightly below the 2-percent target starting in September. Core inflation remains G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 9 around 1 percent, and the ECB is not expected to FIGURE 1.6 China begin raising its main refinancing rate above zero Following several quarters of broad-based deceleration, growth appears to until at least 2020. be stabilizing. However, trade flows remain weak. Bank credit is stable and bond issuance has picked up, but other non-bank lending has Growth is projected to slow from 1.8 percent in moderated due to regulatory tightening. Equity prices, which recovered in early 2019 thanks in part to stimulus measures, have faced downward 2018 to 1.2 percent in 2019 and to edge up to an pressures amid the recent re-escalation of trade tensions. average of 1.4 percent in 2020-21. Relative to previous projections, this represents a downgrade A. Growth and manufacturing PMI B. Export and import growth, volumes of 0.4 percentage point in 2019 and 0.1 percentage point in 2020, reflecting weakness in trade and domestic demand that will not be fully offset by more accommodative fiscal and monetary policy support. Japan Activity in Japan benefited from government support in the first half of 2019, as well as a C. Credit growth D. Equity prices and exchange rate rebound following natural disasters last year, but remains lackluster. Trade—particularly exports to China—has been especially weak. A value-added tax (VAT) hike in October is likely to dampen activity further. Nonetheless, unemployment is low, labor force participation continues to climb, and the services sector remains relatively healthy. Growth in 2019 is expected to be 0.8 percent, Source: Haver Analytics, World Bank. down from previous projections due to weaker- A. Purchasing Managers’ Index (PMI) readings above 50 indicate expansion in economic activity; than-expected external demand. A variety of fiscal readings below 50 indicate contraction. Last observation is April 2019 for manufacturing PMI and 2019Q1 for GDP. measures are expected to soften the near-term B. Figure shows 3-month moving averages. Data include only goods. Export and import volumes are calculated as export and import values deflated by export and import price deflators. Export and impact of the VAT hike toward the end of the import indices for some missing values and for April 2019 are estimates. Last observation is April 2019. year. With the economy at close to full C. Figure shows average of monthly data for periods indicated. Bonds include local government employment and potential output constrained by special bonds and net financing of corporate bonds. Other instruments include entrusted loans and trust loans. Last observation is March 2019. low labor force growth, capacity constraints will D. NEER = nominal effective exchange rate. An increase in the NEER denotes an appreciation. Equity index is represented by the Shanghai Stock Exchange Composite. Last observation is May 20, slow activity to a projected 0.7 percent in 2020 2019 for equity prices and May 21, 2019 for NEER. Click here to download data and charts. and 0.6 percent in 2021. China rebounded in early 2019 partly due to policy support measures, have faced downward pressures Following several quarters of broad-based decelera- amid the recent re-escalation of trade tensions tion, growth appears to be stabilizing (Figure (Figure 1.6.D). Consumer price inflation has 1.6.A). Trade flows have been weak, however, picked up but remains below target. weighed down by softness in manufacturing output, trade tensions with the United States, and Growth is projected to decelerate from 6.6 percent lackluster global growth (Figure 1.6.B). in 2018 to 6.2 percent in 2019, primarily reflecting softening manufacturing activity and Recent activity has been supported by monetary trade. The recent increase in tariffs on trade with and fiscal stimulus. Bank credit and bond issuance the United States is projected to weigh on growth have picked up, but other non-bank lending has in 2020, which has been revised down to 6.1 moderated due to regulatory tightening (Figure percent. This outlook is predicated on no further 1.6.C). Equity prices and the renminbi, which escalation of trade disputes with the United States. 10 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE 1.7 Global trade It also assumes that policy actions partly mitigate Global goods trade growth weakened substantially in late 2018 and early domestic and external headwinds to activity 2019. While trade in Asia was markedly affected, the slowdown in (SCPRC 2019). industrial activity was widespread across countries. The softness reflected in part slowing demand for capital goods amid elevated trade policy uncertainty. Exports in most EMDE regions are expected to decelerate this year. Global trade growth is projected to slow to 2.6 percent this year, the Global trends weakest pace since the global financial crisis. Global trade has weakened amid slowing investment A. Goods trade volume, container B. Share of countries with negative or growth and elevated trade policy uncertainty. As the shipping, and export orders below-average industrial production short-term growth outlook has softened, international growth financing conditions have eased, providing a respite to countries with large external financing needs. Industrial commodity prices have partially recovered, with weaker demand offset by supply cuts. Global trade Global industrial activity and goods trade have lost considerable momentum in 2019. Goods trade C. Nominal merchandise import D. Capital goods production and growth and new export orders fell to levels growth in China and export growth semiconductor sales growth in Asia comparable to those prevailing at the start of 2016, when concerns about the global economy were elevated (Figure 1.7.A). The deceleration was broad-based—the share of countries with industrial production in technical recession has tripled since the start of 2018, reaching nearly 25 percent in early 2019 (Figure 1.7.B). Trade in Asia—which contains major, tightly interconnected, global manufacturing hubs—was F. Global GDP and trade growth particularly affected, although recent indicators E. Export volume growth, by region suggest some stabilization (Figure 1.7.C). Weakness in global trade was concentrated in heavily traded capital goods, including electronic components such as semiconductors (Figure 1.7.D). These products are deeply embedded in international production networks and illustrate the links between global investment and trade (Bussière et al. 2013; Buelens and Tirpák 2017). Source: CPB Netherlands Bureau for Economic Policy Analysis; Haver Analytics; Institute of Shipping Economics and Logistics; Semiconductor Industry Association; World Bank. Increased tariffs by the United States and A. Data are 3-month moving averages. New export orders measured by Purchasing Managers’ Index (PMI). PMI readings above 50 indicate expansion in economic activity; readings below 50 indicate retaliatory actions by China and other trading contraction. Last observation is March 2019 for goods trade and April 2019 for container shipping and new export orders. partners that were implemented last year have B. Share of countries for which industrial production growth (3-month on 3-month change) was affected bilateral trade flows and prices of the negative or below their 2012-17 average for two consecutive quarters. Sample includes 39 EMDEs and 29 advanced economies. Last observation is March 2019. targeted products; however, they resulted in C. Import and export data are merchandise imports and exports in U.S. dollars, respectively, and is expressed as 3-month moving averages. “Asia” comprises Bangladesh, India, Indonesia, Japan, limited effects on aggregate trade volumes and Malaysia, Mongolia, Pakistan, Philippines, Republic of Korea, Singapore, Sri Lanka, Thailand, and Vietnam. Last observation is March 2019 for Asia exports and April 2019 for China imports. activity in these countries (Constantinescu, D. Capital goods index weighted by gross domestic product at constant 2010 U.S. dollars. Sample Mattoo, and Ruta 2019; Fajgelbaum et al. 2019). includes the G20 countries for capital goods for which data are available. Semiconductor index is 3- month moving averages of global billings by semiconductor equipment manufacturers, including front- Nevertheless, the increase in tariffs by the United end and final manufacturing equipment. Last observation is March 2019. E.F. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. Shaded area States and China that was announced in May indicates forecasts. E. EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the represents a substantial re-escalation in trade Caribbean, MNA = Middle East and North Africa, SAR = South Asia, and SSA = Sub-Saharan Africa. tensions and is likely to have more severe effects. F. Trade is the average of export and import volumes. Click here to download data and charts. Beyond economic losses for the affected exporters, G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 11 BOX 1.1 Debt: No free lunch “[In the United States], if the future is like the past, this implies that debt rollovers, that is the issuance of debt without a later increase in taxes, may well be feasible. Put bluntly, public debt may have no fiscal cost.” Olivier Blanchard (2019) “High debt levels make it more difficult for governments to respond aggressively to shocks.” Kenneth Rogoff (2019) Government debt has risen substantially in emerging market and developing economies (EMDEs), by an average of 15 percentage points of GDP since 2007 to 51 percent of GDP in 2018. The current environment of low global interest rates and weak growth may appear to mitigate concerns about elevated debt levels. Considering currently subdued investment, additional government borrowing might also appear to be an attractive option for financing growth-enhancing initiatives such as investment in human and physical capital. However, history suggests caution: the cost of rolling over debt can increase sharply during periods of finan- cial stress and result in financial crises; high debt levels can limit the ability of governments to provide fiscal stimulus during downturns; and high debt can weigh on investment and long-term growth, especially at a time when investment momentum is already weak. Hence, EMDEs need to strike a careful balance between taking advantage of low interest rates and avoiding the potentially adverse consequences of excessive debt accumulation. Introduction since 2000? Second, what are the benefits and costs associated with rapid debt accumulation? Government debt has risen sharply in advanced economies, reaching levels not seen in the past six decades. Evolution of EMDE debt since 2000 Yet, low interest rates and subpar growth have led to an intense debate about whether the rapid increase in debt is Pre-crisis improvements in fiscal positions. Prior to the reason for concern.1 Some argue that countries, especially global financial crisis, rapid growth helped narrow fiscal those that issue reserve currencies, should take advantage deficits and reduce government debt ratios, especially in of low interest rates to borrow more to finance priority EMDEs (Figure 1.1.1.A and B; Kose, Kurlat, et al. 2017). expenditures. Others caution that high debt weighs on In addition to robust growth, debt relief in the Multilateral long-term growth, by increasing the risk of crises, limiting Debt Relief Initiative (MDRI) and the Highly Indebted the scope for countercyclical fiscal stimulus, and Poor Countries initiative (HIPC) contributed to the dampening private investment. decline in debt in low-income countries (LICs) and lower middle-income countries. Fiscal deficits that reached 3 Although the focus of this debate has been mainly on percent of GDP in EMDEs, on average, in 2001 turned advanced economies, many EMDEs have also borrowed into fiscal surpluses amounting to 0.7 percent of GDP, on heavily and their hard-won cuts in public debt ratios prior average, by 2007. Over the same period, EMDE to the global financial crisis have largely been reversed. The government debt fell by 13 percentage points of GDP to tradeoffs EMDEs face are even starker, in light of their 36 percent of GDP. history of severe debt crises and their more pressing current spending needs to achieve development goals and Post-crisis debt accumulation. EMDE fiscal positions improve living standards. have weakened partly because of sharp growth slowdowns that pushed government debt up by an average of 15 This box seeks to provide a basis for assessing the merits of percentage points to 51 percent of GDP by 2018. This additional debt accumulation in EMDEs by addressing deterioration was broad-based—by 2018, government two specific questions. First, how has EMDE debt evolved debt was 10 or more percentage points of GDP higher than in 2007 in about 60 percent of EMDEs, with commodity exporters, which account for almost two-thirds Note: is box was prepared by M. Ayhan Kose, Franziska Ohnsorge, of EMDEs, being hit the hardest (World Bank 2015, and Naotaka Sugawara. 1 Blanchard (2019), Blanchard and Summers (2019), Furman and 2018a). In LICs, government debt rose by 14 percentage Summers (2019), and Krugman (2019) provide reasons for additional points of GDP, to 46 percent of GDP in 2018 after falling borrowing in advanced economies, and the United States in particular, to a trough of 32 percent of GDP in 2012. whereas Auerbach, Gale, and Krupkin (2019), Mazza (2019), Riedl (2019), and CRFB (2019) caution against adding to debt, citing in Post-crisis shifts in debt composition. In many EMDEs, particular the example of the United States. For a detailed discussion of financing of debt has shifted toward higher-risk sources, these issues, see Kose, Ohnsorge, and Sugawara (forthcoming). 12 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 BOX 1.1 Debt: No free lunch (continued) including debt held by nonresidents, issued on non- In a nutshell, the empirical evidence suggests that the concessional terms, or at shorter maturity (Figure 1.1.1.C). optimal level of debt depends on a wide range of trade- Debt held by nonresidents accounted for about 50 percent offs. This in part reflects a broader theoretical challenge in of government debt in the median EMDE in 2018, the literature. The basic insight from theory is that debt making these countries more vulnerable to a deterioration increases output in the short-run but reduces it in the in global investor sentiment. As a result, sovereign ratings long-run (Elmendorf and Mankiw 1999). Debt can be have been downgraded for many EMDEs, and 40 percent beneficial in the short-run to smooth macroeconomic of LICs are now classified as at high risk of debt distress fluctuations and, in the long-run, to finance long-term (World Bank 2019a). The composition of LIC debt has investments that yield a higher rate of return than the cost become increasingly non-concessional as they have of debt. However, elevated debt levels can lead to accessed capital markets and borrowed from non-Paris sustainability challenges, increase vulnerability to crises, Club creditors (World Bank 2018a, 2019a). erode the size and effectiveness of fiscal expansion, and weigh on investment and growth (Figure 1.1.1.E and F). Simultaneous buildup of private and public sector debt. Whereas the private sector has deleveraged in most When weighing benefits against cost of debt, political- advanced economies since the crisis, private sector debt has economy forces may tilt the scale towards underestimating risen in EMDEs in tandem with mounting government the cost of borrowing while overestimating its benefits. debt. As a result, total debt in EMDEs has risen to 169 Disagreements over spending preferences or short-lived percent of GDP, on average, in 2018, from 98 percent of government tenures generate incentives to expand GDP in 2007 and its highest level in two decades government spending envelopes, financed by debt (Alesina (Borensztein and Ye 2018; World Bank 2018b). Even in and Tabellini 1990; Drazen 2000; Aguiar and Amador EMDEs excluding China, where corporate debt has soared 2011). Especially ahead of elections, the absence of full post-crisis, total debt has risen to a near-record 107 information may create a conflict of incentives that percent of GDP in 2018. Although the increase in EMDE encourages political incumbents to employ debt-financed private debt partly reflects growth-enhancing financial fiscal stimulus to improve short-term growth prospects deepening, elevated private debt represents a fiscal risk. (Shi and Svensson 2006; Aidt, Veiga, and Veiga 2011). As Past experience illustrates that private sector debt may shift a result, government expenditures, public debt and deficits onto government balance sheets during financial crises as tend to increase statistically significantly albeit modestly governments provide support to private institutions in around elections (Philips 2016). Such political cycles in difficulty (Kose, Ohnsorge, and Sugawara 2018; World budget pressures tend to be stronger in countries with Bank 2017a). For example, government debt rose by more weaker fiscal transparency (Alt and Lassen 2006 a,b; than 30 percentage points of GDP in Indonesia and Klomp and De Haan 2011), without balanced-budget Thailand during the Asian financial crisis in the late 1990s requirements (Alt and Rose 2009; Cioffi, Messina, and (Figure 1.1.1.D; World Bank 2015, 2017a). Tommasino 2012) and with poorer governance (Shi and Svensson 2006; Streb, Lema, and Torrens 2009). Debt: How much is too much? Several strands of literature have attempted to identify how Benefits of debt much debt is “too much”—a threshold level of debt below Additional debt accumulation by EMDEs could be which it is sustainable or not harmful to growth (Kose, justified because of their need to invest in growth- Ohnsorge, and Sugawara forthcoming). For example, one enhancing projects, such as infrastructure, health and strand of the literature has estimated the sustainable level education, and to protect vulnerable groups. During of debt in advanced economies if fiscal deficits remain periods of weak growth, it may also be appropriate to consistent with past performance or if sovereign bond employ expansionary fiscal policy to stimulate activity. yields move consistent with past movements. Some studies have identified debt thresholds above which the likelihood of a financial crisis increases. A third strand of the warning indicator, see Manasse and Roubini (2009) and Kraay and literature has explored the debt levels above which debt Nehru (2006). For a discussion of safe debt thresholds, see Reinhart, burdens become detrimental to long-term growth.2 Rogo , and Savastano (2003). Some studies report that higher debt is associated with lower growth when government debt is larger than 80-100 percent of GDP (Reinhart and Rogo 2010; Cecchetti, 2 For studies on the sustainable level of debt, see Ghosh et al. (2013) Mohanty, and Zampolli 2011; Baum, Checherita-Westphal, and Rother and Greenlaw et al. (2013). For studies that examine debt as an early 2013). at said, others found no such e ects (Panizza and Presbitero 2014). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 13 BOX 1.1 Debt: No free lunch (continued) FIGURE 1.1.1 Government debt, deficits, and multipliers Government debt has risen from pre-crisis levels, and fiscal balances have deteriorated. It has shifted toward financing sources that are more vulnerable to exchange rate and interest rate risks, as well as changes in global investor sentiment. Higher debt levels are associated with larger interest payments and they tend to render fiscal policy less effective. A. Government debt B. Fiscal balance C. Average maturity and share of non-concessional debt D. Government debt during past banking E. Government debt and interest F. Fiscal multipliers after 2 years crises payments in EMDEs, 2018 Source: Huidrom et al. (2019); International Monetary Fund; Kose, Kurlat, et al. (2017, data available at http://www.worldbank.org/en/research/brief/fiscal-space); Laeven and Valencia (2018). A.B. Averages computed with current U.S. dollar GDP as a weight. A. Sample includes 37 advanced economies, 151 EMDEs, and 32 LICs. B. Sample includes 38 advanced economies, 154 EMDEs, and 32 LICs. C. Median of up to 65 EMDEs for average maturity and 122 EMDEs for non-concessional debt, though the sample size varies by year. D. “Before” and “after” denote, respectively, one year before and after the onset of banking crisis, as shown by numbers below the corresponding country names, taken from Laeven and Valencia (2018). Indonesia refers to central government debt only. E. General government gross debt on the horizontal axis and interest payments on the vertical axis. Sample includes 104 EMDEs, excluding small states as defined by the World Bank. F. Bars show the conditional fiscal multipliers for different levels of government debt after two years. Fiscal multipliers are defined as cumulative change in output relative to cumulative change in government consumption in response to a 1-unit government consumption shock. They are based on estimates from the interacted panel vector autoregression model, where model coefficients are conditioned only on government debt. Values shown on the x-axis correspond to the 10th to 90th percentiles in the sample. Bars represent the median, and vertical lines are the 16-84 percent confidence bands. Click here to download data and charts. Promoting long-term growth. Government investment in Moreover, EMDEs have large investment needs to meet physical and human capital can provide an important the Sustainable Development Goals (SDGs): low- and foundation for stronger growth over the long-term. These middle-income countries face aggregate investment needs investments have taken on greater urgency in light of the of $1.5–$2.7 trillion per year—equivalent to 4.5–8.2 expected slowdown in potential growth—the rate of percent of GDP—between 2015 and 2030 to meet growth an economy can sustain at full employment and infrastructure-related SDGs, depending on policy choices capacity—over the next decade (World Bank 2018c). In (Rozenberg and Fay 2019). Infrastructure investment can EMDEs, in particular, potential growth is expected to slow have particularly large growth benefits if it connects by 0.5 percentage point to 4.3 percent during 2018-27, isolated communities with input and output markets, well below the average rate of 6.7 percent during 2002-07. allows companies to realize economies of scale by 14 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 BOX 1.1 Debt: No free lunch (continued) increasing market size, and increases competitive pressures rates in advanced economies, continuing this multi-year (Égert, Kozluk and Sutherland 2009; Calderón and Servén trend (Holston, Laubach, and Williams 2017). However, 2010). To the extent that debt-financed investment an increase in global borrowing cost, for example because spending stems the slowdown in potential growth, it also of a decline in global savings rates, could test the helps preserve the revenues required to service this debt sustainability of high debt in some countries (Henderson (Fatas et al. 2018).3 2019; Rogoff 2019). Stabilizing short-term macroeconomic fluctuations. The recent discussion on debt has focused on the Temporary debt accumulation also plays an important role differential between interest rates and nominal GDP to stabilize short-term macroeconomic fluctuations. growth. If interest rates (the cost of capital) are below During recessions, borrowing for government spending or nominal output growth (the presumed rate of return on tax cuts can provide the necessary fiscal stimulus to capital), then the real burden of the debt declines over support activity (World Bank 2015; Yared 2019; Figure time because the rate of return on debt-financed 1.1.1.F). A large literature has estimated the output effects investment is more than sufficient to service the debt. (fiscal multipliers) of additional government spending or However, the interest rate-growth differential has to be tax cuts (Huidrom et al. 2016, 2019; Ramey 2019). The weighed against the accumulation of new debt—the estimates vary widely—from a 1.1-dollar output decline to primary fiscal deficit. If, every year, primary deficits add a 3.8-dollar output increase for every dollar of additional more to the debt than is repaid on past debt (even if high government spending or reduced revenues—depending on rates of return are more than sufficient to service the debt), the cyclical position of the economy; structural country then the debt stock will be on a rising trajectory.4 characteristics, including the coherence of fiscal frameworks; and the fiscal instrument employed. Broadly During 1990-2018, the interest-rate-growth differential speaking, output effects tend to be larger during recessions has been negative in just over half (57 percent) of country- than expansions, and larger for advanced economies than year pairs (54 percent of country-year pairs among 36 for EMDEs (Kraay 2012, 2014). In EMDEs, lack of fiscal advanced economies and 60 percent of country-year pairs space has often constrained fiscal policy during recessions, among 63 EMDEs). However, even in about one-quarter but there is some evidence that fiscal policy has become of these instances, the differential was not large enough to less procyclical during the 2000s (Frankel, Vegh, and offset the increase in debt from primary balances and Vuletin 2013). maintain the government debt ratio on a stable or declining path. As a result, during 1990-2018, primary Costs associated with debt balances, long-term interest rates and nominal GDP growth have been such that debt has been on a steadily The main arguments against heavy borrowing, which may rising trajectory about half of the time—in 44 percent of outweigh the benefits of borrowing in some countries, are country-year pairs among 34 advanced economies and 49 that rollover costs can increase sharply during periods of percent of country-year pairs among 62 EMDEs. financial stress and perhaps even trigger a financial crisis; and high debt levels can limit the size and effectiveness of Increasing vulnerability to financial crises. Higher fiscal stimulus during downturns. In addition, they can spending on debt service implies some combination of constrain growth by crowding out productivity-enhancing further borrowing, or increased taxes, or less spending on private investment over the long term, especially if the critical government functions (Figure 1.1.1.E; Debrun and costs of debt outweigh its benefits. Kinda 2016). The challenge of mounting borrowing is that a growing debt-to-GDP ratio could erode investor Deteriorating debt sustainability. During the post-crisis confidence, requiring a government to pay a rising risk period, the cost of government borrowing has been premium on its debt. Eventually, these pressures can historically low, for both advanced economies and EMDEs culminate in a debt crisis if investors fear that the (Figure 1.1.2.A and B). Looking ahead, demographic shifts accumulation of government debt is no longer sustainable and slowing productivity growth are expected to (Henderson 2019; Rogoff 2019; Blanchard 2019). contribute to a further secular decline in both real interest 3 In EMDEs, debt can also play an important role in 4 The balance between these two forces is captured in the sustainability nancial deepening by establishing a safe asset for use as collateral and as gap, defined as the difference between the primary balance and the debt benchmark for non-government debt (Hauner 2009; World Bank and stabilizing primary balance at specific interest rates and growth rates IMF 2001). (Kose, Kurlat, et al. 2017). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 15 BOX 1.1 Debt: No free lunch (continued) FIGURE 1.1.2 Borrowing costs and fiscal positions Borrowing costs in advanced economies and EMDEs have been historically low since the global financial crisis, despite a slight increase in 2018. However, the spread between investment and non-investment grade borrowing cost has widened in 2018. Financial stress events, especially sovereign debt crises, worsen debt dynamics, lead to credit downgrades, and tend to be associated with higher borrowing costs. A. EMDE long-term government bond B. Advanced-economy government and C. Long-term sovereign debt ratings yields corporate bond yields during crises D. Long-term interest rates during crises E. Government debt during crises F. Fiscal balances during crises Source: Bloomberg; Kose, Kurlat, et al. (2017, data available at http://www.worldbank.org/en/research/brief/fiscal-space); Laeven and Valencia (2018). A. Average long-term government bond yields (with maturity of 10 years or close) for EMDEs with long-term foreign-currency sovereign ratings below investment grades and above investment grades in each year. Dotted lines show averages over 2002-07. Sample includes 61 EMDEs. B. Average long-term government bond yields (with maturity of 10 years) for 36 advanced economies, and corporate bond yields computed as simple averages of U.S. high yield, U.S. investment grade, Euro high yield, and Euro investment grade corporate bond yields. C.-F. Simple averages, as well as interquartile ranges, based on balanced samples. Crises refer to debt crises, as defined in Laeven and Valencia (2018). When there are multiple crises identified within five years, the one with the lowest real GDP growth is counted as an event. Sample includes 16 crisis episodes (Panels C and E), 11 episodes (Panel D), and 21 episodes (Panel F). C. The sovereign ratings are converted to a numerical scale ranging from 1 to 21 (higher = better rating). D. Long-term interest rates refer to nominal 10-year government bond yields, or bond yields with similar maturities. Click here to download data and charts. For reserve currency-issuing advanced economies, like the witnessed debt crises in EMDEs, often combined with United States, it has been argued that such a spike in risk banking or currency crises (Kose and Terrones 2015; premia is unlikely, since these countries are often viewed as Laeven and Valencia 2018). safe havens during periods of market turbulence (Furman and Summers 2019; Krugman 2014). For EMDEs, Constraining government action during downturns. however, this risk is more acute. History has shown that High debt constrains governments’ ability to respond to EMDE borrowing costs tend to rise sharply during downturns, in part because debt service crowds out other episodes of financial stress, and higher debt servicing costs important government spending needs, including growth- can cause debt dynamics to deteriorate (Figure 1.1.2.C to enhancing public investment or social safety nets (Obstfeld F). A recent example is the case of Argentina, where its 2013; Reinhart and Rogoff 2010; Romer and Romer five-year U.S. dollar-denominated sovereign bond yields 2018). This was also the case during the global financial more than doubled during 2018 to over 11 percent in crisis: fiscal stimulus during 2008-09 was considerably early September. Indeed, every decade since the 1970s has smaller in countries with high debt than in those with low 16 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 BOX 1.1 Debt: No free lunch (continued) government debt (World Bank 2015). Moreover, weak advantage of the present low interest rate environment and fiscal positions tend to be associated with deeper and avoiding the risks posed by excessive debt accumulation. longer recessions, a situation that worsens if the private For countries with sound fiscal positions and with sector also falls into distress and its debt migrates to frameworks that help ensure long-term sustainability, the government balance sheets. balance may tip toward debt-financed spending to boost growth prospects if the cyclical position is appropriate. But Reducing the effectiveness of fiscal policy. High for those countries with constrained fiscal positions, government debt tends to render fiscal policy less alternative policies exist to expand the fiscal resources effective (Figure 1.1.1.F). High government debt can needed to finance growth-friendly policies. reduce the size of fiscal multipliers through two channels. First, when a government with a high level of debt These alternatives include better spending and tax policies, implements fiscal stimulus, consumers expect that tax in an improved institutional environment. Spending can increases will soon follow (Sutherland 1997). This be shifted toward areas that lay the foundation of future expectation leads consumers to cut consumption and save growth, including education and health spending as well as more (the “Ricardian” reaction to government dis-saving). climate-smart investment to strengthen economic Second, when the level of debt is higher, fiscal stimulus resilience. Government revenue bases can be broadened by can increase creditors’ concerns about sovereign credit removing special exemptions and strengthening tax risk. This raises sovereign bond yields and, hence, administration (Gaspar, Ralyea, and Ture 2019; IMF borrowing costs across the whole economy (Corsetti et al. 2019; World Bank 2017b). Business climates and 2013). This, in turn, crowds out private investment and institutions can be strengthened to support vibrant private consumption, reducing the size of the fiscal multiplier sector growth that can yield productivity gains and expand (“interest rate channel”). Indeed, empirical evidence the revenue base. suggests that, regardless of the time horizon considered, fiscal multipliers are smaller when government debt is Greater debt transparency and better debt management higher (Figure 1.1.1.F; Huidrom et al. 2016, 2019). can mitigate some of the costs associated with debt Similarly, evidence points to less effective monetary buildups and some of the political-economy pressures for policy in the presence of high debt because of poorly rapid debt accumulation. The buildup in LIC debt has not anchored inflation expectations in high-debt countries been accompanied by necessary improvements in the (Kose et al. 2019). quality of debt management. Better debt management and transparency can help reduce borrowing costs, enhance Slowing investment and growth. High and rising debt sustainability, and dampen fiscal risks. For example, a government debt may eventually raise long-term interest sound debt management system would keep short-term rates (Rubin, Orszag, and Sinai 2004; Laubach 2009). and foreign currency exposures to prudent levels. Greater High debt could also create uncertainty about transparency—as well as institutional constraints on fiscal macroeconomic and policy prospects, including the policy, including robust fiscal rules, and better possibility that governments may need to resort to governance—can mitigate some of the political-economy distortionary taxation to rein in debt and deficits (IMF forces that are biased towards rapid debt accumulation.6 2018; Kumar and Woo 2010). Higher interest rates and Over time, improved debt management and transparency uncertainty would tend to crowd out productivity- would help foster macroeconomic stability. enhancing private investment and weigh on output growth.5 The empirical evidence for the association Regardless of the desired level of debt, prudent debt between debt and growth is, however, mixed (Panizza and management favors debt contracted on terms that preserve Presbitero 2014). macroeconomic and financial resilience—preferably at longer maturities, at fixed (and favorable) interest rates, are Conclusion denominated in local currency and transparently disclosed. A debt composition that is less vulnerable to market EMDE governments need to put in place frameworks that disruptions reduces the likelihood that a decline in market help them strike a careful balance between taking 5 Auerbach, Gale, and Krupkin (2019); Gale and Orszag (2003); Croce 6 Alt and Lassen (2006 a,b); Klomp and De Haan (2011); Alt and Rose et al. (2018); Huang, Pagano, and Panizza (2017); and Panizza, Huang, (2009); Cio , Messina, and Tommasino (2012); Shi and Svensson and Varghese (2018). (2006); and Streb, Lema, and Torrens (2009). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 17 BOX 1.1 Debt: No free lunch (continued) sentiment, sharp depreciations, or interest rate spikes erode increase sharply during periods of financial stress, as some debt sustainability. This is particularly important in EMDEs have painfully learned once again in recent years. EMDEs, which tend to suffer sharp capital flow stops or Excessive debt burdens may make governments more reversals during times of financial stress. vulnerable to crises, limit the size and effectiveness of fiscal stimulus during future cyclical downturns, and weigh on EMDEs should avoid the temptation of the “this-time-is- investment and longer-term growth. As the long history of different” syndrome in the current period of low interest financial crises in EMDEs has repeatedly shown, debt rates (Reinhart and Rogoff 2009). Even if the cost of debt cannot be treated as a free lunch. is currently low, the historical record suggests that it could these new tariffs are contributing to heightened The post-crisis decline in the income elasticity of policy uncertainty, which is expected to dent trade reflects slower value chain integration and confidence and investment. trade liberalization (UNCTAD 2018). As demand from major economies continues to While the global trade growth forecast assumes moderate, export growth is expected to decelerate that new tariffs imposed continue to apply across EMDE regions in 2019. An exception is throughout the forecast horizon, trade relations Sub-Saharan Africa, where export growth is between the United States and China remain expected to recover modestly from supply fragile and could deteriorate further. Meanwhile, disruptions in key commodity-producing sectors trade agreements that recently entered into force, in 2018 (Figure 1.7.E). The weakness in export such as the Comprehensive and Progressive growth this year is projected to be particularly Agreement for Trans-Pacific Partnership and the pronounced in the Middle East and North Africa, EU-Japan Economic Partnership Agreement, reflecting oil production cuts in OPEC countries could help boost trade and foster deeper and U.S. sanctions on the Islamic Republic of integration between signatory countries. The Iran. Overall, export growth in 2019 is expected recently signed, but yet to be ratified, United to be below historical averages in more than 80 States-Mexico-Canada Agreement (USMCA) percent of EMDEs. could impact trade in agricultural products, automobiles, textiles and apparel; however, it is In all, global trade growth is projected to weaken expected to have limited effects on economic from 4.1 percent in 2018 to 2.6 percent this activity (Chepeliev, Tyner and van der year—a full percentage point below previous Mensbrugghe 2018; Burfisher, Lambert, and forecasts, slightly below the pace observed during Matheson 2019). Potential tariffs on U.S. imports the 2015-16 trade slowdown, and the weakest from Mexico announced in late May—not since the global financial crisis (Figure 1.7.F). As included in baseline forecasts—could weigh on the weakness in manufacturing abates, global trade North American trade. is expected to stabilize to an average of 3.2 percent in 2020-21. This assumes no further escalation in Financial markets trade tensions between major economies; new stimulus measures implemented in China and, to Amid signs of deterioration in global economic a lesser degree, the Euro Area; and firming prospects and persistently low inflation, major domestic demand in some EMDEs. However, central banks have adopted more accommodative global trade is projected to be weaker than monetary policy stances for the near term. The previously envisaged over the forecast horizon. U.S. Federal Reserve has placed its tightening This reflects a softer outlook for global investment cycle on hold, while the European Central Bank and evidence of a lower income elasticity of trade. has delayed the end of its negative interest rate 18 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE 1.8 Global finance to a drop in long-term yields—to their lowest Major central banks have adopted a more dovish stance as a response to levels since mid-2017 in the United States, and to low inflation and deteriorating growth prospects. As a result, advanced- below zero in Germany for the first time since late economy bond yields have fallen, and the share of debt trading at negative 2016 (Figures 1.8.A and B). interest rates has increased. Search for yield has supported a recovery in EMDE portfolio flows, a compression of bond spreads, and robust bond issuances; however, renewed trade tensions are weighing on risk appetite. In this context, the share of bonds yielding negative market interest rates increased to its A. Federal funds rate expectations B. U.S. and German 10-year highest level since end-2017, reaching more than government bond yields 20 percent globally and around 40 percent in Europe and Japan (Figure 1.8.C). While bank profitability does not appear to have been unduly affected so far, a long-lasting period of negative interest rate policies in the Euro Area and Japan could eventually pose challenges for bank profitability and financial intermediation (Arteta et al. 2016). As long-term yields in advanced economies have C. Share of bonds trading with D. EMDE portfolio flows eased, external financing conditions for EMDEs negative interest rates have improved, supporting a recovery in portfolio flows into EMDEs following persistent net outflows over most of 2018 (Figure 1.8.D). Notwithstanding recent reversals related to trade policy uncertainty, equity market valuations have risen, and aggregate EMDE sovereign bond spreads have dropped about 50 basis points since the start of 2019 (Figure 1.8.E). International debt issuance has been robust this year, as many E. EMDE bond yields and spreads F. EMDE international bond issuances borrowers have taken advantage of more favorable market conditions to meet growing refinancing needs (Figure 1.8.F). Some easing of external financing pressures, combined with moderating inflation, allowed many EMDE central banks to cut interest rates, or put their tightening cycles on hold. Gains in both equity and bond portfolio flows this year may be partly offset by subdued bank-related Source: Bloomberg, Dealogic, Institute of International Finance, J.P. Morgan, World Bank. flows, including in trade finance amid the A. Last observation is May 23, 2019. B. Figure shows weekly data. Last observation is May 23, 2019. deceleration in global trade (BIS 2014). Foreign C. Last observation is May 2019, which includes data through May 23, 2019. D. Cumulative weekly flows since January 1, 2018. Equity flows include Brazil, India, Indonesia, direct investment (FDI) trends remain mixed, Pakistan, Philippines, Qatar, Sri Lanka, South Africa, Thailand, Turkey, and Vietnam. Debt flows include Hungary, India, Indonesia, Mexico, Poland, South Africa, Thailand, and Turkey. Post-crisis with a rebound in flows to China, and some Latin average over January 1, 2010, to December 29, 2017. Last observation is May 23, 2019. American countries, including Brazil, offset by E. Bond yields are computed summing the J.P. Moran Emerging Market Bond Index (EMBI) spread and the U.S. 10-year bond yield. Dashed lines represent post-crisis average over period January 1, weak flows in Europe and Central Asia, Middle 2010, to December 31, 2018. Last observation is May 23, 2019. F. Figure shows cumulative sum. Last observation is May 2019, which is estimated using East and North Africa, and Sub-Saharan Africa. month-to-date volume as of May 23, 2019. Click here to download data and charts. Global financing conditions are expected to remain supportive in the near term and tighten policy and implemented new measures to only gradually later in the forecast period. This stimulate credit and activity. Shifting market assumes that monetary policy accommodation in expectations about monetary policies contributed major advanced economies will be gradually G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 19 removed, but at a slower pace than previously FIGURE 1.9 Commodity markets expected. The eventual rise of advanced-economy Most industrial commodity prices have recovered in 2019 following notable yields would, however, have a negative effect on declines late last year. Against a backdrop of weaker global growth and capital flows to EMDEs. In Sub-Saharan Africa, growing U.S. production, crude oil prices have been supported by production cuts, mostly in Saudi Arabia, and the United States’ decision to persistent governance and regulatory impediments terminate waivers for its sanctions on Iran. Amid low inventories, metals on investment, together with relatively subdued prices have been supported by supply disruptions, notably in iron ore production in Brazil. Agricultural supply continues to rise, with U.S. farmers growth prospects, are expected to continue to reducing plantings of soybeans in favor of corn. weigh on FDI flows (Laudicina, Peterson, and McCaffrey 2018). Policy uncertainty, geopolitical A. Commodity price indexes, monthly B. Crude oil production risks, and security concerns could also continue to adversely impact EMDE capital inflows (World Bank 2018d). Commodity markets Prices of most industrial commodities picked up in the first half of 2019, but remained well below peak values from last year, while agricultural prices were mostly flat (Figure 1.9.A). Supply constraints C. Metals stocks D. Global iron ore production and and production cuts have supported prices since disrupted production the start of the year; however, heightened trade tensions have recently weighed on prices of some commodities, particularly metals. Price forecasts for the year as a whole have been downgraded due to weaker-than-expected global growth. Crude oil prices recovered over the first half of the year, averaging $64 per barrel (bbl), supported by production cuts among OPEC and its non-OPEC partners, as well as the United States’ decision to E. Supply growth of main grains F. Area harvested in the United States terminate waivers for its sanctions on Iran. Saudi Arabia has contributed the most to the fall in supply, reducing output by 1 million barrels per day (mb/d) relative to late-2018 levels, while the Russian Federation has cut production by 0.2 mb/ d (Figure 1.9.B). In contrast, production in the United States has continued to grow, and the country maintained its position as the world’s largest oil producer. Venezuela’s crude oil output Source: Bloomberg, International Energy Agency, London Metals Exchange, Vale S.A., U.S. has dropped further, to about 0.8 mb/d by mid- Department of Agriculture, World Bank, World Steel Association. A. Indexes are based on nominal U.S. dollars. Last observation is April 2019. 2019, from 1.4 mb/d in 2018 (IEA 2019). B. Last observation is April 2019. C. Last observation is April 19, 2019. D. Red bars show the percent of disrupted iron ore production that has occurred in 2019 so far. In Oil prices are expected to average $66/bbl in 2019 Australia, the disrupted production has resulted from adverse weather events. In Brazil, production has been restricted following the Vale mining disaster. and $65/bbl in 2020, a slight downward revision E. Supply is the sum of beginning stocks and production. Years represent crop seasons (for example, 2018 refers to 2018-19 crop season). Data reflect the May 10, 2019 USDA update. relative to January reflecting softening global F. Data for 2019 are estimates and as of May 9, 2019. activity. The outlook remains highly uncertain Click here to download data and charts. and dependent on policy decisions, particularly whether the production cuts among OPEC and its members have resulted in substantial spare partners will be extended into the second half of production capacity, which lessens the likelihood 2019. However, the supply cuts by OPEC of spikes in oil prices in the near term. 20 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE 1.10 Activity in EMDEs Supply bottlenecks for metals such as copper, EMDEs experienced broad-based weakness in manufacturing at the start nickel, lead, and zinc supported prices in the first of 2019, followed by some recent signs of stabilization. Growth in countries half of 2019, which was accompanied by sharp recently affected by financial stress or sanctions has been particularly declines in inventories (Figure 1.9.C). Iron ore subdued, weighing on aggregate EMDE growth. In those countries, export growth has slowed and import compression is underway due to weak prices rose sharply at the start of the year due to domestic demand—particularly investment. In other EMDEs, growth is temporary mine closures following the Vale generally near potential. In many countries, especially commodity exporters, activity has been weaker than previously expected. mining disaster in Brazil and weather-related disruptions in Australia (Figure 1.9.D). More recently, however, the re-escalation of trade A. Manufacturing and services PMIs B. Contribution to EMDE growth excluding China tensions have contributed to declining prices for most base metals. Overall, metals prices are expected to decline slightly in 2019 and 2020, a downward revision relative to the January forecast reflecting a weaker outlook for global metals demand. Agricultural prices were stable, on average, in the first half of 2019, amid high stock levels and favorable crop conditions for the fourth C. Contribution to growth D. Investment growth consecutive year (Figure 1.9.E). Wheat prices, which had risen relative to other agricultural prices, fell sharply on positive supply news, particularly in Europe and Russia. Soybean prices also dropped amid rising trade tensions and the spread of African Swine Fever to pig populations in China, which are a key source of demand. In response to weaker soybean prices, U.S. farmers reduced plantings of soybeans and increased plantings of corn (Figure 1.9.F; World Bank E. Projected and potential growth in F. Growth 2018e). Agricultural prices are expected to decline 2019 in 2019 and stabilize in 2020. Emerging market and developing economies: Recent developments Source: Haver Analytics, International Monetary Fund, J.P. Morgan, Organisation for Economic Co-operation and Development, World Bank. and outlook A. Horizontal line is the expansionary threshold for the Purchasing Managers’ Index (PMI). Last observation is April 2019. EMDE activity has been weaker than expected amid B.-E. EMDEs under recent pressure include: a) countries that have had an increase in their J.P. Morgan EMBI credit spread of at least one standard deviation above the 2010-19 average at any time softening external demand and investment. As a since April 2018 (Argentina, Brazil, Egypt, Gabon, Jordan, Lebanon, Mexico, Nigeria, South Africa, Sri Lanka, Tunisia, Turkey); or b) countries that have been subject to recent sanctions (Iran, Russia). result, EMDE growth is expected to slow further, to 4 “Others excl. China” is EMDEs excluding China and EMDEs under pressure. B.-F. Aggregate growth rates are based on constant 2010 U.S. dollar GDP weights. Shaded areas percent this year, before regaining some strength in indicate forecasts. 2020-21. This forecast depends on a rebound in the C. Domestic demand includes government consumption, private consumption, and gross capital formation, which includes the changes in inventories. Net exports are export minus import volumes. large EMDEs that have been recently affected by C.D.F. Data for 2015-16 are simple averages. Data for 2018 are estimates. E. Potential growth estimates based on eight different methodologies (production function approach; financial market pressures. In Sub-Saharan Africa, multivariate filter; three univariate filters, including Hodrick-Prescott filter, Christiano-Fitzgerald filter, where extreme poverty is increasingly concentrated, and Butterworth filter; IMF World Economic Outlook; and OECD Economic Outlook and Long-Term Baseline Projections), as in the January 2018 Global Economic Prospects report. Blue bars show per capita income growth remains insufficient to lead minimum-maximum range of potential growth. Orange diamonds show average projected growth. F. Yellow diamonds are projections from the January 2019 Global Economic Prospects report. to substantial poverty alleviation. Click here to download data and charts. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 21 Recent developments average. Notably, investment has deteriorated substantially in Argentina, where confidence and EMDEs experienced broad-based weakness in public spending retreated after severe financial manufacturing and exports at the start of the year, stress, and Iran, where economic sanctions are followed by some recent signs of stabilization weighing heavily on capital spending (Special (Figure 1.10.A). Activity in the services sector has Focus 1.1). remained resilient, reflecting continued growth in consumer spending. Slower-than-expected mining and oil production, combined with domestic policy uncertainties, has Countries that experienced recent pressures related delayed the recovery in activity in some of the to varying degrees of financial market stress or largest commodity exporters in Sub-Saharan idiosyncratic headwinds such as sanctions—a Africa (Angola, Nigeria, South Africa; World group that includes many commodity exporters— Bank 2019b). Amid oil production cuts agreed by have faced a particularly sharp deceleration in OPEC members and some key non-OPEC activity this year (Figure 1.10.B).1 Private producers, growth in Saudi Arabia and Russia is consumption growth appears stable, but it remains moderating, while sanctions or political crises are weak. Investment growth has moderated further as expected to lead to sharp contractions in other oil policy uncertainty persists, dampening imports exporters (Iran, Sudan; World Bank 2019c and (Figures 1.10.C and D). Economic slack remains 2019d). elevated in many countries in this group. Conditions are improving or stable elsewhere. In EMDEs that did not suffer recent pressures—a Momentum in Brazil is gradually firming, group that includes many commodity importers as although at a slower pace than previously well as the more diversified commodity expected. Rising commodity prices this year, along exporters—growth is stable or moderating. with improving business confidence, have helped Activity in these countries is being restrained by a lift investment and private consumption in some combination of capacity constraints and softening large economies. In several commodity exporters external demand. As a result, exports and domestic in East Asia and Pacific and Latin America, where demand are decelerating in tandem, with private earlier terms-of-trade shocks were less acute, consumption still resilient but investment growth growth is stable or only gradually decelerating remaining subdued (Special Focus 1.1). Import from high levels (Chile, Malaysia, Peru; World growth is slowing as well, partly due to the high Bank 2019e). import content of many capital goods. Economic slack in this group of countries is generally Commodity-importing EMDEs limited, and growth is near its potential in many cases (Figure 1.10.E). Growth in commodity importers continues to decelerate, reflecting moderating external demand, Commodity-exporting EMDEs increasing capacity constraints, and the lingering effects of financial stress in some countries—most Growth in commodity exporters has been weaker notably Turkey. Among European EMDEs, than expected and remains lackluster (Figure slowing activity is particularly pronounced in 1.10.F). Notwithstanding a modest recovery from economies with close ties to the Euro Area or its 2015 low, investment growth in commodity facing ongoing domestic challenges (Belarus, exporters remains weak and below its long-term Serbia, Turkey). In some countries, diminishing slack is putting a lid on growth (Hungary, Poland). 1 EMDEs under recent pressure include: a) countries that have had an increase in their J.P. Morgan EMBI credit spread of at least one In Asia, activity is gradually decelerating but standard deviation above the 2010-19 average at any time since April remains robust, with output in many countries 2018 (Argentina, Brazil, Egypt, Gabon, Jordan, Lebanon, Mexico, Nigeria, South Africa, Sri Lanka, Tunisia, Turkey); or b) countries expanding at a rate of 6-7 percent (Bangladesh, that have been subject to recent sanctions (Iran, Russia). Cambodia, China, India, the Philippines, 22 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 BOX 1.2 Short-term growth prospects for LICs Growth in low-income countries (LICs) is projected to remain robust in 2019, at 5.4 percent. It is, however, more moderate than previously forecast, as weaker external demand has been accompanied by devastating extreme weather events and by a normalization of agricultural production in some large economies. Growth is projected to rise to 6.0 percent in 2020 and 6.1 percent in 2021, as domestic demand continues to strengthen and as increased oil and metals production supports activity among industrial-commodity exporters. These growth rates are, however, insufficient to markedly reduce poverty, particularly in LICs affected by fragility, conflict, and violence. Risks to the outlook include slower-than-expected growth in major trading partners, a resumption in the tightening of international financial conditions, adverse weather, and health crises. Recent growth and prospects for 2019 Progress in poverty reduction. Despite declines in poverty rates over the past decade, more than 40 percent of the Economic activity. Growth has remained robust in LICs, population in LICs still live in extreme poverty, and but lost some momentum. It is projected to decelerate to continued progress in poverty reduction in these countries 5.4 percent in 2019—from 5.6 percent 2018—and is remains challenging. The poverty headcount is rising in below previous forecasts (Figure 1.2.1.A). The downward economies affected by fragility, conflict, and violence. In revision reflects, in part, unexpectedly weak external countries where progress is being made in reducing demand from major trading partners, extreme weather poverty, economic growth is concentrated in urban areas, events that dampened activity in several countries, as well yielding little benefit to the rural poor. as an earlier-than-expected normalization of agricultural production in some large LICs (Uganda, Tanzania) after External positions. Current account deficits are widening strong recoveries from drought in previous years. in almost half of LICs, with the average deficit expected to increase to 9.3 percent of GDP in 2019 from 8.4 percent In non-resource-intensive LICs, growth has been in 2018 (Figure 1.2.1.B). In some LICs (Afghanistan, supported by robust construction activity related to Burundi, Guinea, Guinea-Bissau), widening external investment in infrastructure (Rwanda, Senegal) and deficits reflect weaker external demand and slower export rapidly growing services sectors amid continued growth. Elsewhere (Mozambique, Nepal, Niger, Uganda), urbanization (Ethiopia, Uganda). On the demand side, imports of capital goods related to large infrastructure growth reflects strong household consumption supported investment projects have been contributing to larger by solid harvests (Benin, Burkina Faso) and expansionary deficits. The deficit in Mozambique will rise further during monetary policy (The Gambia, Uganda), as well as the cyclones’ aftermath by weaker agricultural exports and sustained public investment (Comoros, The Gambia, with elevated imports of aid and reconstruction materials. Madagascar, Nepal, Uganda). Among some exporters of In a few LICs (Benin, Ethiopia), current account deficits industrial commodities, growth has strengthened—despite are narrowing despite weak external demand because past weaker external demand—as oil and mining production investments in export-oriented industries are supporting has continued to benefit from investment in new capacity stronger export growth. While FDI inflows have been (Chad, Democratic Republic of Congo, Guinea). largely sufficient to finance current accounts deficits— especially in countries with large infrastructure investment However, several economies are facing severe strains. programs—they have weakened somewhat amid last year’s Output in Zimbabwe is expected to contract in 2019 with tighter external financing environment. This has a sharp rise in inflation reducing real incomes and foreign contributed to a decline in LICs’ international reserves exchange shortages constraining activity. The Southern relative to their imports. They now stand further below the and East African region was hit by two devastating tropical commonly recommended minimum of three months’ cyclones—Idai and Kenneth—in March and April 2019 cover (Figure 1.2.1.C). that took a heavy human toll and caused severe damage to social and economic infrastructure in the Comoros, Fiscal positions. Fiscal deficits are gradually narrowing in Malawi, Zimbabwe and, in particular, Mozambique. In LICs, with the average deficit expected to decline from 4 this country, cyclone Idai in particular damaged a percent of GDP in 2018 to 3.4 percent in 2019 (Figure significant part of the port city of Beira and its 1.2.1.D). Narrower deficits among many fast-growing surrounding area—affecting one of Mozambique’s key LICs reflect fiscal consolidation (Benin, Ethiopia, Togo), export terminals. as well as greater public spending efficiency and improved revenue collections (Benin, Togo). Among industrial- Note: This box was prepared by Rudi Steinbach. Research assistance commodity-exporting LICs, rising government revenues was provided by Maria Hazel Macadangdang and Mengyi Li. related to increased oil and metals production (Chad), G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 23 BOX 1.2 Short-term growth prospects for LICs (continued) FIGURE 1.2.1 Short-term economic prospects for LICs Growth in LICs is projected to remain robust in 2019, at 5.4 percent, albeit more moderate than previously forecast. It is expected to rise to 6.0 percent in 2020 and 6.1 percent in 2021. Growth is being spurred by new oil and mining production capacity coming on stream among some large industrial-commodity exporters; public investment and strong agriculture performances should support growth in non-resource-intensive LICs. Per capita income growth will not be sufficient to markedly reduce poverty. Current account deficits are widening, amid weaker external demand and strong capital goods imports, while financing of these deficits has been under pressure. Fiscal deficits remain large, contributing to elevated government debts. A. GDP growth B. Current account deficits C. International reserves in months of imports D. Fiscal deficits E. Government debt F. Per capita GDP growth Source: Haver Analytics; International Monetary Fund, World Economic Outlook; World Bank; World Development Indicators. Note: LICs = low-income countries. Industrial-commodity exporting countries include energy- and metal-exporting economies, and the sample includes 8 countries. Non-resource-intensive countries include agricultural-exporting countries and commodity importers, and the sample includes 22 countries. A. Aggregate growth rates calculated using 2010 U.S. dollar GDP weights. B.D.E. Simple averages of country groups. C. Simple averages. Sample includes 23 countries. F. FCV = fragility, conflict, and violence. FCV and Non-FCV LICs samples each include 14 countries. Weighted averages of country groups. Click here to download data and charts. greater tax revenue mobilization (Sierra Leone), and fiscal However, in some LICs, increased fiscal discipline and consolidation (Tajikistan) are improving fiscal balances. more effective revenue mobilization have begun to stabilize However, in some LICs, fiscal deficits are widening, amid debt ratios. Among non-resource-intensive LICs, weak economic growth that weighs on government indebtedness has remained broadly unchanged, or even revenues (Liberia), election-related fiscal pressures declined somewhat, in Benin, the Comoros, Ethiopia, (Mozambique), and scaled up public consumption and Haiti, and The Gambia. Similarly, increases in debt appear investment by a new government (Democratic Republic of to have come to a halt in some industrial-commodity Congo). exporters, where revenues have been lifted by increased resource production (Chad, Democratic Republic of After increasing sharply in recent years, government debt Congo). Nevertheless, debt continues to rise in many ratios are elevated among LICs, with debt expected to countries, driven by strong public investment (Rwanda, reach 52 percent of GDP, on average, in 2019—a 15 Tanzania, Uganda) and larger current spending, in some percentage point increase since 2013 (Figure 1.2.1.E). cases related to elections (Burundi, Mozambique). 24 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 BOX 1.2 Short-term growth prospects for LICs (continued) In addition to elevated levels of debt, the composition of Prospects for per capita income convergence. The growth government debt has changed in recent years, as non- recovery will help lift per capita GDP growth in LICs from concessional and foreign-currency-denominated borrowing 2.6 percent in 2019 to 3.2 percent in 2020 and 3.3 has increased amid greater access to international capital percent in 2021 (Figure 1.2.1.F). However, among LICs markets and increased non-resident participation in affected by fragility, conflict, and violence—which host domestic debt markets (World Bank 2019a, 2019b). about 56 percent of the LIC poor and 43 percent of the LIC population—prospects for convergence to middle- While international financial conditions have eased in income country income levels are limited, as per capita recent months, they are still tighter than in 2017, keeping income growth is expected to be significantly lower, debt-servicing costs elevated and making fiscal averaging 1.9 percent in 2020-21. For these economies, consolidation in countries with large debt burdens more growth is thus expected to remain insufficient to challenging. significantly reduce poverty rates, and the number of people in LICs living in extreme poverty (below the Outlook for 2020-21 international poverty line for income of $1.90 per day) is expected to remain elevated. Economic growth. Growth in LICs is expected to strengthen to 6.0 percent in 2020 and 6.1 percent in Risks. Risks to the economic outlook for LICs are 2021. This projected pickup assumes that the recovery predominantly on the downside. Slower-than-expected among oil and metals exporters will be bolstered by higher growth in major economies—China, the United States, production as new capacity comes on stream, while and the Euro Area—could set back LIC growth. These domestic demand continues to strengthen (Chad, three countries account for 31 percent of LIC exports, 41 Democratic Republic of Congo, Guinea). In the percent of LIC FDI, and 23 percent of remittances to Democratic Republic of Congo—the largest industrial LICs, leaving LICs highly exposed to developments in commodity-exporting LIC and the country estimated to their economies. A slowdown in China would hit have the most cobalt reserves in the world—mining industrial-commodity-exporting LICs particularly hard, as production accounts for more than 80 percent of exports China accounts for more than one-half of global metals and 25 percent of government revenues. Mining demand (World Bank 2016 and 2018b). production is expected to increase by around 10 percent a year over the forecast horizon, driven by strong growth in Unexpected shifts in investor sentiment, or in economic cobalt demand from the expanding global electric vehicle developments or policies in major economies, could lead industry (Alves Dias et al. 2018; Campbell 2019). to a re-tightening of financial conditions. The impact would be amplified in LICs with larger debt burdens, Growth is also expected to remain robust in several non- weaker macroeconomic fundamentals, or elevated political resource-intensive LICs. In particularly fast-growing LICs risks. The disruptions to capital inflows and sharp (Rwanda, Uganda, and Tanzania), expansions will be currency depreciations that could result from a sudden supported by public investment in infrastructure and deterioration in market sentiment would raise debt- continued strong agricultural growth. Similarly, servicing costs further—especially on debt denominated in agricultural production in Malawi is assumed to recover as foreign currency—and undermine fiscal consolidation the Fall Armyworm infestation of recent years recedes. efforts while constraining critical poverty-reducing Reconstruction efforts in the cyclone-affected countries in expenditures. Southern and East Africa—the Comoros, Malawi, Mozambique, and Zimbabwe—are also expected to Many LICs are vulnerable to weather-related shocks as support activity over the next two years. In Afghanistan, climate change increases the frequency of extreme weather greater political stability following an assumed peaceful events such as tropical storms, floods, heatwaves, and transition after the upcoming election in July is expected severe and prolonged drought episodes. Crop damage to improve the business environment and deliver a growth events caused by a greater incidence of insect pests (e.g., spurt. Improved political stability is also expected to the Fall Armyworm) could become more severe as warmer support the outlook for Guinea-Bissau and Zimbabwe. conditions fuel their population growth and metabolic While growth in Ethiopia is expected to remain strong, it rates (Deutsch et al 2018). In the average LIC, agriculture will be held back by a tighter fiscal stance, as the accounts for 29 percent of GDP. LICs that are most government continues its efforts to stabilize public debt. highly dependent on agricultural activity are most at risk G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 25 BOX 1.2 Short-term growth prospects for LICs (continued) TABLE 1.2.1 Low-income country forecastsa Percentage point differences (Real GDP growth at market prices in percent, unless indicated otherwise) from January 2019 projections 2016 2017 2018e 2019f 2020f 2021f 2019e 2020f 2021f Low Income Country, GDP b 4.8 5.6 5.6 5.4 6.0 6.1 -0.5 -0.2 -0.2 Afghanistan 2.3 2.7 1.0 2.4 3.2 3.6 -0.3 0.0 0.4 Benin 4.0 5.8 6.5 6.5 6.5 6.5 0.3 0.0 -0.1 Burkina Faso 5.9 6.3 6.8 6.0 6.0 6.0 0.0 0.0 0.0 Burundi -0.6 0.5 1.6 1.8 2.1 2.0 -0.5 -0.4 -0.8 Chad -6.3 -3.0 2.6 3.4 5.6 4.8 -1.2 -0.5 -0.1 Comoros 2.2 2.7 2.8 3.1 3.2 3.2 0.0 0.1 0.1 Congo, Dem. Rep. 2.4 3.7 5.8 5.9 6.5 6.8 1.3 1.0 0.9 Ethiopiac 7.6 10.2 7.9 7.9 8.2 8.2 -0.9 -0.7 -0.7 Gambia, The 0.4 4.6 6.6 5.4 5.2 5.0 0.0 0.0 -0.2 Guinea 10.5 10.6 5.8 5.9 6.0 6.0 0.0 0.0 0.0 Guinea-Bissau 6.3 5.9 3.8 4.3 4.8 5.5 0.1 0.4 1.0 Haitic 1.5 1.2 1.5 0.4 1.6 1.3 -1.9 -0.8 -1.2 Liberia -1.6 2.5 1.2 0.4 1.6 1.3 -4.1 -3.2 -3.5 Madagascar 4.2 4.3 5.2 5.2 5.3 5.1 -0.2 0.0 -0.2 Malawi 2.5 4.0 3.5 4.5 4.7 5.1 0.2 -0.6 -0.4 Mali 5.8 5.3 4.9 5.0 4.9 4.8 0.0 0.0 0.0 Mozambique 3.8 3.7 3.3 2.0 3.5 4.2 -1.5 -0.6 0.1 Nepalc 0.6 8.2 6.7 7.1 6.4 6.5 1.2 0.4 0.5 Niger 4.9 4.9 5.2 6.5 6.0 5.6 0.0 0.0 0.0 Rwanda 6.0 6.1 8.6 7.8 8.0 7.5 0.0 0.0 -0.5 Senegal 6.2 7.2 6.8 6.8 7.0 7.0 0.2 0.2 0.1 Sierra Leone 6.4 3.8 3.7 5.4 5.4 5.2 0.3 -0.9 -1.1 Tajikistan 6.9 7.1 7.3 6.0 6.0 6.0 0.0 0.0 0.0 Tanzania 6.9 6.8 6.0 5.4 5.7 6.1 -1.4 -1.3 -0.9 Togo 5.2 4.3 4.9 5.0 5.2 5.1 0.2 0.1 0.0 Uganda c 4.6 3.9 5.9 6.1 6.5 5.8 0.1 0.1 -0.7 Zimbabwe 0.8 4.7 3.5 -3.1 3.5 4.9 -6.8 -0.5 0.9 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 World Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. a. Central African Republic, Democratic People’s Republic of Korea, Somalia, Syria, and Yemen are not forecast due to data limitations. b. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. c. GDP growth based on fiscal year data. For Nepal, the year 2019 refers to FY2018/19. Click here to download data. of increases in poverty rates as a result of these factors Republic of Congo has been ongoing since mid-2018 and (World Bank 2019a). could weigh heavily on activity in the country and the sub- region, especially if it were to spread to major urban Health crises remain a constant concern among LICs. The centers and to neighboring countries (Burundi, Rwanda, latest Ebola epidemic in the northeastern Democratic South Sudan, Tanzania, Uganda). 26 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE 1.11 EMDE growth prospects Low-income countries Following a further deceleration in 2019, growth in EMDEs is expected to recover in 2020-21, as headwinds are assumed to dissipate in a number of Growth remains robust in low-income countries key economies. However, investment growth will remain subdued. In the (LICs; Box 1.2; Special Focus 2.1); however, it has longer run, productivity and demographic trends point to weakening growth potential across EMDEs, further weighing on investment prospects. lost some momentum amid weaker external demand from major trading partners and extreme weather events. Among non-resource-intensive A. Growth B. Investment growth countries, rising consumption growth and sustained public investment in infrastructure are supporting activity, offset by a modest slowdown in agricultural output (Uganda, Tanzania). Growth among exporters of industrial commodities has generally firmed due to investment in new resource production capacity (Chad, Democratic Republic of Congo, Guinea). In contrast, the Comoros, Malawi, Zimbabwe, and particularly Mozambique are facing severe C. Contribution to potential growth D. 10-year ahead investment growth forecasts strains after two devastating tropical cyclones— Idai and Kenneth—hit Southern and East Africa in March and April, taking a heavy human toll and causing severe economic damage. Current account deficits across LICs have widened, on average, due to strong capital goods imports related to public investment projects and slower export growth among some metals exporters (Guinea, Nepal, Niger). Strong public investment Source: Consensus Economics, J.P. Morgan, Penn World Tables, World Bank. spending has, in part, kept fiscal deficits elevated; A.-C. Aggregate growth rates are calculated using constant 2010 U.S. dollar GDP weights. Shaded however, they have narrowed in some countries areas indicate forecasts. A.B. EMDEs under recent pressure include: a) countries that have had an increase in their J.P. amid continued fiscal consolidation and improved Morgan EMBI credit spread of at least one standard deviation above the 2010-19 average at any time since April 2018 (Argentina, Brazil, Egypt, Gabon, Jordan, Lebanon, Mexico, Nigeria, South Africa, revenue collection (Benin, Ethiopia, Sierra Leone). Sri Lanka, Tunisia, Turkey); or b) countries that have been subject to recent sanctions (Iran, Russia). C. TFP = total factor productivity. Sample includes 50 EMDEs. Potential growth estimates are based on production function approach. For further details on potential growth estimates, refer to the Outlook January 2018 edition of the Global Economic Prospects report. D. 10-year-ahead forecasts surveyed in indicated year. Constant 2010 U.S. dollar investment- weighted averages. Sample includes 23 advanced economies and 20 EMDEs (indicated by † in Growth outlook Table SF1.1.1). For 2010-18, the average of four projections during the year is shown; for 2019, the average of two projections during the first half of the year is shown. Click here to download data and charts. EMDE growth is expected to slow from 4.3 percent in 2018 to 4 percent this year—0.3 percentage point lower than previously projected, Vietnam), despite moderating export growth. In with notable heterogeneity across regions (Box India, growth remains solid, supported by 1.3; Chapter 2). Almost 40 percent of EMDEs are improved confidence, slowing inflation, and still expected to decelerate in 2019 relative to last year. robust investment (World Bank 2019e, 2019f). Moreover, forecasts for 2019 growth have been Other economies continue to benefit from pan- downgraded for more than 40 percent of Asian infrastructure investments and expanding countries. For many countries, a substantial part intra-regional trade (Bhutan, Cambodia, of the forecast downgrade is attributable to Vietnam). Activity is weaker in countries where continued weakness in investment, which remains policy uncertainty continues to discourage private well below historical averages. investment (Mexico, Sri Lanka), and in countries that have tightened fiscal and monetary policies to Growth in EMDEs facing the lingering impact of reduce fiscal and current account deficits (Haiti, earlier financial stress (Argentina, Brazil, Nigeria, Pakistan, Tunisia). South Africa, Turkey) and idiosyncratic head- G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 27 BOX 1.3 Regional perspectives: Recent developments and outlook Growth in all EMDE regions has been weaker than expected amid softening external demand and, in some countries, persistent domestic headwinds. Activity in the East Asia and Pacific and South Asia regions remains buoyant, while growth in other EMDE regions is expected to recover in 2020-21. East Asia and Pacific. Growth in the region is projected to FIGURE 1.3.1 Regional growth slow from 6.3 percent in 2018 to 5.9 percent in 2019-20, and to ease further to 5.8 percent in 2021. This will mark Growth in all EMDE regions has been weaker than expected, hindered by a combination of policy the first time since the 1997-98 Asian financial crisis that uncertainties, weak external demand, and the lingering EAP growth dropped below 6 percent. In China, growth is impact of past financial stress. Activity is expected to expected to decelerate from 6.6 percent in 2018 to 6.2 recover in 2020-21. percent in 2019, and gradually decline to 6.0 percent by 2021, reflecting softening manufacturing activity and trade A. Regional growth, weighted average amid domestic and external headwinds. In the rest of the region growth is also expected to moderate to 5.1 percent in 2019, before rebounding modestly to 5.2 percent in 2020-21, as global trade stabilizes. Risks to regional growth remain tilted to the downside and have intensified with the re-escalation of trade tensions. They include a sharper-than-expected slowdown in major economies, including China; an intensification of global trade tensions; and an abrupt change in global financing conditions and investor sentiment. Europe and Central Asia. Growth in the region is projected to fall sharply from 3.1 percent in 2018 to 1.6 percent in 2019. The slowdown partly reflects a sharp weakening of activity in Turkey, which fell into recession B. Regional growth, unweighted average in the wake of acute financial market stress in 2018. Regional growth is projected to pick up in 2020-21 as Turkey recovers and Russian strengthens. Excluding these economies, the rest of the region is expected to moderate. In particular, growth in Central Europe is projected to soften as economies grapple with the slowdown in the Euro Area and binding domestic capacity constraints. Key external risks to the region include spillovers from weaker- than-expected activity in the Euro Area and from escalation of global policy uncertainty, particularly in relation to trade tensions and the United Kingdom’s exit from the European Union. Renewed financial pressures in Turkey could also disrupt regional growth. Latin America and the Caribbean. Growth in the region is Source: World Bank. expected to be subdued in 2019, at 1.7 percent, reflecting A.B. Bars denote latest forecast; diamonds correspond to January 2019 challenging conditions in several of the largest economies. forecasts in the Global Economic Prospects report. Average for 1990-2018 is constructed depending on data availability. For Europe and Central Asia, Gradually building momentum in Brazil and a recovery in the long-term average uses data for 1995-2018 to exclude the immediate Argentina are projected to contribute to a pickup in aftermath of the collapse of the Soviet Union. A. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. Since largest economies account for about 50 percent of GDP in some regions, weighted averages predominantly reflect the developments in the largest economies in each region. Note: This box was prepared by Patrick Kirby, with contributions B. Unweighted average regional growth is used to ensure broad reflection of from Rudi Steinbach, Temel Taskin, Ekaterine Vashakmadze, Dana regional trends across all countries in the region. Vorisek, Collette Wheeler, and Lei Ye. Research assistance was provided Click here to download data and charts. by Hazel Macadangdang. 28 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 BOX 1.3 Regional perspectives: Recent developments and outlook (continued) regional growth to 2.5 percent in 2020 and 2.7 percent in South Asia. The region continued to enjoy solid economic 2021. Financial conditions in the region have eased activity in 2018, posting 7 percent GDP growth due to markedly since early 2019. Despite soft global trade, robust domestic demand. Pakistan was a notable regional export growth has picked up, boosted by trade exception, with a broad-based weakening of domestic diversion in response to bilateral tariffs by the United demand against the backdrop of tightening policies aimed States and China, and by solid growth in the United at addressing the country’s macroeconomic imbalances. States. As these effects wane and global trade decelerates Regional growth is projected to remain close to 7 percent further, export growth in the region is projected to slow. over the forecast horizon, as it benefits from strong private Risks to the growth outlook remain tilted to the downside. consumption and investment. The main risks to the Sharper-than-projected slowdowns in the United States outlook include a re-escalation of political uncertainty and and China could have negative spillovers on regional regional tensions, financial sector weakness due to growth through trade, financial, and commodity market nonperforming assets, fiscal challenges, and a sharper- channels. Adverse market responses to weak fiscal than-expected weakening of growth in major economies. conditions and disruptions from natural disasters are other important risks. The crisis in Venezuela also presents risks. Sub-Saharan Africa. The recovery in the region has disappointed, with weakening external demand, supply Middle East and North Africa. Growth in the region is disruptions, and elevated policy uncertainty weighing on projected to remain subdued in 2019, at 1.3 percent. activity in major economies. Growth in the region is Activity in oil exporters has slowed due to weak oil sector projected to pick up from 2.5 percent in 2018 to 2.9 output and the effects of intensified U.S. sanctions on percent this year and an average of 3.4 percent in 2020-21, Iran, despite an easing of the fiscal stance and positive as domestic demand gathers pace and oil production prospects for non-oil sectors in some countries. Many oil recovers in large exporting economies. However, this importers continue to benefit from business climate expected recovery is significantly slower than previously reforms and resilient tourism activity. Regional growth is projected, reflecting persistent headwinds in major projected to pick up to around 3 percent in 2020-21, economies, and it is largely insufficient to make progress in supported by capital investment and policy reforms. Risks poverty reduction. Downside risks to the outlook include to the outlook are tilted to the downside, including weaker-than-expected external demand, lower commodity geopolitical tensions, reform setbacks, and a further prices, renewed stress in global financial markets, fiscal escalation of global trade tensions. slippages, political uncertainty, armed conflicts, and adverse weather conditions. winds such as sanctions (Iran, Russia) is expected and Turkey, the impact of severe financial market to remain subdued this year (Figure 1.11.A). turmoil is expected to diminish over the forecast Projections for 2019 were revised down in most of horizon as investor confidence returns (World these countries, with particularly sizable Bank 2019c). In Brazil, Russia, and South Africa, downgrades for Brazil, Mexico, and Turkey. headwinds associated with elevated policy Forecasts for countries facing oil production cuts uncertainty are also expected to moderate. In Iran, this year (Bahrain, Russia, Saudi Arabia, and the impact of U.S. sanctions is projected to peak United Arab Emirates) were also downgraded. In this year, with growth resuming in 2020 (World contrast, growth in EMDEs that did not face Bank 2019d). recent pressures is expected to remain solid. In EMDEs that did not suffer recent pressures, EMDE growth is projected to firm to 4.6 percent growth is expected to remain stable in 2020-21. in 2020-21, in line with previous forecasts. This Resilient domestic demand and still favorable assumes a waning drag from earlier financial global financing conditions should largely offset pressures in some large countries, that global the negative impact of decelerating exports. financing conditions remain generally benign, and However, there are some large divergences. that global trade growth stabilizes. In Argentina Growth in India and Indonesia is expected to G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 29 remain steady and above EMDE averages, while slowdown seen across EMDEs in the post-crisis capacity constraints and the projected deceleration period are likely to persist, notwithstanding the in the Euro Area will slow activity in Poland and promise of new technologies. Over the next Hungary. decade, investment is expected to remain subdued, which will exacerbate the decline in potential EMDE investment growth is expected to growth directly through slower capital deepening decelerate in 2019, primarily because of con- and indirectly through its dampening impact on tractions in countries affected by recent pressures productivity (Figure 1.11.D). (Figure 1.11.B). While investment growth is projected to recover somewhat in 2020-21, it is Per capita income growth and poverty expected to remain below long-term averages, reflecting elevated debt levels, limited fiscal space, Sustained per capita income growth has lack of clarity about policy direction, and historically been the main driver of global poverty inadequate business climates (Special Focus 1.1). reduction (World Bank 2018f). Softening growth in EMDEs since the global financial crisis has Growth in LICs is expected to recover to an been associated with a slower pace of global average of 6.1 percent in 2020-21, from 5.4 poverty reduction, as well as an increased percent in 2019 (Box 1.2). In non-resource- concentration of extreme poverty in Sub-Saharan intensive countries, the pickup assumes stronger Africa. While extreme poverty has fallen private investment amid improving business substantially in some regions, such as East Asia environments (Rwanda, Uganda), continued and Pacific, addressing broader measures of robust public infrastructure spending, solid poverty still remains an acute challenge (World agricultural output (The Gambia, Malawi, Bank 2019f). Tanzania), and greater political stability (Afghanistan, Guinea-Bissau, Zimbabwe). Among Near-term growth prospects will be insufficient to exporters of industrial commodities, the recovery result in significant progress toward global poverty is predicated on rising oil and mining production alleviation, with per capita income growth this amid continued investment in new capacity year remaining below its long-term average in (Chad, Democratic Republic of the Congo, more than half of EMDEs. In about a third of Guinea), and on stronger domestic demand. EMDEs, per capita growth in 2019 will be below Despite the pickup in growth, LICs’ prospects for that of advanced economies, resulting in widening progression to middle-income status will be income gaps.2 These EMDEs are mainly in challenged by a greater incidence of fragility; a commodity-reliant regions such as Sub-Saharan heavy reliance on agriculture, which is vulnerable Africa, Latin America and the Caribbean, and the to climate change and extreme weather events; and Middle East and North Africa (Figure 1.12.A). the fact that many are land-locked, limiting the There are significant differences within regions, scope of involvement in global trade (Special however. In the case of Sub-Saharan Africa, per Focus 2.1). capita growth is weak in the largest three Over the medium term, challenges associated with economies (Nigeria, South Africa, and Angola), in demographics, productivity, and investment point some metals exporters, and in countries affected to weakening growth potential in EMDEs (Figure by fragility, conflict, and violence. In contrast, 1.11.C; World Bank 2018c). Slowing labor force some non-resource-intensive countries in the growth will be most pronounced in key economies region are experiencing solid per capita income in East Asia and Pacific and in Europe and Central growth rates (Côte d’Ivoire, Ethiopia, Rwanda, Asia, while it is projected to be broadly neutral for Senegal). growth in Latin America and the Caribbean, in the Middle East and North Africa, and in South 2 Median per capita income growth is also expected to be weak, as the correlation between median household income growth and per Asia, and to remain supportive in Sub-Saharan capita GDP growth is 0.75 for those countries for which household Africa. Many of the drivers of the productivity income data are available. 30 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE 1.12 EMDE per capita income growth and be sustained at about 8 percent per year (Special poverty Focus 2.1; Figure 1.12.C). This is more than twice Weakening growth this year suggests that, in many EMDEs, per capita the rates projected over the next two years—and income gaps with advanced economies will continue to widen. Per capita only a small and declining proportion of EMDEs income in countries with the largest number of extreme poor is expected to grow at a somewhat faster clip than other EMDEs, but at less than half the have achieved such growth in any given year since pace needed to reduce global extreme poverty to 3 percent by 2030. the global financial crisis (Figure 1.12.D). A. GDP per capita growth and share of EMDEs with widening income gaps, B. Per capita growth in EMDEs Risks to the outlook 2019 Risks continue to be tilted to the downside. A further escalation in trade tensions and rising policy uncertainties could weigh on investment and contribute to financial market volatility. New financial stress episodes in EMDEs could be amplified by rising debt levels, corporate sector vulnerabilities, and increasing refinancing pressures. Sharper-than-expected slowdowns in major economies could have substantial spillover effects for D. Share of EMDEs with per capita C. Extreme poverty scenarios growth at or above 8 percent per EMDEs. These risks are compounded in some regions annum by the possibility of intensifying conflict and by the increased frequency of extreme weather events. Baseline forecasts point to a deceleration of global growth from 3 percent in 2018 to 2.6 percent this year—0.3 percentage point below previous projections, amid a more broad-based slowdown in manufacturing activity and trade than previously anticipated. More accommodative Source: World Bank. monetary policy stances in major advanced A. EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the economies, new fiscal stimulus measures in China, Caribbean, MNA = Middle East and North Africa, SAR = South Asia, SSA = Sub-Saharan Africa. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. Countries with a and the diminishing effect of financial pressures widening income gap are those with per capita GDP growth of at least 0.1 percentage point lower than advanced-economy per capita GDP growth. in some major EMDEs are assumed to help B.-D. Shaded areas indicate forecasts. B. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights (“GDP-weighted”) stabilize activity and prevent a further deteri- or number of extreme poor living at or below $1.90 a day (“poverty-weighted”). The poverty-weighted oration in global growth. On balance, global estimate of per capita GDP growth excludes countries for which poverty head counts are not available. Sample includes 104 EMDEs for poverty-weighted and 117 EMDEs for GDP-weighted per growth is predicted to edge up to a slightly capita growth. C. Data for 2016-18 are estimates. The blue line shows the poverty rate assuming that income per weaker-than-expected 2.7 percent in 2020 and to capita of the bottom 40 percent of the income distribution grows at the historical average from 2005-15; the red line shows this but assuming a rate of 8 percent per year. The yellow horizontal line 2.8 percent in 2021. indicates the 3 percent extreme poverty rate goal set for 2030. See World Bank (2018f) for details. D. Share of EMDEs that reach or exceed 8 percent GDP per capita growth. Sample includes 146 EMDEs. There is considerable uncertainty surrounding Click here to download data and charts. global growth projections, and risks to the global outlook continue to be firmly tilted to the Aggregate per capita income in countries with the downside (Figure 1.13.A). Intensifying policy and largest numbers of extreme poor is expected to political uncertainty, including a further escalation grow at a somewhat faster clip than that of other of trade disputes between major economies, could EMDEs over the forecast horizon (Figure 1.12.B). weigh on sentiment and dampen investment and That pace will nevertheless remain well below trade. Relative to the baseline assumption of no what is needed to achieve poverty alleviation goals. additional escalation going forward, a renewed To reduce global extreme poverty to 3 percent by deterioration in trade relations could therefore 2030, income per capita growth in countries result in substantially lower global growth. The where extreme poverty concentrates would need to potentially large adverse effects associated with G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 31 such escalation highlight the opportunity costs of FIGURE 1.13 Balance of risks the absence of a comprehensive trade deal between The balance of risks to global growth remains tilted to the downside. The the United States and China. A mutually probability of global growth being 1 percentage point below forecast in beneficial resolution of trade disputes between the 2020 is close to 20 percent. world’s two largest economies would lead to a A. Probability distribution around B. Probability of global growth being 1 sustained dissipation of global policy uncertainty, growth forecasts percentage point below baseline support confidence and investment, and bolster the near- and long-term global growth outlook. A renewed deterioration of EMDE financial market sentiment could be amplified by high levels of debt and spread through financial sector exposure to sovereign risk. A sharper-than- expected deceleration of activity in systemically large economies—such as China, the Euro Area, Source: Bloomberg, World Bank. and the United States—could also have broad- A.B. The fan chart shows the forecast distribution of global growth using time-varying estimates of the standard deviation and skewness extracted from the forecast distribution of three underlying risk ranging repercussions for EMDEs. The factors: oil price futures, the S&P 500 equity price futures, and term spread forecasts. Each of the risk probability of growth in 2020 being at least 1 factor’s weight is derived from the model described in Ohnsorge, Stocker, and Some (2016). Values for 2019 are computed from the forecast distribution of 6-month-ahead oil price futures, S&P 500 percentage-point below current projections is equity price futures, and term spread forecasts. Values for 2020 are based on 18-month-ahead forecast distributions. Last observation is May 21, 2019. estimated at close to 20 percent (Figure 1.13.B). Click here to download data and charts. Such slowdown would be comparable to the 2001 global downturn. and retaliatory responses by China, would result in Renewed trade tensions significant economic losses for exporters of the and policy uncertainty targeted products and lead to cascading trade costs to other sectors. While some countries could Rising policy uncertainty in major advanced benefit from trade diversion in the short run, economies and EMDEs has already contributed adverse effects from weakening growth and rising to weakening confidence and delayed investment policy uncertainties involving the world’s two plans (Figure 1.14.A). An intensification of such largest economies would have predominantly uncertainties—including a sharp escalation in negative repercussions (Freund et al. 2018). In trade tensions between the United States and addition, the risk of higher tariffs on U.S. imports China, a disorderly exit of the United Kingdom of automobiles and parts remains elevated, and from the EU, and more fractious political could cause severe disruptions to tightly integrated landscapes after elections in major economies— global value chains (GVCs; Figure 1.14.B). could contribute to a continued deterioration in global activity, with particularly significant The complex and discretionary nature of tariff consequences for trade and investment. For measures and a lack of clarity about future trading instance, a sustained increase of 10 percent in an rules could also be a notable barrier to firms’ index of U.S. economic policy uncertainty could, decisions to invest and export. In particular, U.S. after one year, reduce EMDE output growth policy uncertainty is found to significantly erode by 0.2 percentage point and EMDE investment growth and investment prospects across EMDEs growth by 0.6 percentage point (World Bank (Kose, Lakatos, et al. 2017). In the presence of 2017c). GVCs, protectionist measures have widespread adverse implications not only on targeted sectors Trade relations between the United States and and countries but also on downstream industries several of its major trading partners remain fragile and other trading partners (Bellora and Fontagne and could deteriorate further, leading to a 2019; Blanchard, Bown, and Johnson 2016). If all proliferation of new tariffs and other trade barriers proposed tariff increases were to be implemented, with broad-ranging consequences. An increase in the average U.S. tariff rate would increase to levels U.S. tariffs on all remaining imports from China, not seen since the late 1960s and substantially 32 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE 1.14 Risk of renewed trade tensions and policy 2018). This could eventually jeopardize progress uncertainty in international cooperation and undermine past Global policy uncertainty is close to record highs, reflecting increased risks gains from the multilateral trading system. of further escalation in trade tensions and rising political uncertainty. Additional U.S. tariff hikes, including in the automobile sector, could A no-deal Brexit from the EU could have a severe significantly disrupt tightly-integrated value chains and raise average U.S. tariffs substantially above those of most G20 countries. Amid increasingly impact on the United Kingdom and, to a lesser divided political landscapes, elections in countries accounting for more extent, on its European trading partners, in the than a third of global GDP could contribute to unpredictable policy changes. event of large disruptions and delays at border crossings (Crowley, Exton and Han 2019; A. Global policy uncertainty B. U.S. auto imports, by economy Graziano, Handley, and Limão 2018). It could also be a source of financial stability risks if it leads to an abrupt interruption in financial relationships and cross-border financial flows (Bank of England 2018). While actions have been taken to mitigate some of these risks, including regulatory agreements to avoid disruption in the derivatives markets, significant financial market stress in a no- deal event is still possible (ECB 2018). In addition, the United Kingdom accounts for a large C. Average import tariffs in G20 D. Share of global GDP accounted for share of cross-border lending to some EMDEs, countries by countries with general elections which could be negatively impacted by a sudden retrenchment. More generally, increasingly divided political landscapes in key countries and rising support for more inward-looking policies could contribute to heightened policy uncertainty and geopolitical risks over time. Countries holding general or parliamentary elections this year account for 35 Source: Baker, Bloom, and Davis (2016); Election Guide; Haver Analytics; International Foundation percent of global GDP (Figure 1.14.D). These for Electoral Systems; National Sources; Peterson Institute for International Economics; U.S. Census Bureau; World Bank. include major advanced economies (all EU A. The global policy uncertainty index is computed by Baker, Bloom, and Davis (2016), and is based on the frequency of words in domestic newspapers mentioning geopolitical tensions, including member states, Canada) and EMDEs (Argentina, military, nuclear, war, and terrorism. Last observation is April 2019. B. Data are as of May 23, 2019. India, Indonesia, South Africa). C. Blue bars are the trade-weighted averages for 2017 tariffs. “Considered” reflects announcements of possible tariffs as of May 23, 2019, including an additional 25 percent tariff on U.S. imports from China not subject to 2018 tariff hikes and on U.S. imports of motor vehicles and parts from non-North Financial stress episodes American trading partners. D. Bars represent the share of global GDP accounted for by countries that held or are expected to hold general elections in the years 2017-21. Sample includes 33 advanced economies and 142 Renewed episodes of substantial financial market EMDEs. Share calculated using constant 2010 U.S. dollars GDP. Shaded area indicates forecasts. Click here to download data and charts. stress could have increasingly pronounced and widespread effects, in view of rising levels of indebtedness (Figure 1.15.A). Such episodes could surpass the average tariff among G20 countries be triggered or amplified by several factors. (Figure 1.14.C). First, an increase in corporate default rates amid Intensifying trade tensions involving major slowing activity in major economies could lead to economies could increase the likelihood of global a rapid deterioration in financial market escalation in protectionist measures. An escalation sentiment, a re-pricing of risks, and a spike in of tariffs up to legally allowed bound rates could bond spreads for more vulnerable borrowers. The translate into a decline in global trade flows share of lower-rated corporate bond issuers has amounting to 9 percent, similar to the drop ob- increased substantially in both advanced served during the global financial crisis (Kutlina- economies and EMDEs in recent years, indicating Dimitrova and Lakatos 2017; Devarajan et al. a drop in the quality of outstanding bond stocks G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 33 (Figure 1.15.B). A broad-based loss of investment- FIGURE 1.15 Risk of renewed financial stress grade status could potentially trigger sudden Elevated global debt levels and declining credit quality increase the pullbacks by investors (BIS 2019). Both corporate likelihood of financial stress episodes in EMDEs, which could be amplified and sovereign borrowers could come under stress, by mounting refinancing needs and the possibility of dislocating currency depreciations. Growing interconnections between financial sector and especially given low interest coverage and large sovereign risks make banks in EMDEs increasingly vulnerable to distress volumes of bond refinancing scheduled in coming of their sovereigns—and vice versa. years (Figure 1.15.C). A substantial re-escalation of trade tensions involving major economies could A. Credit to non-financial sectors B. Share of global bonds rated BBB or below amplify this risk by dampening financial market sentiment, global trade, and investment prospects. Second, shifting expectations about monetary policy across major economies could lead to disruptions in capital flows to EMDEs, particularly if accompanied by an appreciation of the U.S. dollar. This could be prompted, for instance, by markets repricing the possibility of additional U.S. interest hikes in the next couple of C. International bond redemptions in D. Number of countries with large currency depreciations years, in contrast to current market expectations of EMDEs interest rate cuts later this year and in 2020. While the risk of an abrupt increase in U.S. long-term yields has abated amid concerns about slowing activity, a faster-than-expected acceleration in U.S. wage growth or signs of an unexpected pickup in global growth could contribute to a sudden tightening of borrowing conditions. Reduced confidence in central banks’ ability to deliver price stability, or perceived threats to their independ- E. Bank claims on total government F. Share of EMDEs with above-median ence, could also contribute to greater financial and and public non-financial entities government debt and bank claims on the government macroeconomic volatility (Berger, de Haan and Eijffinger 2001; Draghi 2018; Tucker 2018). Third, large currency depreciations in EMDEs could amplify credit default risks. Although such events have become less frequent over time, they can still be triggered by shifts in U.S. monetary policy expectations, sharp commodity price movements, or concerns about debt sustainability Source: Bank for International Settlements; Dealogic; International Monetary Fund; Kose, Kurlat, et al. or domestic policy uncertainties (Figure 1.15.D). (2017); World Bank. A. Aggregates are calculated using debt and GDP in U.S. dollars. Aggregates of advanced Rising foreign ownership of local-currency bonds, economies and EMDEs are based on 27 countries and 16 countries, respectively, and data for 2018 are for the third quarter. Data for 2018 in low-income countries (LICs) are for the latest available and sizable shares of local-currency lending quarter and sample includes 22 LICs. Total credit is measured as total credit to general government originating from foreign banks, have helped and non-financial private sector for advanced economies and EMDEs and a sum of general government debt and domestic claims on the private sector for LICs. reduce immediate currency risks in some B. Last observation is July 2018. C. Sovereign bonds include central government and state and local authorities. Data are as of May countries. However, foreign participation in local- 22, 2019. currency debt markets can also amplify the D. Figure shows 3-month moving averages. Depreciations are defined as negative quarterly changes in the effective exchange rate. The sample is comprised of 138 EMDEs. Last observation is transmission of external financing shocks to December 2018. E. Data published in the October 2018 edition of the World Bank Macro Financial Review. domestic borrowing conditions if liquidity dries F. 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, SSA = Sub-Saharan Africa. Blue up as investor risk sentiment deteriorates (Agur et bars indicate the share of EMDEs within each region for which general government debt and total al. 2018). A lack of central bank independence bank claims are simultaneously above the EMDE median of the respective indicators. The EMDE median statistic for 2007 and 2017 is 34.6 and 50.7 percent for general government debt and 4.1 and and rigid currency regimes also make it more 8.5 percent for bank claims on government. Sample includes 147 EMDEs. Click here to download data and charts. 34 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 difficult to adjust to sharp exchange rate banking sector health. Negative interest rate movements, amplifying fluctuations in domestic policies could weaken bank profitability over time prices and activity in the affected countries and erode financial stability (Arteta et al. 2016). (Special Focus 1.2; Ha, Kose, and Ohnsorge 2019). Renewed financial stress in large EMDEs, In the United States, activity could be negatively such as Argentina or Turkey, could lead to affected by weaker-than-expected confidence and significant contagion effects if accompanied by investment amid trade tensions with major trading heightened investor risk aversion and portfolio partners. Deteriorating creditworthiness in the relocations among broad asset classes. corporate sector could amplify negative shocks. A recession is unlikely in the short term, but the Fourth, government guarantees to the financial probability could increase as the effects of fiscal system, alongside large bank holdings of stimulus dissipate and trade policy uncertainty government debt, can create self-reinforcing persists. Three of the last four U.S. recessions were feedback effects between the banking sector and triggered by financial shocks, which revealed sovereign risks (Dell’Ariccia et al. 2018). This underlying balance sheet weaknesses and led to a sovereign-bank nexus has become more sudden retrenchment of activity, accentuated by pronounced in EMDEs since the global financial the government’s inability to agree on the crisis (Figure 1.15.E). The share of countries with implementation of countercyclical fiscal measures. both elevated public debt levels and high banking sector exposure is particularly elevated in the China faces both external risks associated with Middle East and North Africa and South Asia threats of rising U.S. tariffs and domestic risks (Figure 1.15.F). In Eastern Europe and Central related to high corporate indebtedness in sectors Asia, as well as in East Asia and Pacific, a greater with deteriorating profitability. The total stock of source of vulnerability is the level of private sector non-financial-sector debt is above levels seen at the debt, and the risk that rising corporate defaults peak of previous credit booms in other major could weaken bank balance sheets. Public sector EMDEs. The materialization of these risks could balance sheets would be eroded if the government have significant adverse repercussions on activity. were to support the banking sector—that is, if Although the authorities hold policy levers to contingent liabilities become actual liabilities—in mitigate such repercussions in the near term, episodes of stress. continued fiscal and monetary stimulus could become ineffective over time while adding further Sharper-than-expected slowdowns leverage to private and public sectors. Providing in major economies stimulus through highly indebted state-owned Around 80 percent of advanced economies— enterprises (SOEs) may eventually undermine including major European countries, Japan, and economy-wide productivity growth. the United States—are expected to register A combined deterioration in the outlook for the slowing growth in 2019 (Figure 1.16.A). China’s United States, the Euro Area, and China—which deceleration and rebalancing toward domestic together accounted for about 50 percent of global consumption and services is also expected to GDP and almost two-thirds of global growth in continue. For all of these economies, however, 2018—would have major spillover effects for downside risks have intensified. EMDEs through trade, financial, commodity, and In the Euro Area, the risk of a markedly sharper- confidence channels (Figure 1.16.B). The growing than-expected slowdown has risen on the back of use of GVCs could contribute to the propagation significant growth disappointments since mid- of shocks across countries (Duval et al. 2016). A 2018, decelerating global trade, and elevated 1-percentage-point growth shock for these three policy uncertainty. A further deceleration could economies would curtail global growth by 1.7 trigger renewed financial stress in more vulnerable percentage points and EMDE growth (excluding countries, leading to slower investment, higher China) by 1.4 percentage points after one year unemployment, and renewed concerns about (Figure 1.16.C). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 35 A pronounced slowdown in the Euro Area would FIGURE 1.16 Risk of sharp slowdowns in major most severely affect countries in Central and economies Eastern Europe and North Africa, because of tight A sharper-than-expected downturn in the United States, Euro Area, or trade, remittance, and banking system linkages China would have major spillover effects, with a slowdown in China having a disproportionate impact on commodity exporters. (World Bank 2016). Financial markets in Latin America could also be adversely affected by deleveraging and de-risking measures among A. Share of countries experiencing B. Share of global output and growth growth slowdowns attributable to major economies weakened Euro Area banks. A substantial in 2018 deceleration in China would lower commodity prices worldwide, with a widespread effect on commodity exporters (Figure 1.16.D). Exposure to risks in the United States is particularly pronounced for Latin America and the Caribbean, since the United States is the single largest export destination for more than half of the countries in the region. In addition, U.S. capital markets supply a substantial share of portfolio flows to many EMDEs and a drying up of these markets C. Impact of 1 percentage point D. Composition of global commodity demand growth slowdown in the United States, would cause equity values and exchange rates to Euro Area, and China weaken significantly. Region-specific downside risks In addition to global risks, a variety of region- specific risks could dampen growth (Box 1.3; Chapter 2). Many countries remain vulnerable to financial turmoil. Further declines in trade, whether caused by slowing manufacturing activity Source: World Bank. or increased trade barriers, would impact regions A. Growth slowdowns are declines of at least 0.1 percentage point change in growth. Sample includes 36 advanced economies and 146 EMDEs. that are heavily invested in value chains, such as B. Figure is calculated using constant 2010 U.S. dollar GDP. Major economies includes China, the the manufacturing hubs in East Asia and Central Euro Area, and the United States C. Bars are the impulse response to a 1 percentage point decline in the United States, Euro Area, Europe. A significant decline in commodity prices and China. Yellow error lines are the 16-84 percent confidence intervals. Based on the vector autoregression model presented in World Bank (2016). The sample includes 22 advanced economies would weigh on activity in regions with a large and 19 EMDEs. D. AEs = advanced economies. Figure shows 2010-17 average. Sample for energy and metals number of commodity exporters, which account includes 18 advanced economies and 33 "other" EMDEs. Agriculture includes 14 advanced for half of the world’s poor. economies and 117 “other” EMDEs. Click here to download data and charts. Renewed conflict in various parts of the world— the Korean Peninsula, the Middle East and North edented power have already caused catastrophic Africa, South Asia, the South China Sea, Sub- floods in agricultural plains and heavily populated Saharan Africa, or Ukraine—could severely disrupt river deltas and mudslides in mountainous regional activity. Skirmishes between India and regions. Rising sea levels threaten low-lying islands Pakistan in February are a reminder that latent and coastal regions. geopolitical tensions can flare up at any time. Due to their location and topography, small island Climate change is contributing to a multitude of developing states are particularly vulnerable to risks for more exposed EMDE regions (IPCC extreme weather events, which is exacerbated by 2018). More extensive droughts and extreme heat limited infrastructure and a lack of financial are causing more frequent harvest failures and resources (World Bank 2017d). Countries with desertification. Rapidly spreading forest and large populations working on agricultural lands grassland fires increasingly threaten built-up areas with difficult terrain, poor soil quality, or limited and resource-based industries. Cyclones of unprec- rainfall, including many in Sub-Saharan Africa 36 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE 1.17 Climate risks and poverty Monetary and nancial policies In several EMDE regions, populations in vulnerable rural and sea level areas are particularly exposed to climate risks. The extreme poor are more With the notable exception of the United States, susceptible to food price shocks. the room for conventional monetary policy easing is limited in most advanced economies, as policy A. Population in less-favored B. Share of income spent on food rates remain at or near zero (Figure 1.18.A). agricultural areas or living at sea level products in EMDEs Indeed, central banks have responded to recent weakness in growth principally by providing additional forward guidance, making inexpensive credit available to banks, and adjusting their balance sheets. After the financial crisis, such unconventional policies were a necessary complement to central banks’ conventional policy rate cuts amid weak Source: Barbier and Hochard (2018); Laborde, Lakatos, and Martin (2019); World Bank. A. EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the aggregate demand and declining neutral interest Caribbean, MNA = Middle East and North Africa, SAR = South Asia, SSA = Sub-Saharan Africa. rates (Christensen and Rudebusch 2019). Now, Less-favored agricultural areas are agricultural lands constrained by difficult terrain, poor soil quality, limited rainfall, or with limited access to markets. “Sea level" identifies areas where elevation is below given the lack of conventional policy space in most 5 meters. Data are from 2010. B. Simple averages across 31 countries. For further details, refer to Laborde, Lakatos, and advanced economies, central banks may again be Martin (2019). Click here to download data and charts. forced to respond to a negative shock mostly or entirely with unconventional policies. It is not clear that they will be as effective as conventional and South Asia, face growing risks from changing policies in such a scenario. There is evidence of weather patterns (Figure 1.17.A). Poor people are decreasing returns to scale in quantitative easing disproportionally affected by climate change as (Figure 1.18.B; Reza, Santor, and Suchanek they tend to live in riskier areas such as lower 2015). Over time, negative interest rates can also terrain in flood plain areas or on steep, eroded, pose problems for bank profitability, and hence and unstable hillsides. They also depend heavily for the availability of bank credit (Arteta et al. on agriculture for income, and lack the savings 2016). The effectiveness of forward guidance may and access to borrowing that can help them cope be significantly reduced in the presence of with disasters (Hallegate et al. 2016; World Bank borrowing constraints and uninsurable risks 2019g). The poor also spend higher shares of their (McKay, Nakamura, and Steinsson 2016). income on food, making them more vulnerable to Furthermore, any perceived loss of central bank food price spikes that follow local harvest failures independence could substantially reduce the (Figure 1.17.B; Laborde, Lakatos, and Martin effectiveness of monetary policy. Maintaining clear 2019). and credible monetary policy is key for macroeconomic and financial stability. Policy challenges Protracted periods of low interest rates could Challenges in advanced economies encourage excessive risk taking which, combined with declining creditworthiness, may result in Many advanced economies have limited fiscal or financial instability (Figure 1.18.C). Rigorous monetary policy space to respond to a severe macroprudential monitoring and regulation is downturn. Low policy rates leave little room for essential to prevent such outcomes. further conventional monetary loosening. Elevated debt tends to limit the magnitude and effectiveness of Fiscal policy fiscal stimulus. Coordinated policy action may be needed in the event of a severe slowdown. Policies to Even though public debt is high and rising in boost investment and productivity would bolster long- most advanced economies, many governments can term growth prospects, and over time help restore borrow money at near-zero or negative rates. space for effective macroeconomic policy. Persistently low borrowing costs provide credit- G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 37 worthy countries with additional fiscal space— FIGURE 1.18 Monetary and fiscal policies in advanced they can sustain small deficits without increasing economies debt-to-GDP ratios (Figure 1.18.D; Blanchard Policy rates in most advanced economies remain at or near zero, limiting 2019; Rachel and Summers 2019; Kose, Kurlat, et the conventional response to a downturn. Unconventional responses may exhibit diminishing returns. A rising share of lower-rated corporate debt al. 2017). calls for macroprudential vigilance. Many economies have deficits well in excess of debt-stabilizing levels. Fiscal space may, however, be eroded by a sudden fall in nominal growth or rise in borrowing costs. A. Central bank policy rates B. Estimated impact on yields per Moreover, even in the present low-interest-rate billion U.S. dollar in quantitative easing environment, many advanced economies have deficits that would put the ratio of government debt to GDP on a persistent upward path, a trend that is exacerbated by weak potential growth. The debt-to-GDP ratio that is sustainable varies considerably by country and over time. A persistently rising debt ratio exposes public finances to the risk of a sharp rise in borrowing costs. It also reduces policymakers’ ability to C. U.S. non-financial corporate bonds D. Fiscal balances respond to a slowdown with deficit spending, both by rating because there is less room for additional borrowing and because stimulus tends to be less effective when countries have weak fiscal positions (Huidrom et al. 2019). A severe slowdown in activity may require a strong, timely, and well-coordinated response, reminiscent to that undertaken during the global financial crisis. Simultaneous fiscal expansion can Source: Bloomberg; European Central Bank; Haver Analytics; Krishnamurthy and Vissing-Jorgensen (2013); Kose, Kurlat, et al. (2017, data available at http://www.worldbank.org/en/research/brief/fiscal- speed the recovery from crisis, as the positive space); National Sources; World Bank. impact of fiscal stimulus in one country spills over A. Sample includes 37 advanced economies. Light blue area indicates Euro Area countries. Last observation is April 2019. into its neighbors, thus magnifying the impact of B. Estimates from Krishnamurthy and Vissing-Jorgensen (2013). LSAP = Large-Scale Asset Purchase. LSAP1: December 2008-March 2010; LSAP2: November 2010-June 2011; limited fiscal space. LSAP3 = Maturity Extension Program (MEP): September 2011–December 2012. C. Data are calculated using the ICE (Intercontinental Exchange) Merrill Lynch investment-grade and high-yield bond indexes, excluding cash and the issues of financial firms, as of the last trading day of December for each year shown. Face values as percentage of U.S. nominal GDP. Structural policies D. The debt-stabilizing primary balance is the primary balance needed to stabilize debt at its current 1+ γ level and is calculated as (——i - γ ) d* , where i is the nominal long-term interest rate, γ is nominal GDP Expectations for long-term growth in advanced growth, and d* is the target debt ratio in percent of GDP. The nominal long-term interest rate is the country ten-year treasury bond yield at the cut-off date; nominal GDP growth is the seasonally economies have fallen sharply in recent years due adjusted year-on-year percentage change of GDP in local currency in 2018; the target debt ratio is the 2018 level of debt for each country. to a combination of demographic headwinds, Click here to download data and charts. weak productivity, and slowing investment (Figure 1.19.A; World Bank 2018c, 2018b). On the fiscal front, the prospect of slower growth implies less Governments can promote stronger long-term fiscal space to respond to shocks since government activity, and restore policy space, by pursuing revenues will be reduced, and the primary balance growth-enhancing structural reforms that improve needed to stabilize debt will be increased (Figure the business climate, build physical and human 1.19.B). For monetary policy, weak long-term capital, promote labor market flexibility, investment growth lowers the underlying demand encourage labor force participation, and foster the for funds, reducing equilibrium interest rates and adoption of new technologies. A free, fair, and providing less space for conventional monetary rules-based global trade system boosts global policy to respond to an economic slowdown potential by allowing capital to flow to its most (Laubach and Williams 2016). productive locale, lowering costs for both 38 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE 1.19 Structural policies in advanced economies manage disruptions associated with heightened trade Declining labor force growth and weak productivity are reducing long-term tensions and to gradually shift to a more balanced growth expectations. Weak growth magnifies the burden of previously and sustainable growth path and support an orderly issued debt, eroding fiscal space. deleveraging process. A. Potential growth in advanced B. Deterioration in debt-stabilizing economies primary balance caused by a Policy challenges in China 1 percentage point fall in growth In response to trade tensions with the United States, as well as softening exports and domestic demand, authorities have provided monetary and fiscal support, while stepping up structural reform efforts. Monetary policy loosening has mainly taken the form of cuts to bank reserve requirements. On the fiscal front, the authorities have reduced value added and social security tax rates, and boosted public investment spending by Source: Haver Analytics; Kose, Kurlat, et al. (2017, data available at http://www.worldbank.org/en/ research/brief/fiscal-space); Organisation for Economic Co-operation and Development; World Bank. increasing the ability of local governments to issue A. TFP = total factor productivity growth. Figure shows potential growth estimates based on production function approach. For further details on potential growth estimates, refer to the January bonds. The business environment is likely to 2018 edition of the Global Economic Prospects report. Aggregates calculated using constant 2010 U.S. dollar GDP weights. Sample includes 30 advanced economies. Shaded area indicates forecasts. benefit from new laws protecting foreign investors B. The debt-stabilizing primary balance is the primary balance needed to stabilize debt at its current i-γ and strengthening intellectual property rights. The level and is calculated as (—— ) d* , where i is the nominal long-term interest rate, γ is nominal 1+ γ GDP growth, and d* is the target debt ratio in percent of GDP. Calculations assume a country with 2 authorities’ commitment to macroeconomic percent interest rates and nominal growth falling from 4 to 3 percent. stability and structural reforms was reaffirmed in Click here to download data and charts. March (SCPRC 2019). businesses and consumers. By allowing economies China’s immediate policy challenge is to manage to produce the goods and services in which they disruptions caused by trade tensions with the have a comparative advantage, such a system United States without exacerbating domestic encourages the efficient use of resources and the vulnerabilities. In the longer term, the country’s growth of real incomes. key challenge is to continue its gradual shift to more balanced growth, while reducing the Challenges in emerging market and financial stability risks stemming from high levels developing economies of corporate debt (World Bank 2019e). Continued reforms toward more sustainable EMDEs need to reinforce macroeconomic frameworks growth need to be combined with efforts to to improve resilience to shocks, particularly in improve the business environment, support countries with high debt levels. Given limited fiscal innovation, strengthen intellectual property rights, space and large investment needs to meet critical enhance competition and financial discipline, development goals, policymakers need to ensure that reduce barriers to entry, boost productivity, and public spending is cost effective and growth foster household consumption (World Bank enhancing and that policy environments are 2018g). These reforms would also contribute to conducive to private-sector-led solutions. Structural achieving a comprehensive resolution of trade reforms aimed at bolstering the business climate could disputes with the United States and bolster also significantly bolster prospects. Improving access to China’s growth prospects. reliable and affordable infrastructure, leveraging productivity-enhancing technologies, and buttressing The opening of China’s financial system to institutional quality can help remove key bottlenecks international investors—as illustrated by the to activity. Building resilience to extreme weather country’s inclusion in various global bond and events, and boosting agricultural productivity is also equity benchmark indexes—will require prudent a key priority in countries with large and poor rural management. Slowing growth in the working-age populations. China’s main policy challenges are to population is becoming an increasing drag on G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 39 long-term growth; however, this could be offset by FIGURE 1.20 EMDE monetary policy productivity-enhancing investments in health, Moderating inflation in EMDEs led some central banks to ease policy rates education, and research and development (World in the first half of 2019. Since the global financial crisis, there has been a substantial increase in the number and coverage of macroprudential Bank 2018c). measures across EMDEs. Greater central bank independence and transparency would help reduce the impact of currency movements on EMDE monetary and financial policies domestic inflation. The waning impact of previous currency A. Share of EMDEs with inflation B. EMDE policy rate changes depreciations and of the 2017-18 rebound in above target energy prices has helped tame inflation in early 2019 (Figure 1.20.A). Monetary policy tightening has, therefore, paused in many EMDEs, and some have eased their policy stance (Figure 1.20.B). However, underlying inflationary pressures are still present in many countries and recent oil price increases are expected to add to these pressures. In addition, while external financing conditions have eased somewhat, the currently benign market C. Use of macroprudential tools D. Central bank independence and sentiment could change abruptly. This could in EMDEs exchange rate pass-through reignite short-term capital outflows and force procyclical monetary policy tightening. The most vulnerable EMDEs tend to be highly indebted, to have borrowed extensively in foreign currencies, or to rely on short-term capital inflows to finance their current accounts. Sharp depreciations that accompany short-term capital outflows are often contractionary, particularly in Source: Cerutti, Claessens, and Laeven (2018); Haver Analytics; World Bank. countries with elevated foreign-currency- A. The 2013-18 average is 41.7 percent. Last observation is 2019Q1, which includes available data denominated debt, as they both increase debt through May 22, 2019. Unbalanced sample includes 48 EMDEs with announced inflation targets. B. Unbalanced sample includes 70 EMDEs and excludes Argentina and Venezuela. Last observation burdens and reduce the value of collateral on is 2019Q1, which reflects available data up to May 22, 2019. C. Data is based on the 2018 update of Cerutti, Claessens, and Laeven (2017). Sample includes 155 corporate balance sheets (Korinek 2018; Serena EMDEs. D. Exchange rate pass-through after one year driven by a monetary policy shock. Estimated from and Sousa 2018). The adverse impact of these factor-augmented vector autoregression models for 26 EMDEs over 1998-2017. A positive pass- disruptions can be amplified further by tight through means that a currency depreciation associated with an easing of monetary policy leading to higher inflation after one year. Bars show the interquartile range and markers represent the median linkages between sovereign and private sector risks. across countries. The central bank independence index is computed by Dincer and Eichengreen (2014). Low and high central bank independence are defined as below or above the sample average. Click here to download data and charts. Central banks and regulators need to bolster policy frameworks in order to confront future shocks, particularly in countries where rising independence and transparency could also help public and private debt-to-GDP ratios are boost confidence and enhance the policy room to increasing exposure to currency, interest rates, or maneuver. This can be particularly effective in debt-rollover risks. The resilience of banking and limiting the impact of currency depreciations on corporate sectors can be enhanced by inflation (Figure 1.20.D; Carrière -Swallow et al. implementing macroprudential policies that 2017; Eichler and Littke 2018; Special Focus 1.2). prevent the buildup of systemic risk. Since the In turn, this reinforces the shock-absorbing global financial crisis, EMDEs have significantly capacity of market-driven exchange rate increased the number and coverage of movements. macroprudential measures, such as countercyclical capital buffers and limits on foreign-currency In LICs, monetary policy transmission channels borrowing (Figure 1.20.C; Cerutti, Claessens, and are often weaker than in other EMDEs as financial Laeven 2017). Shoring up central bank markets are less deep. This underscores the need 40 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 for LIC central banks to provide a credible anchor negative consequences of tighter budgets by in order to maintain price stability (Ha, Kose, and preserving growth-enhancing spending and Ohnsorge 2019). implementing tax reforms that support investment and revenue mobilization (Ramey 2019). Such EMDE fiscal policy reforms may include broadening the tax base, eliminating loopholes and unnecessary preferences Fiscal deficits and debt levels are rising in many (for example, avoiding base erosion and profit EMDEs, increasing their vulnerability to tighter shifting), and strengthening tax administration financing conditions and potentially constraining and collection to reduce avoidance or evasion their capacity to implement countercyclical fiscal (OECD 2017). Improving the effectiveness and policy and growth-enhancing investments. efficiency of public spending can help Generally benign external financing conditions in governments provide important services without recent years have allowed EMDE sovereigns and sacrificing fiscal space (Herrera and Ouedraogo firms to notably increase the amount of debt 2018). issued on international bond markets (Figure 1.21.A; Fuertes and Serena 2018; Serena and Restoring fiscal space ensures that EMDE Moreno 2016). However, rising debt is often policymakers are able to act should downside risks associated with growing external vulnerabilities—a materialize. Government stimulus tends to elicit a majority of countries that recently experienced weaker demand response when fiscal space is pressures had deficits in excess of 4 percent of narrow and government debt is elevated (Figure GDP (Figure 1.21.B). 1.21.D; Brinca et al. 2016; Hagedorn, Manovskii, Mitman 2019; Huidrom et al. 2019). The Looking forward, EMDEs need to strike a balance introduction or improvement of fiscal stabilizers between taking advantage of current low interest can also help smooth the business cycle (Amra, rates and the potentially adverse consequences of Hanusch, and Jooste 2019). excessive debt accumulation (Box 1.1). Countries with sound fiscal positions and with fiscal frameworks that help ensure long-term EMDE structural policies sustainability can borrow at low interest rates to Unless countered by comprehensive structural support growth-enhancing investments. However, reforms, adverse demographic trends in an countries with constrained fiscal positions should increasing number of countries, and weak prioritize measures to reduce fiscal deficits, productivity growth, are likely to result in a lengthen the maturity of existing debt, improve further deterioration in EMDE growth potential the quality of spending, and raise tax collection over the next decade (Figure 1.22.A). Weakening and compliance, particularly in LICs (World Bank external demand from major economies and 2019a). elevated trade policy uncertainty also highlight the In countries where sovereign default risks are high, need to address the most pressing impediments to undertaking fiscal consolidation to address long- domestic and regional growth and to renew term debt sustainability can help restore market commitments to trade liberalization. An improved confidence, and increase the space for future multilateral rules-based trading system remains the policy actions (Figure 1.21.C; Ilzetzki, Mendoza, rst line of defense against protectionist tendencies and Végh. 2013; Aizenman et al. 2019). Just as and could yield previously untapped development stronger bank balance sheets reduce the risk of opportunities for many EMDEs. financial sector problems affecting the sovereign, a stronger government balance sheet can help reduce e implementation of structural reforms to the risk that domestic banks are affected by improve the business climate and foster private sovereign distress. investment and job creation would substantially bolster the growth outlook. is is particularly While restoring fiscal space is an important important given current scal constraints and large priority, EMDE governments can minimize the investment needs (Special Focus 1.1). Estimates of G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 41 the infrastructure spending required to meet the FIGURE 1.21 EMDE fiscal policy Sustainable Development Goals by 2030 range Low borrowing costs and ample availability of credit have allowed between 4.5 to 8.2 percent of EMDE GDP, governments to borrow heavily on international markets. Fiscal deficits are declining, but persist at elevated levels in many countries, especially those depending on policy choices and the quality and that have recently faced financial pressures. Government stimulus tends to quantity of infrastructure services (Rozenberg and be less effective when debt is high. Fay 2019). Business climates and institutions can be strengthened to support productivity and A. International gross bond issuance, B. Fiscal deficit unlock private investments to meet future needs. by borrower sector Key priorities include increasing access to reliable and a ordable electricity, improving transport services, leveraging digital technologies, and improving business climates. Raising agricultural productivity could substantially boost develop- ment opportunities in countries with large rural populations, as well as increase the resilience of the rural sector to extreme weather events. E ective social safety nets and active labor market policies C. Long-term sovereign debt ratings D. Fiscal multiplier, by debt level are also key to manage economic, social, and environmental risks. Access to electricity. Limited access to electricity is a drag on economic activity in many EMDEs— particularly in LICs, as electricity infrastructure is either inadequate or plagued by frequent outages (Andersen and Dalgaard 2013; Blimpo and Cosgrove-Davies 2019; Special Focus 2.1). Source: Bank for International Settlements; Huidrom et al. (2019); International Monetary Fund; J.P. Policymakers in the a ected countries should Morgan; Kose, Kurlat, et al. (2017, data available at http://www.worldbank.org/en/research/ brief/fiscal-space); World Bank. prioritize critical investment to ensure reliable, A. Figure shows 4-quarter moving averages of gross-bond issuance. “Other” includes central banks cost-e ective, and sustainable power generation. and public and private financial institutions. Last observation is 2018Q4. B. Shaded area indicates forecasts. Policy actions need to achieve both access to B.C. EMDEs under recent pressure include: a) countries that have had an increase in their J.P. Morgan EMBI credit spread of at least one standard deviation above the 2010-19 average at any time a ordable electricity for the poor, as well as since April 2018 (Argentina, Brazil, Egypt, Gabon, Jordan, Lebanon, Mexico, Nigeria, South Africa, Sri Lanka, Tunisia, Turkey); or b) countries that have been subject to recent sanctions (Iran, Russia). adequate pro tability for power utilities. Such C. Sovereign ratings are converted to a numerical scale ranking from 1 to 21, as estimated by Kose, reforms include reviewing costly and regressive Kurlat, et al. (2017). A higher ranking indicates a better rating (in other words, less likely to have a sovereign default episode). energy subsidies, minimizing losses in D. Figure shows fiscal multipliers 2 years from impact based on estimates from the IPVAR model of Huidrom et al. (2019). An economy is considered to have low debt when government debt is below transmission and distribution, and ensuring 40 percent of GDP and high debt when it exceeds 60 percent of GDP. Orange lines represent 16-84 percent confidence bands. payment of electricity bills (Kojima and Trimble Click here to download data and charts. 2016). Small-grid solutions and renewable energy may also expand access to electricity (World Bank 2018h). Moreover, operation and maintenance— regulatory barriers such as impediments to entry in an often-neglected component of e ective power trucking, brokerage, terminal and warehousing generation—need to be budgeted with a reliable operations; as well as greater reliance on market source of funding (Rozenberg and Fay 2019). mechanisms and private sector participation (World Bank 2018i). Mobility and market access Logistics and transportation. Ine cient logistics can also be bolstered by prioritizing cost-e ective and inadequate transport infrastructure are key transport infrastructures. Appropriate land-use growth bottlenecks in many EMDEs, raising the planning and urbanization policies can cost of doing business and reducing the potential substantially reduce the cost of meeting transport for domestic and international integration. needs, while minimizing carbon footprints Reform priorities include the removal of (Rozenberg and Fay 2019; Figure 1.22.B). 42 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE 1.22 EMDE structural policies Improved cross-border connectivity can also help Productivity growth is lackluster in EMDEs. Investment needs in transport foster intraregional trade and diversi cation, as are large but costs can be reduced with appropriate land-use planning in well as encourage higher domestic value-added most regions. Upgrading economic complexity and government content in production. is may particularly help effectiveness closer to advanced-economy levels could yield large growth dividends, particularly in Sub-Saharan Africa. Weak governance and Sub-Saharan Africa—which, together with South unfavorable business climates are also associated with significantly higher Asia, has considerably lower export complexity poverty rates, highlighting the importance of structural reforms that bolster than other EMDE regions and signi cantly higher the business climate in EMDEs. intraregional trade costs (Figure 1.22.C; UNECA A. Total factor productivity growth in B. Investment needs in urban 2018). EMDEs transport to meet Sustainable Development Goals Digital technologies. More widespread adoption of digital technologies, including in the delivery of nancial and public sector services, could further boost productivity by helping spread innovation and improving both private sector and government e ciency (Baldwin 2019). In countries with large informal sectors, widespread adoption of these digital technologies could help expand tax bases through the scalization of C. Economic Complexity Index, 2014-16 D. Government effectiveness, 2014-16 informal sector transactions. New technologies are more likely to be adopted successfully if policies are in place to mitigate the costs of adjustment for both workers and rms, and if market failures are addressed (World Bank 2019h). Policy measures that prioritize investment in human capital are needed to ensure that digital technologies promote inclusive growth. Digital technologies are also expected to further contribute to the reduction of F. Poverty, by Ease of Doing Business trade costs and an increase in trade ows (WTO E. Poverty, by regulatory quality 2018). However, the spread of digital technologies will also likely a ect the composition of trade by increasing the services value-added component, changing patterns of comparative advantage, and a ecting the complexity and length of global value chains. Governance and business climate. Better institu- Source: Observatory of Economic Complexity, Penn World Tables, Rozenberg and Fay (2019), World tional quality—such as control of corruption and Bank. Note: TFP = Total factor productivity. AE = Advanced economies, EAP = East Asia and Pacific, rent-seeking, fair application of the rule of law, ECA = Europe and Central Asia, LAC = Latin America and the Caribbean, MNA = Middle East and protection of property rights, and political North Africa, SAR = South Asia, and SSA = Sub-Saharan Africa. A. Shaded area indicates forecasts. GDP-weighted averages of production function-based potential stability—is associated with more innovation, TFP growth estimates. Sample includes 50 EMDEs. B. Figure shows estimates from Rozenberg and Fay (2019). Data cover the years 2015 to 2030. increased nancial access, and stronger investment C. The Economic Complexity Index (ECI) measures the relative knowledge intensity of exports. growth (Berkowitz, Lin, and Ma 2015). Higher values indicate higher degree of economic complexity. Sample includes 96 EMDEs and 31 AEs. Governance reforms can lead to sizable D. The indicator reflects the perceptions of the quality of public services, the quality of civil service and the degree of its independence from political pressures, the quality of policy formulation and productivity gains, particularly in countries implementation, and the credibility of the government's commitment to such policies. Higher values indicate better quality. Sample includes 150 EMDEs and 36 AEs. furthest away from best practices, many of which E. The poverty rate is an unweighted average in each group. “Best” indicates quartile of EMDEs with the strongest regulatory quality (based on data for year with latest poverty data). “Worst” indicates are in Sub-Saharan Africa (Bhattacharyya 2009; quartile of EMDEs with the weakest regulatory quality. The back data for regulatory quality has been Cusolito and Maloney 2018; Acemoglu, Johnson, taken from the World Governance Indicators. The data is for 2017. F. The poverty rate is an unweighted average in each group. “Best” indicates quartile of EMDEs with and Robinson 2005; Figure 1.22.D). Improving the highest 2019 Ease of Doing Business score (above 67.5). “Worst” indicates quartile of EMDEs with the lowest 2019 Ease of Doing Business score (below 51.6). the business climate by simplifying tax and Click here to download data and charts. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 CHAPTER 1 43 regulatory requirements and ensuring clarity and GDP in most LICs, and climate risks are predictability for investors is another e ective way presenting severe challenges in many of them to support private investment and productivity. (Special Focus 2.1). Better governance and business climates can also help reduce the likelihood of corruption, Productivity-enhancing measures in the informality, and extreme poverty (Demenet et al. agricultural sector—including improved irrigation, 2016; Djankov et al. 2018; Lawless 2013; Paunov better access to markets, e ective use of fertilizers 2016; Figures 1.22.E and F). and new technologies—could bene t the two- thirds of the global poor who earn their livelihood Agricultural productivity, climate risks, and from farming (World Bank Forthcoming). poverty. e e ects of climate change are Improved institutions and policy bu ers can becoming increasingly visible. e poor are enhance resilience to climate change, as they disproportionally a ected by climate risks as they provide the resources needed to support victims of tend to live in more vulnerable areas, depend on extreme events. Investment in climate-smart income sources such as agriculture that are often infrastructure, combined with appropriate land- susceptible to climate shocks, and lack the savings use planning, can help mitigate those risks. and access to borrowing that can help them cope E ective social safety nets and productive with natural disasters (World Bank 2019g). Many inclusion programs also have an important role to EMDEs in Sub-Saharan Africa and South Asia play in protecting the most vulnerable, acting as a have large agricultural sectors that are subject to countercyclical bu er during economic extreme weather events and other environmental downturns, and facilitating transitions to stresses. Agriculture accounts for at least a third of productive employment. 44 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 TABLE 1.2 Emerging market and developing economies1 Commodity exporters2 Commodity importers3 Albania* Madagascar Afghanistan Panama Algeria* Malawi Antigua and Barbuda Philippines Angola* Malaysia* Bahamas, The Poland Argentina Mali Bangladesh Romania Armenia Mauritania Barbados Samoa Azerbaijan* Mongolia Belarus Serbia Bahrain* Morocco Bhutan Seychelles Belize Mozambique Bosnia and Herzegovina Solomon Islands Benin Myanmar* Bulgaria Sri Lanka Bolivia* Namibia Cabo Verde St. Kitts and Nevis Botswana Nicaragua Cambodia St. Lucia Brazil Niger China St. Vincent and the Grenadines Burkina Faso Nigeria* Comoros Thailand Burundi Oman* Croatia Tonga Cameroon* Papua New Guinea Djibouti Tunisia Chad* Paraguay Dominica Turkey Chile Peru Dominican Republic Tuvalu Colombia* Qatar* Egypt Vanuatu Congo, Dem. Rep. Russia* El Salvador Vietnam Congo, Rep.* Rwanda Eritrea Costa Rica Saudi Arabia* Eswatini Côte d’Ivoire Senegal Fiji Ecuador* Sierra Leone Georgia Equatorial Guinea* South Africa Grenada Ethiopia Sudan* Haiti Gabon* Suriname Hungary Gambia, The Tajikistan India Ghana* Tanzania Jamaica Guatemala Timor-Leste* Jordan Guinea Togo Kiribati Guinea-Bissau Trinidad and Tobago* Lebanon Guyana Turkmenistan* Lesotho Honduras Uganda Maldives Indonesia* Ukraine Marshall Islands Iran* United Arab Emirates* Mauritius Iraq* Uruguay Mexico Kazakhstan* Uzbekistan Micronesia, Fed. Sts. Kenya West Bank and Gaza Moldova, Rep. Kosovo Zambia Montenegro Kuwait* Zimbabwe Nepal Kyrgyz Republic North Macedonia Lao PDR Pakistan Liberia Palau * Energy exporters. 1. Emerging market and developing economies (EMDEs) include all those that are not classified as advanced economies and for which a forecast is published for this report. Dependent territories are excluded. Advanced economies include Australia; Austria; Belgium; Canada; Cyprus; the Czech Republic; Denmark; Estonia; Finland; France; Germany; Greece; Hong Kong SAR, China; Iceland; Ireland; Israel; Italy; Japan; the Republic of Korea; Latvia; Lithuania; Luxembourg; Malta; Netherlands; New Zealand; Norway; Portugal; Singapore; the Slovak Republic; Slovenia; Spain; Sweden; Switzerland; the United Kingdom; and the United States. 2. An economy is defined as commodity exporter when, on average in 2012-14, either (i) total commodities exports accounted for 30 percent or more of total goods exports or (ii) exports of any single commodity accounted for 20 percent or more of total goods exports. Economies for which these thresholds were met as a result of re-exports were excluded. When data were not available, judgment was used. 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. 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SPECIAL FOCUS 1.1 Investment: Subdued Prospects, Strong Needs G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 S P EC IAL FO CU S 1.1 55 Investment: Subdued Prospects, Strong Needs Investment growth in emerging market and developing economies (EMDEs) over the next three years is expected to be subdued and below historical averages. This continues a prolonged, broad-based slowdown after the global financial crisis, notwithstanding a modest recovery between 2016 and 2018. During the forecast period, EMDE investment growth is expected to be held back by weak global growth, limited fiscal space against the backdrop of elevated debt, and the presence of several structural constraints. Weak investment is a concern because it will further dampen potential growth, and make achieving the Sustainable Development Goals more difficult. Depending on country circumstances, the use of appropriate fiscal and structural reforms could generate upside potential for investment in the medium and long term. For EMDEs with limited fiscal space, institutional reforms to improve business conditions could help attract private investment. In light of elevated debt levels, policymakers should also ensure resources are allocated to high quality investment projects and improve the transparency and efficiency of public investment management systems where necessary. FIGURE SF1.1.1 Investment trends and prospects Recent developments Notwithstanding a modest recovery from its 2015 low, EMDE investment and prospects growth remains weak and below historical averages—in the aggregate as well as in the majority of countries. Investment growth in EMDEs is projected to advance modestly in the medium term, reflecting a pickup in Investment growth in emerging market and commodity exporters, but to a rate still below historical averages. The developing economies (EMDEs) is below sluggishness of investment is expected to persist in the long term. historical averages and is expected to remain weak over the forecast horizon (Figure SF1.1.1.A).1 In A. EMDE investment growth B. Share of EMDEs with investment absolute terms, EMDE investment amounted to growth below 2000-18 average $9.7 trillion (nearly one-third of GDP) in 2018. This Special Focus updates previous work ana- lyzing the drivers and implications of post-crisis investment weakness in EMDEs (World Bank 2017; Kose et al. 2017; Vashakmadze et al. 2017). EMDE investment growth reached a modest 4.7 percent in 2018 and is expected to slow (to 3.9 percent) in 2019, before advancing modestly in C. Investment growth D. Long-term investment growth 2020 and 2021. A modest cyclical recovery in forecasts commodity exporters is expected to support the investment recovery in 2020-21. The outlook for EMDE investment has been downgraded since 2018, however, amid weaker-than-expected global activity and softening investor confidence. Moreover, EMDE investment growth is projected to remain below historical averages during the forecast period. Source: Consensus Economics, Haver Analytics, Oxford Economics, World Bank. A.-C. Investment refers to real gross fixed capital formation (public and private combined). 2010 Note: This Special Focus was prepared by Dana Vorisek, Naotaka investment-weighted averages. Sample includes 65 EMDEs and 34 advanced economies (listed in Table SF1.1.1). Due to limited data availability, this special focus covers a smaller set of EMDEs than Sugawara, and Lei Sandy Ye. Research assistance was provided by Liu those for which the WBG projects GDP growth in Global Economic Prospects. Cui and Mengyi Li. A. Shaded areas indicate forecasts. 1 Investment is defined as real gross fixed capital formation. Table B.C. Shaded areas indicate global recessions and slowdowns. SF1.1.1 lists the countries in the investment sample. Together, the 65 D. 10-year-ahead forecasts surveyed in indicated year. Constant 2010 U.S. dollar investment- weighted averages. Sample includes 23 advanced economies and 20 EMDEs (indicated by † in Table EMDEs and 34 advanced economies represent 96 percent of global SF1.1.1). For 2010-18, the average of four projections during the year is shown; for 2019, the GDP in 2018. The 65 EMDEs represent 92 percent of total EMDE average of two projections during the first half of the year is shown. GDP in 2018. Click here to download data and charts. 56 S P EC IAL FO CU S 1.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 The recent modest recovery in EMDE investment growth have changed during the past decade— growth follows a prolonged, broad-based slow- comparing the drivers in the immediate post-crisis down following the global financial crisis. years to the most recent years, when investment Investment growth in these economies fell from growth began to recover. Third, it discusses the 11.8 percent in 2010 to a low of 2.8 percent in medium- and long-term consequences of weak 2015. In well over half of EMDEs, investment investment growth. growth has been below country-specific long-term averages since 2012 (Figure SF1.1.1.B). This The Special Focus presents the following main differs from the experience in advanced findings. First, investment growth in EMDEs has economies, where investment growth recovered risen modestly since bottoming out in 2015, rapidly after the global financial crisis and has reflecting a cyclical recovery among commodity- since been around its long-term average of 2.3 exporting EMDEs and a fading of country-specific percent (Figure SF1.1.1.C). For the world, factors holding back investment in some large investment growth is expected to decelerate to 2.7 economies. In the medium term, investment percent in 2019, from 3.7 percent in 2018, and to growth is expected to continue to gain ground, remain subdued through 2021, held back by although only modestly, and at a pace still below persistent sluggishness in investment growth in long-term historical averages. Second, empirical advanced economies. estimates suggest that during 2015-18, the main driver of the acceleration in EMDE investment The long-term investment outlook is subdued. growth was the terms of trade improvement in The private sector’s 10-year-ahead outlook for commodity-exporting economies. This contrasts investment has steadily weakened over the past with the multiple cyclical drivers depressing decade, for both EMDEs and the world (Figure investment growth in a large number of EMDEs SF1.1.1.D; Kose, Ohnsorge, and Sugawara, during 2011-15. Third, weak investment growth forthcoming).2 In early 2019, the 10-year-ahead has contributed to weaker potential growth and outlook for EMDE investment growth was 3.2 will make meeting the Sustainable Development percent, nearly 8 percentage points below the most Goals (SDGs) more challenging. A sustained recent high in 2010, and more than half a improvement in investment growth in EMDEs percentage point lower than projected in 2018. requires the use of fiscal, monetary, and structural The long-term outlook for EMDEs excluding policy tools, with specific priorities depending on China has also been downgraded relative to 2018. country circumstances. Against this backdrop, this Special Focus examines the following questions. Drivers of investment growth • What were the main drivers of weak post- crisis investment growth in EMDEs? Post-crisis slowdown • What are the implications of weak investment The slowdown in EMDE investment growth from growth in EMDEs and what policy responses 2010 to 2015 reflected external and domestic are available? factors.3 For commodity exporters, a steep drop in oil and metals prices between mid-2014 and early This Special Focus extends previous analysis of 2016 and associated adverse terms-of-trade shocks investment in EMDEs in several dimensions (World Bank 2017; Kose et al. 2017). First, it 3 Studying the trends in investment growth is relevant for short- updates the investment data and provides revised term analysis. Trends in investment ratios (i.e., investment relative to projections of investment growth. Second, the GDP) are an important complement to trends in investment growth, study examines how the drivers of investment and are more relevant for long-term analysis on investment and savings. For the sample of 65 EMDEs used in this note, the investment ratio has moderated somewhat, from a post-2000 high of 2 The world sample includes 23 advanced economies and 20 34.8 percent in 2013 to 33.4 percent in 2018. Excluding China, the EMDEs that together represent 87 percent of global GDP in 2018. investment ratio in EMDEs is substantially lower, but it has also The 20 EMDEs represent 78 percent of total EMDE GDP in 2018. fallen, from a high of 25.4 percent in 2012 to 23.8 percent in 2018. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 S P EC IAL FO CU S 1.1 57 were key factors behind their investment FIGURE SF1.1.2 Decomposition of EMDE investment slowdown (Islamaj et al. 2019; Kose et al. 2017; trends World Bank 2017; Stocker et al. 2018; Slowing investment growth in EMDEs after 2010 reflected decelerations in Vashakmadze et al. 2017). Policy uncertainty, both public and private investment growth. By country composition, China weak activity in advanced economies, and high accounts for a large portion of the investment slowdown in EMDEs after 2010, but commodity-exporting economies also contributed. LICs for which corporate leverage also dampened investment in data is available showed above-trend investment growth in 2016 and 2017, EMDEs during this period. after a slowdown in 2014-15. Slowing investment growth in EMDEs reflected A. Public and private investment B. Country contributions to EMDE decelerations in both public and private growth in EMDEs investment growth investment growth during the post-crisis period (Figure SF1.1.2.A).4 The two largest commodity- exporting economies, Brazil and Russia, suffered double-digit investment contractions in 2015 amid deep economic recessions. Investment growth in commodity-importing economies has been less volatile, but also moderated after 2010. An economic policy shift in China toward more sustainable and balanced growth (i.e., more reliance on consumption and less reliance on C. Investment growth D. Investment growth in LICs investment) contributed significantly to the EMDE investment growth slowdown (Figure SF1.1.2.B). Slowing investment growth in China may also have dampened investment growth in other EMDEs (World Bank 2017). Yet even excluding China, investment growth in EMDEs has slowed since 2010 (Figure SF1.1.2.C). Moderate recovery since 2016 Source: Haver Analytics, International Monetary Fund, World Bank. A. 2010 investment-weighted averages. Investment refers to real gross fixed capital formation. EMDE The moderate recovery in investment growth since sample includes 63 economies (listed in Table SF1.1.1, except Jamaica and West Bank and Gaza). 2016 reflects in part a pickup in global B. C. 2010 investment-weighted averages. Investment refers to real gross fixed capital formation. Shaded areas indicate forecasts. EMDE sample includes 65 economies (listed in Table SF1.1.1). manufacturing and trade that began in mid-2016 D. 2010 investment-weighted averages. Sample includes eight LICs: Benin, Burkina Faso, Mali, Mozambique, Nepal, Senegal, Tanzania, and Uganda. and peaked in late 2017. The recovery has been Click here to download data and charts. further supported by a rebound in oil and metals prices in 2017-18, which encouraged capital expenditures in the commodity-dependent regions growth rebounded in 2016 and 2017 from a low of Latin America and Sub-Saharan Africa. associated with sharply declining oil prices and international sanctions in 2015. In Brazil, Commodity exporters. Investment growth in investment growth accelerated in 2018 as the EMDE commodity exporters accelerated to 2.2 economy slowly recovered from a multiyear percent in 2017 and 3.2 percent in 2018, after recession. Large infrastructure projects are two years of contraction. In Russia, investment supporting solid investment in Indonesia. Improvements in these countries more than offset deteriorating investment growth in 2018 in other 4 Among the 11 EMDEs that disaggregate private and public large economies, such as Argentina, where investment in their national accounts, private investment growth investment contracted due to financial turmoil, outpaced public investment growth in 2016-18 in some (Bahrain, Malaysia, Mexico, South Africa, Thailand), while public investment policy uncertainty, and a severe drought—and the growth has been faster in others (Bangladesh, Peru). In still other Islamic Republic of Iran, where U.S. economic countries, the trend is less clear. Private investment has accounted for about three-quarters of total investment, on average, since 2010, in sanctions are inhibiting investment. the EMDEs that disaggregate the two components. 58 S P EC IAL FO CU S 1.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 Commodity importers. Investment growth in improves and credit conditions become gradually commodity-importing EMDEs also picked up in less tight. In Russia, investment is expected to 2018, to 5.5 percent. In China, private investment accelerate moderately as public spending on improved in response to policies, which offset infrastructure picks up. The acceleration will not weakness in public investment. In India, be universal among the largest economies, investment firmed as temporary disruptions, such however. Through 2021, investment growth in as those related to the implementation of a goods China is expected to continue its gradual and services tax in 2017, faded and credit growth moderation, to rates well below those of recent picked up. Investment in Mexico recovered decades. In India, it is expected to grow a slower modestly in 2018 as trade uncertainty receded pace than in 2018, although investment growth is with the announcement of the United States- expected to remain robust as benefits of recent Mexico-Canada Agreement. In Turkey, however, policy reforms further materialize. investment slumped last year, as the country experienced high market volatility and economic In addition to country-specific drivers of the stress. EMDE investment outlook, several broad factors are expected to influence EMDE investment Low-income countries. Low-income countries growth in the short and medium term. (LICs) with available data initially (during 2010- 13) did not share the investment slowdown of the Easier financing conditions. In the context of an broader group of EMDEs (Figure SF1.1.2.D). increasingly dovish stance by the U.S. Federal However, investment appears to have fallen Reserve and the European Central Bank, external sharply, in line with other EMDEs, during the financing conditions for EMDEs have improved global financial crisis and the most recent since late 2018.5 Sovereign bond spreads have commodity price bust starting in 2014. The 2014- fallen, bond issuance has picked up, and recent 15 slowdown was followed by two years of above- data indicate that capital inflows to EMDEs are trend growth. In Nepal and Tanzania, two of the recovering. The easier financing environment may largest LIC economies, investment expanded provide a boost to still sluggish investment, at least rapidly in 2016-17, on post-earthquake in the short term. However, additional financing reconstruction and robust construction sector must be channeled toward productive uses, so that activity, respectively. All LICs with available data it does not simply add to already high government reported solid investment growth in 2017. and corporate leverage in many EMDEs. Modest medium-term acceleration Limited fiscal space and rising debt. Elevated and rising debt levels in EMDEs, including corporate Investment growth in EMDEs is expected to dip debt, will weigh on investment growth, especially slightly in 2019, to 3.9 percent, reflecting the if global financing conditions tighten unexpect- resumption of a trend slowdown in investment edly. Government finances in many EMDEs are growth in China as it rebalances its economy, as in a fragile position, with deteriorating debt well as temporary factors in several other large dynamics and limited fiscal space (Figure commodity importers. These factors include SF1.1.3.A). In some cases, reforms to improve policy uncertainty in Mexico (including for the fiscal space have stalled, while funding of new or domestic oil and gas sector) and a challenging post increasing liabilities, such as public sector wage -crisis investment environment in Argentina and bills, has put further strain on domestic revenues Turkey. In 2020 and 2021, investment growth is projected 5 Many studies have found strong linkages between the U.S. to accelerate moderately, supported by faster monetary policy stance and credit cycles in EMDEs. A recent study growth in commodity exporters, but still fall short finds that the spillovers between accommodative U.S. monetary of trend rates. In Brazil, for instance, investment policy and foreign bank lending to emerging markets is strongest for the most risky countries, and within countries, strongest for the most growth is expected to recover as confidence risky firms (Bräuning and Ivashina 2018). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 S P EC IAL FO CU S 1.1 59 (Brazil, South Africa). Oil exporters continue to FIGURE SF1.1.3 Drivers of investment growth in EMDEs face fiscal sustainability challenges. In metals and Unfavorable external conditions and weak fiscal positions are expected to agricultural producers, weaker-than-envisaged continue weighing on investment growth. Econometric estimates suggest commodity prices could put further pressure on that the pronounced investment growth slowdown in 2011-15 was, in almost equal measure, a reflection of weakening domestic output growth, a already fragile public finances (South Africa, sharp deterioration in terms of trade for commodity exporters, and elevated Zambia). The relationship between limited fiscal private debt burdens. The subsequent moderate recovery largely reflected improving terms of trade for commodity exporters. space and sluggish investment may be particularly strong for countries, including many LICs, where debt levels have increased in recent years and A. Fiscal balances in EMDEs B. FDI inflows to EMDEs interest payments are absorbing a rising share of government revenues (World Bank 2019a). Inefficient management of public finances may also constrain investment growth in EMDEs. Unfavorable external economic outlook. External conditions for EMDE investment are expected to become less favorable in the medium term (World Bank 2019a). Growth is projected to ease in major economies (China, the Euro Area, the United C. Predicted change in EMDE D. Predicted change in EMDE investment growth, 2011-15 investment growth, 2015-18 States) in 2019-21, which may slow investment and exports in closely-linked EMDEs. Commodity prices—both energy and non- energy—are projected to weaken somewhat in 2019 (World Bank 2019b). In addition, global policy uncertainty, including trade policy uncertainty, remains elevated. Persistent investor concerns about possible further protectionist trade actions could reduce the attractiveness of new investment projects. Generalized market-related Source: Haver Analytics, International Monetary Fund, International Country Risk Guide, World Bank. A. Medians within groups. Shaded area indicates forecast. Sample includes 151 EMDEs. uncertainty could also reduce capital flows to B. Four-quarter (from t-3 to t) moving sum of FDI inflows, divided by annual GDP. Sample includes 54 EMDEs. Last observation is 2018Q4. EMDEs, potentially hindering investment (Figure C.D. Unweighted averages for 56 EMDEs. Charts show change in contribution of each explanatory SF1.1.3.B).6 variable to predicted investment growth (defined as coefficient estimate times the realization of the variable), based on the regression specification in first column of Annex Table SF1.1.1.1. For presentational clarity, the charts show only the four explanatory variables with the largest contributions to the predicted change in investment growth. Structural factors. In addition to macroeconomic Click here to download data and charts. factors, institutional and structural factors play a role in determining investment growth and investment ratios in EMDEs. These factors diverse. An econometric exercise using panel data include financial sector development and for 57 EMDEs suggests that over the past two oversight, trade policy, demographic change, and decades, higher EMDE investment growth was economic diversification, among others (World associated with macroeconomic factors including Bank 2017). higher output growth, stronger capital inflows, high political stability, stronger terms of trade The economic landscape described above suggests growth, and lower private sector debt burdens that drivers of investment growth in EMDEs are (Annex SF1.1.1, Annex Table SF1.1.1.1). The regression results suggest that the pronounced investment growth slowdown in 2011-15 was, in 6 FDI is a key channel through which fixed investment is financed almost equal measure, a reflection of weakening in EMDEs. For the EMDEs included in this Special Focus, FDI inflows dropped from about 3.3 percent of GDP in 2011 to 1.7 domestic output growth, a sharp deterioration in percent of GDP in 2017. The trend is similar when China is terms of trade for commodity exporters, and excluded. FDI inflows to EMDEs are estimated to have picked up moderately in 2018, although to a level below historical averages. elevated private debt burdens (Figure SF1.1.3.C). 60 S P EC IAL FO CU S 1.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE SF1.1.4 Implications of weak investment growth Implications and policy in EMDEs Decelerating investment growth during the post-crisis period has responses dampened the pace of convergence in per capita GDP between EMDEs and advanced economies and has slowed capital accumulation. Slowing Weak investment to weigh on potential capital accumulation, together with decelerating productivity and changing growth demographic conditions, has contributed to weaker potential growth in EMDEs. Continued weak investment growth will make filling large investment gaps in EMDEs more challenging. The prospect that weak investment growth will remain weak over the longer-term, on the heels of A. Difference, EMDE and advanced- B. Contribution to potential growth, the sharp slowdown in the first half of this decade, economy per capita growth EMDEs raises fundamental concerns about the economic health of EMDEs. The earlier period of weak investment growth in EMDEs dampened the pace of convergence in per capita GDP with advanced economies (Figure SF1.1.4.A). Slowing capital accumulation also contributed to a deceleration in potential growth in EMDEs during the past five years, and capital is expected to continue detracting from potential growth during the next decade (Figure SF1.1.4.B; World Bank 2018). In C. Spending needs in infrastructure D. Additional spending needs in sectors related to SDGs, World Bank sectors related to SDGs, IMF addition, sluggish investment may have slowed estimates estimates potential growth indirectly, by eroding productivity gains embedded in new equipment and technologies, or in research and development. Sustained investment pickup needed to meet the SDGs Despite weak investment prospects, EMDEs have large investment needs. Recent analysis by the World Bank finds that achieving the SDGs related Source: Gaspar et al. (2019), Penn World Tables, Rozenberg and Fay (2019), UN Population Prospects, World Bank. to infrastructure (electricity, transport, water A. 2010 investment-weighted averages. Investment refers to real gross fixed capital formation (public and private combined). Shaded areas indicate global recessions and slowdowns. Sample includes 65 supply and sanitation) and infrastructure-related EMDEs and 34 advanced economies (listed in Table SF.1.1.1). climate change costs (flood protection, irrigation) B. GDP-weighted averages. TFP = total factor productivity. Shaded area indicates forecasts. Sample includes 50 EMDEs. in low- and middle-income countries will require C. D. SDGs = Sustainable Development Goals. C. Bars show average annual spending needs during 2015-30. “Preferred scenario” is constructed an average of investment of $1.5–$2.7 trillion per using ambitious goals and high spending efficiency, and “maximum spending scenario” using ambitious goals and low spending efficiency. Country sample includes low- and middle-income year during 2015–30, or 4.5 to 8.2 percent of countries. Country sample includes low- and middle-income countries, as defined by the World Bank. these countries’ combined GDP, depending The technical appendix of Rozenberg and Fay (2019) provides information on the lcountry sample. D. For health and education, estimates are the difference between the share of GDP in spending on policy choices and the quality and quantity consistent with high performance and the current level of spending as a share of GDP. For infrastructure, estimates show spending needed to close the infrastructure gap (roads, electricity, and of infrastructure services (Figure SF1.1.4.C; water and sanitation) between 2019 and 2030. Gaspar et al. (2019) and IMF (2018) provide more information on the low-income developing country sample. Rozenberg and Fay 2019). The results highlight Click here to download data and charts. the importance of spending efficiency (i.e., the quality of spending) in achieving the infrastruc- ture-related SDGs. An IMF study of additional Although commodity importers benefited from annual spending needed in sectors related to the the decline in commodity prices, slowing capital SDGs (i.e., health, education, roads, electricity, inflows weighed on investment growth. The and water and sanitation) arrives at estimate of subsequent moderate recovery of investment approximately $2.5 trillion per year. This figure growth in 2016-18 largely reflected improving represents about 4 percent of emerging market terms of trade for commodity exporters (Figure economies’ 2030 GDP and more than 15 percent SF1.1.3.D). of low-income developing countries’ 2030 GDP G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 S P EC IAL FO CU S 1.1 61 TABLE SF.1.1.1 Economies in sample Emerging market and developing economies (65) Advanced economies (34) East Asia and Pacific Latin America and the Caribbean Middle East and North Africa Australia † Cambodia * Argentina † Algeria Austria China *† Belize Bahrain Belgium Indonesia † Bolivia Iran Canada † Malaysia † Brazil † Kuwait Cyprus Mongolia Chile † Lebanon * Czech Republic † Philippines *† Colombia † Morocco Denmark Thailand *† Costa Rica Oman Estonia † Vietnam * Dominican Republic * Saudi Arabia Finland Ecuador United Arab Emirates France † Europe and Central Asia El Salvador * West Bank and Gaza Germany † Albania Guatemala Greece Armenia Honduras South Asia Hong Kong SAR, China † Belarus * Jamaica India *† Iceland Bosnia and Herzegovina Mexico *† Sri Lanka * Ireland Bulgaria *† Nicaragua Israel Croatia *† Paraguay Sub-Saharan Africa Italy † Hungary *† Peru † Benin Japan † Poland *† Uruguay Botswana Korea, Rep. † Romania *† Burkina Faso Latvia † Russia † Cameroon Lithuania † Turkey *† Côte d'Ivoire Malta Ukraine † Ghana Netherlands † Kenya New Zealand † Mali Norway † Mauritius * Portugal Mozambique Singapore † Namibia Slovak Republic † Nigeria Slovenia † Senegal Spain † South Africa Sweden † Uganda Switzerland † United Kingdom † United States † * Commodity importers. Each EMDE is classified as a commodity importer or commodity exporter. An economy is classified as a 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). † Countries in Consensus Economics' long-term forecast sample in Figure SF1.1.1.D. (Figure SF1.1.4.D; Gaspar et al. 2019).8 Policy responses Mobilization of sufficient financing to close investment gaps in EMDEs has been challenging The use of a range of policies—counter-cyclical (United Nations Inter-Agency Task Force on stimulus measures as well as structural reforms— Financing for Development 2019). could generate upside potential for investment growth. A multi-pronged approach could simultaneously boost both public and private 8 In addition, UNCTAD (2014) estimates that additional investment. spending of $1.5–2.7 trillion per year between 2015 and 2030 is needed to achieve the infrastructure-related goals in developing countries, plus about $400 billion for infrastructure investment Fiscal policy measures could help by directly related to the health and education goals. The cost estimates provided expanding public investment, where fiscal space is by the World Bank, IMF, and UN studies are not comparable, however. They reflect differences in country samples, subsectors (e.g., available, by reallocating resources from relatively the World Bank study focuses on low-carbon transportation unproductive areas, and by increasing spending systems—rail and bus rapid transit—while the IMF study looks at roads), and inclusion of operation and maintenance costs, among efficiency. Addressing shortcomings in fiscal other factors. processes, such as inefficient public investment 62 S P EC IAL FO CU S 1.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 management systems and weak fiscal transparency, risk premia or higher risk-free real interest rates— could also boost public investment. would reduce investment, whereas higher productivity would raise it. The returns to capital Institutional reforms play a key role in creating are proxied by output growth and terms of trade conditions conducive to attracting investment growth. The risk premium is proxied by measures (Vashakmadze et al. 2017). Relevant reforms of political uncertainty. The cost of financing could address country-specific impediments such investment is proxied by capital inflows, private as business environment constraints, high business credit, and the business climate. startup costs, labor and product market inefficiencies, and weak corporate governance. In The weakness in investment growth has coincided countries where financial development is weak, with weakness in output growth and a financial deepening could boost investment, deteriorating growth outlook for EMDEs (Didier although risk indicators must be monitored to et al. 2015). Weak growth prospects signal avoid financial instability (Kiyotaki and Moore reduced opportunities for firms selling their goods 2005; Sahay et al. 2015). For policymakers, and services and thus lead to lower investment. providing clarity about the direction of policy and This is captured in the “accelerator model,” which refraining from adopting policies with highly assumes that firms aim to maintain a constant uncertain outcomes could help support private capital-to-output ratio, in line with their investment. Membership in trade and integration expectations of future output growth (Jorgenson agreements could help improve the business and 1963). Recent work on advanced economies has investment climate and boost investment growth shown that output growth captures broad trends in some EMDEs, perhaps particularly so if such in investment, but actual investment often falls agreements boost integration in global value short of the model predictions (Leboeuf and Fay chains and help lower the cost of tradable 2016). In the regression framework used in this investment goods (i.e., machinery and special focus, weak growth prospects are proxied equipment), for which EMDEs still face by lagged output growth to reduce concerns about significantly higher costs than advanced economies endogeneity. (IMF 2019; UNCTAD 2013). Sharp decreases in commodity prices may have In the long term, many commodity-exporting caused large post-crisis swings in terms of trade EMDEs need to diversify their economies in order (Baffes et al. 2015). Terms of trade developments to reduce the vulnerability of private investment to shape growth prospects for both commodity natural resource price volatility. EMDEs will also exporters and importers, and help control for the need to develop policies to offset the long-term effects of commodity prices. In commodity- investment dampening effects of population aging exporting economies, terms of trade movements (Aksoy et al. 2019). are dominated by commodity price fluctuations. Weaker terms of trade decreases return to Annex SF1.1.1 Empirical investment, especially in commodity-related projects. It also reduces firms’ net worth, analysis tightening their financial constraints. Framework Elevated private debt may have an adverse impact on firms’ investment for two reasons. First, since A fixed effects panel regression that includes an the benefits from investment are shared between array of explanatory variables as proxies for the the owners and creditors of leveraged firms, high cost and returns to capital is used to estimate the debt can discourage investment. Second, high debt correlates of investment growth in EMDEs. The may reflect misallocation of capital to less framework is consistent with an investment model innovative firms. This is particularly pronounced such that the marginal return on capital equals the for investment in an environment of weak growth cost of capital (e.g., Hall and Jorgenson 1967). prospects and investment in long-lived assets, Higher costs of capital—whether due to higher including real estate.1 The regression includes the G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 S P EC IAL FO CU S 1.1 63 lagged private sector credit-to-GDP ratio to proxy reforms (two standard deviation improvements) for household and firm debt burdens and the captured by one of four governance indicators adverse effects of debt overhang. Although the (regulatory quality, government effectiveness, rule flow of debt may be used to finance investment, of law, and control of corruption). the level of debt is a measure of leverage and is expected to be negatively correlated with When firms are uncertain about future demand investment. For EMDEs, Borensztein and Ye and future policies, their expected risk-adjusted (2018), Magud and Sosa (2015), and Das and returns may not exceed the costs of capital or the Tulin (2017) show that lower debt service capacity returns on liquid financial assets, holding back or higher leverage are associated with weaker investment (Bloom, Bond, and Van Reenen investment. 2007). In macroeconomic studies, the uncertainty generated by political risk has been shown to Capital inflows, including foreign direct weigh on investment (Julio and Yook 2012). The investment, can lift growth both by financing regression includes, as a proxy for political investment and by acting as a catalyst for stability, Political Risk Services’ International additional domestically financed investment. FDI Country Risk Guide (ICRG) political stability may also have indirect, productivity-enhancing rating. A higher index indicates greater political collateral benefits (Kose et al. 2009). These stability. The ICRG political risk index is a include pressures for better institutions, financial weighted average of ratings of government development, and more stabilizing macro- stability, socioeconomic conditions, investment economic policies. The absorption by domestic profile, corruption, the role of military in politics, firms of the new technology or managerial law and order, external and internal conflict, practices introduced by FDI can stimulate religious and ethnic tensions, democratic domestic investment, provided financing is accountability, and bureaucratic quality. Lastly, available. Forays into new export markets by the regressions control for sudden stops in capital domestic firms, encouraged by FDI, may require inflows and for country-fixed effects. Since several up-front investment. Foreign portfolio inflows sudden stops occurred during global recessions may be associated with higher physical investment and slowdowns, they also capture the impact of by way of risk diversification and lower cost of these episodes. capital (Henry 2007). Although capital flows often funds purposes other than investment, the Data regression includes the change in capital inflows Investment data are drawn from Haver Analytics into the reporting economy (in percentage points and the World Bank. Investment growth denotes of GDP) as a proxy for external financing sources, the annual growth rate of real gross xed capital among several other financing sources, of formation. Data on political risk ratings come investment. from the ICRG. Data on governance come from A number of studies have highlighted the the World Bank’s Worldwide Governance importance of the institutional environment for Indicators. Other macroeconomic data used in the investment (e.g., Lim 2014; Qureshi, Diaz- econometric analysis are drawn from the World Sanchez, and Varoudakis 2015). Post-crisis, Bank and the International Monetary Fund. private investment recovered faster in countries Methodology with more developed financial market infrastructure, and higher institutional quality A fixed effects panel regression is used to estimate (e.g., governance quality) has been associated with the correlates of investment growth in 57 EMDEs higher investment. To capture the business for the period 1998-2018. The econometric climate, a dummy variable is included for large framework is similar to that of Nabar and Joyce (2009). However, the emphasis in this Special Focus is on investment growth, as a critical 1 For related studies, see Hennessy (2004) and Borio et al. (2015). component of overall output growth (ultimately, 64 S P EC IAL FO CU S 1.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 ANNEX TABLE SF.1.1.1.1 Correlates of investment growth (1) (2) (3) (4) (5) EMDEs: including Advanced Private Dependent variable: investment growth EMDEs GMM political risk economies investment events Lagged real GDP growth (percent) 0.453*** 0.466*** 0.792*** 1.074*** 0.440** [0.128] [0.126] [0.179] [0.232] [0.198] Change in capital inflows (percentage points 0.122*** 0.115** 0.116** 0.041 0.192*** of GDP) [0.043] [0.044] [0.044] [0.031] [0.046] Political stability 0.279** 0.218** 0.294* -0.118 0.402** [0.107] [0.100] [0.138] [0.099] [0.190] Lagged credit-to-GDP ratio (percent of GDP) -0.284*** -0.288*** -0.049 -0.051*** -0.358*** [0.038] [0.037] [0.037] [0.015] [0.055] Terms of trade growth (percent) 0.233*** 0.229*** 0.255*** 0.188 0.336*** [0.065] [0.066] [0.036] [0.113] [0.080] Large reform spurt 6.493** 6.276** 5.847** -1.191 5.148** [2.447] [2.468] [1.757] [1.176] [2.244] Large deterioration in political stability -3.819*** [1.348] Sudden stop dummy -3.553** -3.662*** -3.266** -3.922** -3.165* [1.383] [1.351] [1.075] [1.564] [1.728] Constant -2.575 1.837 -14.381 15.443* -7.254 [7.216] [6.857] [9.339] [8.233] [11.901] Number of observations 1,057 1,057 1,057 548 878 R-squared 0.187 0.195 0.197 0.132 Number of economies 57 57 57 34 56 Note: Results of a panel regression with country fixed effects for 57 EMDEs during 1998-2018. Dependent variable is real investment growth. Lagged output growth, capital inflows, political stability, and terms of trade growth are expected to be positively associated with investment growth, and conversely the case for lagged credit to GDP and sudden stops. Column (1) denotes the baseline regression. Column (2) controls for episodes of large deterioration in political stability, as defined by standard deviation below the historical mean. Column (3) shows results using a generalized methods of moments (GMM) regression method. The Wald chi square statistic is 103.4. Column (4) runs the same baseline regression for advanced economies. Column (5) replaces dependent variable with private investment growth. All regressions control for sudden stops in capital inflows and country fixed effects. The regressions exclude 8 EMDEs in this Special Focus due to data availability. Capital inflows are defined as the sum of FDI, portfolio flows, and other investment (including banking) flows. Reforms in governance are based on the Worldwide Governance Indicators (WGI). Political stability denotes the International Country Risk Guide’s (ICRG) political risk rating. 2018 data for capital inflows where not available, terms of trade, and governance are assumed to be same as previous year due to data availability. Robust standard errors in brackets. *** p<0.01, ** p<0.05, * p<0.1 the source of rising living standards), rather than individual EMDEs (Anand and Tulin 2014). The changes in the investment-to-GDP ratio, which results are robust to adding dummies for periods would only capture changes in investment growth of high political risk events, using the generalized- relative to output growth. This is in line with method-of-moments estimator, and using private recent studies on advanced economies (Banerjee, investment growth as a dependent variable. The Kearns, and Lombardi 2015; Barkbu et al. 2015; results for advanced economies are shown as well. 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N'Diaye, A. Barajas, D. B. Ayala Pena, R. Bi, Y. Gao, et al. 2015. “Rethinking ———. 2019b. Commodity Markets Outlook. Food Financial Deepening: Stability and Growth in Price Shocks: Channels and Implications. Washington, Emerging Markets.” Staff Discussion Note 15/08, DC: World Bank. SPECIAL FOCUS 1.2 Currency Depreciations, Inflation, and Central Bank Independence G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 S P EC IAL FO CU S 1.2 69 Currency Depreciations, Inflation, and Central Bank Independence Financial market turbulence in 2018 illustrated, once again, that emerging market and developing economies (EMDEs) continue to face the risk of destabilizing exchange rate movements. These stress episodes often compel central banks to tighten policy to lessen currency pressures and fend off inflationary pressures despite slowing growth. To design appropriate policies, it is important to quantify the exchange rate pass-through to inflation associated with different domestic and global shocks and with different country characteristics. The pass-through to inflation tends to be largest when currency movements are triggered or amplified by monetary policy action. In contrast, the pass-through is significantly smaller when central banks pursue a credible inflation target, operate in a flexible exchange rate regime, and are independent from fiscal authorities. This highlights a self- reinforcing feedback loop between central bank credibility, exchange rate and price stability. Increased participation in global value chains and a lower share of imports invoiced in foreign currencies can also be associated with lower exchange rate pass-through, underscoring the need for complementary policies. Introduction Despite easing global financing conditions since the start of 2019, the possibility of new episodes Many emerging market and developing economies of financial market stress, broad-based capital (EMDEs) confronted significant currency outflows, and sharp exchange rate depreciations depreciations last year, reflecting a rise in remain among the most prominent risks to advanced-economy yields, a strengthening in the EMDE prospects (Chapter 1). While flexible U.S. dollar, and an increase in investor risk exchange rates can serve as a shock absorber and aversion amid financial stress in some countries. keep growth on a balanced and sustainable path Currency pressures were most pronounced in over the medium term, sudden sharp currency Turkey and Argentina, due to acute concerns depreciations can jeopardize price stability, about monetary policy frameworks and debt especially when inflation expectations are poorly sustainability. However, other EMDEs also anchored as they tend to be in many EMDEs suffered from sharp exchange rate depreciations, (Kose et al. 2019). In the presence of foreign- particularly countries with large external financing currency-denominated debt, currency deprecia- needs and those unable to maintain misaligned tions can also raise debt burdens and financial currency pegs or other forms of currency stability concerns. These considerations help arrangements. In response, central banks were explain the greater propensity of central banks to compelled to tighten monetary policy in order to respond to currency movements in EMDEs than restore market confidence: in the last quarter of in advanced economies, sometimes to a greater 2018, the number of EMDEs hiking policy extent than is strictly needed to stabilize output interest rates was four times larger than the growth and maintain low inflation (Calvo and number of EMDEs cutting them (Figure Reinhart 2002; Ball and Reyes 2008). SF1.2.1.A). Currency pressures were accompanied Since large exchange rate movements are more by accelerating inflation, with a higher pass- frequent in EMDEs than in advanced economies, through to consumer prices in countries with the a rigorous assessment of the exchange rate pass- largest depreciations and rising concerns about an through to inflation in EMDEs is a critical input erosion of central bank credibility (Figure into policymaking in those countries. This Special SF1.2.1.B). Focus provides an empirical analysis of the exchange rate pass-through ratio (ERPTR) to Note: This Special Focus was prepared by Marc Stocker, Jongrim inflation, defined here as the percentage increase Ha, and Hakan Yilmazkuday. Research assistance was provided by in consumer prices associated with a 1-percent Julia Norfleet and Heqing Zhao. depreciation of the effective exchange rate one 70 S P EC IAL FO CU S 1.2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE SF1.2.1 EMDE exchange rates, monetary policy currency depreciation and accelerating inflation rates, and inflation in 2018 and activity, are more closely associated with larger Central banks have responded to episodes of currency depreciations in exchange rate pass-throughs than any other 2018 by hiking policy interest rates. Inflation rose sharply in countries shocks. Third, pass-throughs are generally smaller where currency pressures were most pronounced. in countries with greater global value chain integration and lower share of foreign-currency A. Frequency of currency B. Currency depreciations and depreciations and policy interest inflation in EMDEs in 2018 invoicing. They are also smaller in countries with rate changes in EMDEs more flexible exchange rate regimes and a credible commitment to an inflation target. This, in turn, facilitates the central bank’s task of maintaining low inflation and makes exchange rate movements a more effective buffer against external shocks. This Special Focus complements the existing literature by documenting nonlinearities in exchange rate pass-through depending on the Source: Haver Analytics, World Bank. magnitude and direction of the exchange rate Note: EMDEs = emerging market and developing economies. movement. It also extends, on the basis of a larger A. Depreciations are monthly declines in the nominal effective exchange rate of more than 5 percent on an annualized basis. Net interest rate hikes are the number of policy interest rate hikes minus the and more EMDE-oriented sample than used in number of interest rate cuts in each month. Sample includes 68 EMDEs. B. The horizontal axis shows cumulative change in the nominal effective exchange rate (NEER) of previous studies, a recent literature that more than 5 percent over the period January to December 2018. Vertical axis shows consumer price inflation in December 2018. Dotted line shows second order polynomial trend. Sample includes 28 emphasizes the importance of the nature of the EMDEs. initial shock and of structural country features for Click here to download data and charts. the transmission of exchange rate movements to inflation. year earlier. This pass-through ratio is expected to The Special Focus highlights that central banks be positive, on average, as a depreciation would need to consider not only the source of exchange tend to be accompanied by rising inflation. rate movements but also the crucial role that their Specifically, this Special Focus examines the subsequent policy responses play in anchoring following questions: inflation expectations and lowering the eventual • How does the exchange rate pass-through vary pass-through to domestic prices. There is a risk across countries and over time? that a central bank that underestimates the exchange rate channel in the transmission of its • Does the exchange rate pass-through depend policy actions might maintain an excessively tight on the nature of the shock? (or loose) monetary policy stance relative to what is needed to maintain low inflation and stabilize • What country characteristics are associated output growth. This could lead to excessive with smaller pass-throughs? fluctuations in activity and make the anchoring of inflation expectations more difficult. The main conclusions are as follows. First, large depreciation episodes—defined as nominal effective depreciations of more than 10 percent in Pass-through across a quarter—continue to be associated, on average, countries and over time with more significant increases in consumer price inflation in EMDEs than in advanced economies. Channels of transmission from exchange rate to In both country groups, larger depreciations tend inflation. The pass-through of currency to be followed by larger pass-through ratios. depreciations to inflation is typically incomplete, Second, the relationship between inflation and with the effect dissipating through the supply currency movements depends on the nature of the chain. The pass-through to consumer prices goes initial shock. Monetary policy shocks, such as an through various channels, from direct effects unexpectedly loose policy stance contributing to through commodity and other import prices, to G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 S P EC IAL FO CU S 1.2 71 indirect effects through wage formation and profit FIGURE SF1.2.2 Correlation between inflation and markups (Bacchetta and van Wincoop 2003; effective exchange rate changes Burstein and Gopinath 2014; Ito and Sato 2008; Correlations between inflation and exchange rate movements vary McCarthy 2007). Distribution costs, firms’ considerably over time. internal pricing, and inventory management can also drive a wedge between producer and A. Advanced economies: Correlation B. EMDEs: Correlation consumer prices and impact the size and speed of the exchange rate pass-through (Alessandria, Kaboski, and Midrigan 2010; Berger et al. 2012; Copeland and Kahn 2012). The size and speed of the impact of exchange rate movements on domestic inflation depend on several factors. These include competition among importing and exporting firms (Amiti, Itskhoki, and Konings 2016), the frequency of price Source: World Bank. Note: EMDEs = emerging market and developing economies. adjustments (Devereux and Yetman 2003; A.B. Correlation over a three-year rolling window between inflation and nominal effective exchange Corsetti, Dedola, and Leduc 2008; Gopinath and rate depreciations in the same quarter. The sample includes 51 economies. The median and interquartile range are for three-year window correlation during 1998-2018. Itskhoki 2010), wage bargaining structures (Aron, Click here to download data and charts. Macdonald, and Muellbauer 2014), the composition of trade (Campa and Goldberg 2010), and the share of trade invoiced in foreign —periods marked by shifts in domestic or global currencies (Casas et al. 2017; Gopinath 2015). demand conditions. Credible monetary policy frameworks that support Among EMDEs, the median correlation also well-anchored inflation expectations have also moved close to zero during the economic recovery been associated with less pass-through to in the early 2000s and during the global financial consumer prices (Carrière-Swallow et al. 2016; crisis, but it became increasingly positive after Gagnon and Ihrig 2004; Reyes 2004; Schmidt- 2010 amid deteriorating supply-side conditions in Hebbel and Tapia 2002; Taylor 2000). A recent many countries, including commodity exporters strand of the literature has emphasized the facing the end of the commodity supercycle importance of identifying the underlying cause of (Baffes et al. 2015; Figure SF1.2.2.B). Shifts in the currency movements when assessing pass-through correlation between exchange rate and consumer ratios (Comunale and Kunovac 2017; Forbes, price movements is consistent with the notion that Hjortsoe, and Nenova 2017, 2018; Shambaugh different shocks as well as country-specific 2008). characteristics can modify the response of inflation to currency movements. Correlation between exchange rate movements and inflation over time. Co-movement between Events of large exchange rate movements. The exchange rate and consumer price developments event study presented in this section explores has varied considerably over time. For advanced episodes of large exchange rate fluctuations, economies, the median correlation became defined as quarterly movements in (trade- positive during the late 1990s (+0.4 in 2000), weighted) nominal effective exchange rates in during the mid-2000s (+0.2 in 2007), and again excess of 5 percent across 34 advanced economies during the mid-2010s (+0.5 in 2014)—periods and 138 EMDEs during 1970-2018. By focusing marked by unusually large monetary policy shocks on large exchange rate swings, the study is more or heightened uncertainty over policy actions likely to be successful in detecting related changes (Figure SF1.2.2.A). In contrast, correlation rates in prices throughout the entire production chain were close to zero during the recovery in the early and in identifying potential nonlinearities that 2000s and 2017-18, and significantly negative would cause larger ERPTRs in the event of sudden during the global financial crisis (-0.5 in 2008-09) marked depreciations. By allowing for both 72 S P EC IAL FO CU S 1.2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE SF1.2.3 Pass-through during significant decades, particularly in EMDEs (Figure currency depreciations SF1.2.3.B). Prior to 1998, such episodes clustered The frequency and severity of depreciation episodes have declined over around periods of broad-based U.S. dollar recent decades. The median pass-through associated with large currency appreciation, often associated with a tightening of depreciations has dropped as well in EMDEs but remains higher than in U.S. monetary policy. In some cases, these led to advanced economies. full-blown currency or debt crises, particularly in Latin America during the 1980s and the early to A. Frequency of significant exchange B. Frequency of significant exchange mid-1990s, and in Asia and Eastern Europe rate depreciations: Advanced rate depreciations: EMDEs economies during the second half of the 1990s. The incidence of currency crises has diminished since the early 2000s, with depreciations in excess of 20 percent affecting less than 1 percent of EMDEs, on average. ERPTRs during large depreciations. The event study suggests a broad-based decline in pass- through among EMDEs over the past two decades (Figure SF1.2.3.C). Median estimates of the same- C. Pass-through from depreciations of D. Pass-through from different quarter pass-through of currency depreciations of 5 to 10 percent depreciation episodes, 1998-2017 5-10 percent per quarter dropped from +0.4 in the period 1980-98 to around +0.1 since 1998 (meaning that a 10 percent depreciation in the median EMDE triggered a 1 percent increase in consumer prices in the same quarter). In advanced economies, the median pass-through for similar depreciations is close to zero for both periods. Depreciations of 10-20 percent in a given quarter continue to be accompanied by a larger Source: World Bank. Note: Depreciations are defined as negative quarterly changes in the nominal effective exchange pass-throughs, with median values of +0.1 for rate. The sample comprises 34 advanced economies and 138 EMDEs. C.D. Pass-throughs are defined as the change in consumer prices after one quarter divided by the depreciation of the nominal advanced economies and +0.2 for EMDEs since effective exchange rate. The markers refer to the median pass-through. 1998 (Figure SF1.2.3.D). Depreciations in excess C. The bars show the interquartile range of pass-throughs. Click here to download data and charts. of 20 percent were associated with pass-throughs of around +0.4 in both groups of countries. The reduced frequency of large depreciations and depreciations and appreciation events, pass- smaller pass-throughs over the past two decades throughs can be estimated conditional on the size may have common causes: enhanced monetary and direction of the exchange rate movement. and fiscal policy frameworks, more flexible This study identifies 2,323 depreciation events exchange rate regimes, accumulations of foreign and 5,514 appreciation events in EMDEs and 242 exchange reserves, and better external debt depreciation events and 706 appreciation events in management (Frankel, Parsley, and Wei 2005). advanced economies (Figure SF1.2.3.A). The Pass-throughs remained larger among EMDEs median depreciation across all events amounted to with less flexible exchange rate regimes (those -10 percent in EMDEs and -8 percent for devaluing from currency pegs or other forms of advanced economies, while the median currency arrangements) and those without appreciation amounted to 6 percent across the two inflation-targeting central banks. groups. ERPTRs during large appreciations. Appreciation The frequency and severity of large currency episodes were generally associated with positive, depreciations have declined over the past two but smaller, pass-throughs compared to G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 S P EC IAL FO CU S 1.2 73 depreciations of the same magnitude, with median • A positive monetary policy shock values of +0.02 for advanced economies and (corresponding to an unexpected tightening of EMDEs for appreciations of 5-10 percent, and monetary policy) initially increases the only slightly larger for appreciations of 10-20 domestic interest rate and appreciates the percent. These results may indicate that currency domestic currency, while it decreases domestic appreciations induce a weaker response from output growth and inflation. import and consumer prices than similarly sized depreciations (Brun‐Aguerre, Fuertes, and • A positive country-specific supply or demand Greenwood‐Nimmo 2017). However, large shock increases country-specific output currency appreciations are also rare events, making growth. A country-specific supply shock rigorous conclusions about such asymmetric reduces domestic inflation, whereas a country- effects difficult to establish in this context. specific demand shock increases it. Overall, the results appear to point to the presence of possible nonlinearities in the relationship • A positive exchange rate shock (corresponding between exchange rate movements and inflation, to an appreciation) only assumes a change in including in EMDEs (Caselli and Roitman 2016). the exchange rate, while its impact on other domestic variables is left unrestricted. Pass-through to inflation • A positive global demand shock triggers a and underlying shocks simultaneous increase in global output growth, global inflation, and oil prices. The event study documents wide cross-country and time variation in the relationship between • A positive global supply shock leads to higher exchange rate movements and inflation. This global output growth and oil prices but lower section explores this variation further by global inflation. estimating ERPTRs conditional on the underlying shocks as well as country-specific characteristics. • A positive oil price shock induces an increase in oil prices and global inflation but a drop in Empirical approach. Exchange rate pass-through global output growth. ratios are estimated for 29 advanced economies and 26 EMDEs over the periods 1971Q1 to • Global shocks can have contemporaneous 1997Q4 and 1998Q1 to 2017Q4 in country- effects on domestic variables, but domestic specific Bayesian factor-augmented vector shocks can only influence global variables with autoregression (FAVAR) models (see Annex 1 for a lag. details).1 The models include a global block A two-step procedure is applied to measure shock- (featuring global inflation, global output growth, specific exchange rate and inflation responses to and oil price changes) and a domestic block these shocks, and are mapped separately from (featuring inflation, output growth, changes in impulse response functions. Second, the pass- nominal effective exchange rates, and monetary through is defined as the cumulative impulse policy rates or equivalent short-term nominal response of consumer price inflation relative to the interest rates). The identification strategy is based impulse response of the effective exchange rate on the following sign and timing assumptions: over one year. A positive pass-through ratio indicates that a shock triggering a currency depreciation is followed by an increase in 1 The model framework used here—a FAVAR with sign restrictions to identify structural shocks—accounts for the consumer prices, as is generally expected. A endogenous nature of exchange rate movements by identifying truly negative value means that a shock triggering a structural shocks that are, by construction, orthogonal to each other. currency depreciation is followed by a decline in This reduces potential estimation bias due to simultaneous interactions between variables. consumer prices. 74 S P EC IAL FO CU S 1.2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE SF1.2.4 Variance decompositions of exchange • Domestic shocks. Monetary policy tightening rate movements, 1998-2017 is followed by currency appreciations in all Domestic shocks account for about two-thirds of the variation in exchange advanced economies and, to an even greater rates in the median advanced economy and more than half in the median extent, in EMDEs, particularly those with EMDE after one year. Monetary policy shocks have contributed most to inflation-targeting central banks and some exchange rate variations. commodity exporters (Brazil, Colombia, and South Africa). Stronger domestic demand is A. Variance decomposition B. Variance decomposition: EMDEs accompanied by currency appreciations as well, but the impact is statistically insignificant after one year in most cases. Changes in domestic supply conditions have mixed effects, consistent with the literature on productivity shocks (Alfaro et al. 2018; Corsetti, Dedola, and Leduc 2008). • Global shocks.2 In EMDEs, domestic Source: World Bank. Note: Median share of country-specific exchange rate variance accounted for by global, domestic, currency appreciations are more likely in the and exchange rate shocks based on country-specific factor-augmented vector autoregression models estimated for 29 advanced economies and 26 EMDEs over 1998-2017. Bars show the interquartile wake of a positive global demand shock, range and markers represent the median across economies. EMDEs = emerging market and developing economies. possibly reflecting the U.S. dollar depreciation Click here to download data and charts. that typically accompanies global upturns and capital inflows to EMDEs, particularly those Estimated exchange rate responses to shocks. with current account deficits (Avdjiev et al. Empirical studies have shown that certain 2018). A positive global supply shock has macroeconomic fundamentals have some, albeit mixed effects, with currency depreciations limited, predictive power over exchange rate observed among some EMDEs that run movements. These fundamentals include changes current account surpluses (for example, in relative business cycle positions, monetary China) and appreciations among some policy stances, risk premiums, and terms of trade commodity exporters (for example, Brazil, (Ca’Zorzi and Rubaszek 2018; Cheung et al. Colombia, Malaysia, and South Africa). 2017). Periods of domestic output or investment Rising oil prices also tend to be associated contraction are often associated with currency with currency appreciations in oil-exporting depreciations (Cordella and Gupta 2015; Landon economies and with depreciations in some oil and Smith 2009; Campa and Goldberg 1999). importers. Monetary policy easing tends to lead to currency depreciations, with a change in interest rate Relative contributions of global and domestic differentials unfavorable to the domestic currency shocks to exchange rate movements. Domestic putting downward pressure on its value (Chinn factors are the main drivers of exchange rate and Meredith 2005; Engel 2016). Rising risk movements, accounting for about two-thirds of premiums and heightened sovereign default risks currency movements in advanced economies and tend to trigger depreciation pressures (Foroni, more than one-half in EMDEs over the past two Ravazzolo, and Sadaba 2018). Finally, nominal decades (Figure SF1.2.4.A). Changes in monetary exchange rates can respond to terms of trade policy play a particularly prominent role (Figure shocks, particularly in commodity-exporting SF1.2.4.B). Although the direction and magnitude countries with flexible currency regimes of the impact of global shocks vary substantially (Aizenman, Edwards, Riera-Crichton 2012; across countries, global shocks explain around 7 Schmitt-Grohé and Uribe 2018). percent of the variance of currency movements in Focusing on the period 1998-2017, the response 2 e median impact of global shocks on exchange rates is close to of nominal effective exchange rates one year after zero across countries, since one country’s currency depreciation is, by different shocks are as follows: de nition, another’s appreciation. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 S P EC IAL FO CU S 1.2 75 the median advanced economy and up to 16 FIGURE SF1.2.5 Shock-specific pass-throughs, 1998- percent in the median EMDE. About one-quarter 2017 of currency movements are accounted for by The exchange rate pass-through is large and positive when currency changes in other (unmeasured) factors, such as movements result from monetary policy shocks. It is smaller when currency sovereign and private sector risk premiums. This is movements are associated with changes in domestic supply conditions and negative when they are associated with changes in domestic demand consistent with a significant impact of conditions. Exchange rate pass-throughs vary widely when driven by expectations about sovereign default risks on global shocks. exchange rate dynamics (Alvarez, Atkeson, and A. Monetary policy shocks B. Domestic demand shocks Kehoe 2009; Foroni, Ravazzolo, and Sadaba 2018). Estimated ERPTRs. Empirically, the following pattern of shock-specific one-year exchange rate pass-through ratios emerge: • Domestic shocks. Domestic shocks account for over half the variance of inflation and exchange rates in most countries but are C. Domestic supply shocks D. Global demand shocks associated with different ERPTRs depending on their source. Monetary policy shocks are generally associated with large, positive ERPTRs that are statistically significant in nearly all advanced economies and EMDEs. This means that currency appreciations triggered by monetary policy tightening tend to be followed by significantly slower inflation after one year, as the dampening impact of declining import prices is compounded by the F. Global supply shocks E. Oil price shocks effect of decelerating demand and activity. Median values since 1998 are estimated to be +0.2 for advanced economies and +0.3 for EMDEs (Figure SF1.2.5.A). Domestic demand shocks are associated with small, negative ERPTRs that are statistically insignificant for most advanced economies and EMDEs (Figure SF1.2.5.B). In other words, the buildup of domestic inflationary pressures Source: World Bank. when domestic demand strengthens Note: Pass-throughs are defined as the ratio of the one-year cumulative impulse response of consumer price inflation to the one-year cumulative impulse response of the exchange rate change unexpectedly could more than offset the estimated from factor-augmented vector autoregression models for 29 advanced economies and 26 disinflationary impact of the accompanying EMDEs over 1998-2017. A positive pass-through means that a currency depreciation is associated with higher inflation. Bars show the interquartile range and markers represent the median across currency appreciation. Median values of the countries. Click here to download data and charts. ERPTRs are at around -0.07 for both advanced economies and EMDEs. Domestic supply shocks are associated with positive heterogenous exchange rate response to these ERPTRs with lower median values than types of shocks. monetary policy shocks (less than +0.1 for advanced economies and EMDEs; Figure • Global shocks. Global shocks account for a SF1.2.5.C). However, most of these estimates smaller proportion of the variance of exchange are insignificant, with wide variations across rate movements and are associated with country groups, largely reflecting the significant variations in estimated ERPTRs, 76 S P EC IAL FO CU S 1.2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE SF1.2.6 Average pass-through heterogeneous across underlying shocks that Over the past two decades, the average pass-through dropped close to trigger exchange rate fluctuations. This zero in advanced economies and somewhat below +0.1 in EMDEs, albeit heterogeneity in part reflects the endogenous with considerable differences across countries. nature of exchange rates (Rincón-Castro and Rodríguez-Niño 2018). In general, nominal A. Average pass-through B. Average pass-through: EMDEs shocks (such as commodity price shocks) are more likely to change relative prices, whereas real shocks (such as supply shocks) are more likely to be associated with lower pass- throughs but a higher impact on real exchange rates that facilitates expenditure switching. Average ERPTRs. The average ERPTR has declined in both advanced economies and EMDEs Source: World Bank. since the late 1990s (Figure SF1.2.6.A). The Note: Pass-throughs are defined as the ratio of the one-year cumulative impulse response of average ERPTR is defined here as the weighted- consumer price inflation to the one-year cumulative impulse response of the exchange rate change estimated from factor-augmented vector autoregression models for 29 advanced economies and 26 average of shock-specific pass-through ratios, EMDEs over 1998-2017. A positive pass-through means that a currency depreciation is associated with higher inflation. Bars show the interquartile range and markers represent the median across where weights are the estimated shares of currency countries. Shock-specific pass-throughs are aggregated using shares of currency movements accounted for by each type of shock as weights. EMDEs = emerging market and developing movements accounted for by each type of shock. economies. The median estimate over the period 1998-2017 A. Full sample estimations are over 1971 to 2017 but can vary at the country level depending on data availability. was close to zero for advanced economies and Click here to download data and charts. +0.08 in EMDEs, significantly down from the prior two decades, but with wide country reflecting the fact that these shocks have, by variations (Figure SF1.2.6.B).3 definition, diverging effects on individual country exchange rates (i.e., one country’s Pass-through and country currency depreciation is another’s appreciation). Estimated ERPTRs associated characteristics with global demand shocks are statistically The previous section illustrates the fact that insignificant in over one-fifth of advanced ERPTRs can vary considerably depending on the economies and one-third of EMDEs, but are nature of the shock driving exchange rate mostly positive across both groups (Figure movements. However, country characteristics SF1.2.5.D). Oil price shocks tend to be matter as well. In particular, previous empirical associated with positive ERPTR for the studies have emphasized that differences in median energy exporters and a negative one monetary policy frameworks and in the degree of for the median advanced economy, though international integration can account for some of not for the United States (partly due to the negative correlation between the U.S. dollar and oil prices; Figure SF1.2.5.E). However, 3 Among larger EMDEs, the average ERPTR in China is estimates are insignificant in over one-half of estimated at +0.08 since 1998, somewhat below previously reported advanced economies and almost two-thirds of estimates (Jiang and Kim 2013; Shu and Su 2009; Wang and Li 2010). For India, the average ERPTR is estimated at +0.14, broadly EMDEs. Global supply shocks tend to be in line with previous studies (Bhattacharya, Patnaik, and Shah 2008; associated with largely insignificant ERPTRs Forbes, Hjortsoe, and Nenova 2017; Kapur and Behera 2012). For the Russian Federation, it is measured at +0.11, consistent with (for nearly three-quarters of advanced ndings of the Central Bank of the Russia (2014). For Brazil, the economies and about two-thirds of EMDEs; average ERPTR is estimated at +0.06 since 1998, toward the lower Figure SF1.2.5.F). end of other studies (Forbes, Hjortsoe, and Nenova 2017; Ghosh 2013; Nogueira and Leon-Ledesmab 2009). For South Africa, the ERPTR is estimated at +0.07, broadly in line with the evidence • Heterogenous consequences. Collectively, presented in Kabundi and Mbelu (2018). For Turkey, the average these results suggest that the estimated ERPTR is somewhat lower than found in earlier studies, partly exchange rate pass-through is highly re ecting the shorter sample focusing on a period marked by signi cant de-dollarization and disin ation. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 S P EC IAL FO CU S 1.2 77 the heterogeneity in estimated ERPTRs (Campa FIGURE SF1.2.7 Global economic integration and and Goldberg 2010; Carrière-Swallow et al. 2016; pass-through Caselli and Roitman 2016; Coulibaly and Kempf Higher global value chain participation is associated with lower pass- 2010; Gagnon and Ihrig 2004; Mishkin and throughs in some EMDEs. A higher share of foreign-currency invoicing is Schmidt-Hebbel 2007). These country character- associated with higher pass-throughs in some EMDEs, but does not seem to account for cross-country variations in EMDEs. istics are further investigated by comparing shock- specific ERPTRs for different subset of countries. A. Global value chain participation B. Global value chain participation and pass-through from monetary Global value chain integration. A priori, the policy shocks impact of greater trade openness and international economic integration on estimated ERPTRs is difficult to ascertain. On the one hand, a larger share of imported products implies a potentially larger role for exchange rate movements in driving domestic inflation (Benigno and Faia 2016; Soto and Selaive 2003). On the other hand, increased foreign competition in domestic markets and greater integration in global value chains (GVCs) may reduce the ERPTR (Auer 2015; Berman, C. Share of imports invoiced in D. Share of foreign-currency invoicing foreign currency and pass-through from monetary Martin, and Mayer 2012; Gust, Leduc, and policy shocks Vigfusson 2010; Amiti, Itskhoki, and Konings 2016; de Soyres et al. 2018; Georgiadis, Gräb, and Khalil 2017; Figure SF1.2.7.A). Consistent with the literature, some economies in East Asia and the Pacific and in Eastern Europe and Central Asia are highly integrated into GVCs and also have low average pass-throughs (Chinn 2014). However, for other EMDEs, the association between GVC participation and ERPTRs is not as clear cut Source: Organisation for Economic Co-operation and Development, World Bank, World Trade (Figure SF1.2.7.B). Organization. Note: Global value chain data are from the OECD-WTO TiVA (Trade in Value Added) database. The selected indicator is foreign value added as a percent of gross exports. Pass-throughs are defined as the ratio between the one-year cumulative impulse response of consumer price inflation and the one- Foreign currency invoicing. Having a large share year cumulative impulse response of the exchange rate change estimated from factor-augmented vector autoregression models for 29 advanced economies and 26 EMDEs over 1998-2017. A positive of imports invoiced in a foreign currency could pass-through means that a currency depreciation is associated with higher inflation. Bars show the interquartile range and markers represent the median across countries. amplify the sensitivity of import and export prices B. Low and high value chain participation are defined as below or above the sample average. to exchange rate movements (Devereux, Tomlin, C. Share of imports invoiced in foreign currency based on data for 50 countries calculated by Gopinath (2015). and Dong 2015; Gopinath 2015). The ERPTR to D. Low and high share of foreign-currency invoicing are defined as below or above the sample average. import and export prices tend to be particularly Click here to download data and charts. elevated for countries with a high share of imports priced in U.S. dollars (Casas et al. 2017; Korhonen and Wachtel 2006). Domestic prices in highly dollarized economies also tend to react invoiced in foreign currencies tends to be more to currency movements relative to other associated with higher pass-through ratios, but countries, since tradable and nontradable goods with significant heterogeneity across countries are priced in a foreign currency (Carranza, (Figures SF1.2.7.C and SF1.2.7.D). Galdon-Sanchez, and Gomez-Biscarri 2009; Reinhart, Rogoff, and Savastano 2014; Sadeghi et Monetary policy framework and credibility. The al. 2015). The selection of the pricing currency increased adoption of credible monetary policy could itself depend on the exchange rate pass- frameworks that support well-anchored inflation through (Gopinath, Itskhoki, and Rigobon 2010). expectations has helped reduce the exchange rate Among EMDEs, a higher share of imports pass-through to consumer prices in EMDEs by 78 S P EC IAL FO CU S 1.2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE SF1.2.8 Monetary policy frameworks and in EMDEs that do not have inflation-targeting pass-through central banks and have less flexible exchange rate A growing number of countries have adopted explicit inflation targets, and regimes (for example, Azerbaijan, Botswana, central bank independence has increased since 2000. Greater central Jordan, and North Macedonia; Figures SF1.2.8.B bank independence has tended to dampen the pass-through to inflation of and SF1.2.8.C).4 The growing number of EMDEs exchange rate movements stemming from monetary policy shocks and is also associated with lower average ERPTRs. Among EMDEs, the pass- adopting explicit inflation targets and reinforcing through is generally lower among countries with more flexible exchange central bank transparency and independence has rate regimes and inflation-targeting central banks. helped to dampen estimated ERPTRs over the last two decades. Thus an improvement of the central A. Central bank independence and B. Central bank independence and bank independence index from one standard inflation-targeting frameworks ERPTRs from monetary policy shocks deviation below the sample mean to one standard deviation above it is estimated to reduce the pass- through ratio associated with monetary policy shocks by half. In countries with more independent central banks, inflation targets, and more flexible exchange rate regimes, inflation also responds less to exchange rate movements triggered by global demand and oil price shocks (Figure SF1.2.8.D). This implies that C. ERPTRs associated with monetary D. ERPTRs associated with global policy shocks in EMDEs demand shocks in EMDEs countries with such characteristics can better absorb external shocks through currency adjustments without threatening price stability. In countries with less flexible or pegged exchange rate regimes, global shocks could generate higher pass- through, making adjustments to devaluations more disruptive. Conclusion Source: World Bank. Note: The central bank independence index is computed by Dincer and Eichengreen (2014). An increase in the index means greater central bank independence. Pass-throughs are defined as the As recent financial market turbulences illustrate, ratio between the one-year cumulative impulse response of consumer price inflation and the one-year large depreciations remain a threat to both price cumulative impulse response of the exchange rate change estimated from factor-augmented vector autoregression models for 29 advanced economies and 26 EMDEs over 1998-2017. A positive and financial stability in more vulnerable EMDEs. pass-through means that a currency depreciation is associated with higher inflation. Bars show the interquartile range and markers represent the median across countries. ERPTR = exchange rate pass To formulate the appropriate monetary policy -through ratio; IT = inflation-targeting. B. Low and high central bank independence are defined as below or above the sample average. response to exchange rate pressures, central banks C.D. Exchange rate and IT regimes are based on IMF classifications. need to be able to anticipate the direction and Click here to download data and charts. magnitude of their impact on domestic inflation. But pass-through ratios—the percentage increase minimizing domestic wage and mark-up in consumer prices associated with a 1-percent adjustments (Figure SF1.2.8.A). In fact, ERPTRs depreciation of the nominal effective exchange associated with domestic monetary policy shocks are rate—vary considerably across countries and over estimated to be significantly smaller in EMDEs time, making inference from average values with more independent central banks and higher unreliable and potentially misleading for policy evaluation and forecasting purposes. Two 4 This is in line with the empirical literature that has generally fundamental factors help to account for the wide found ERPTRs to be smaller among advanced economies and in range of pass-through estimates: the nature of the EMDEs with inflation targeting or more credible central banks shock triggering the currency movement and (Carrière-Swallow et al. 2016; Gagnon and Ihrig 2004; Reyes 2004; Schmidt-Hebbel and Tapia 2002). Over the past two decades, an country characteristics. increasing number of central banks have adopted inflation targets and enhanced their credibility, which has helped reduce ERPTRs An event study of past depreciation episodes (Mishkin and Schmidt-Hebbel 2007; Coulibaly and Kempf 2010). suggests that the pass-through can more than L B0Yt = α + Σ BjYt j=1 -j+ t t Yt t t t t Yt t t t t t t utY ,global   GlobalDemand   OP  + − + 0 0 0 0   t   + + + 0 0 0 0   t OilPrice  t u  u ,global     GlobalSupply   t  + + − 0 0 0 0   t  utY ,domestic  = *  * * + + − *  tDomesticDemand   ,domestic     ut  * * * + − − *  tDomesticSupply   I ,domestic   *  * * * * + *   MonetaryPolicy  ut    t  u ER   * * * * * + + tExchangeRate   t    80 S P EC IAL FO CU S 1.2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 ANNEX FIGURE SF1.2.1.1 Robustness of pass-through • A positive global demand shock triggers a estimates: One- versus two-quarter sign restrictions simultaneous increase in global output growth, global inflation, and oil prices.1 A A. Monetary policy shocks B. Global demand shocks positive global supply shock leads to higher global output growth and oil prices but lower global inflation. A positive oil price shock induces an increase in oil prices and global inflation but a drop in global output growth. Finally, global shocks can have contemporaneous effects on domestic variables, but domestic shocks can only influence global variables with a lag. C. Domestic demand shocks D. Global supply shocks • A positive country-specific supply or demand shock increases country-specific output growth. However, a country-specific supply shock reduces domestic inflation, whereas a country-specific demand shock increases it. A positive interest rate shock (corresponding to a contractionary monetary policy) initially increases the domestic interest rate and results in an appreciation of the domestic currency, while it decreases domestic output growth and inflation. Finally, a positive exchange rate E. Domestic supply shocks F. Oil price shocks shock (corresponding to an appreciation of the domestic currency) only assumes an increase in the exchange rate, while its impact on other domestic variables is left unrestricted. All country-specific shocks are assumed to affect country-specific variables on impact through the corresponding sign restrictions, although the robustness checks also consider such restrictions lasting for an alternative Source: World Bank. number of periods (Annex Figure SF1.2.1.1). Note: Pass-throughs are defined as the ratio of the one-year cumulative impulse response of consumer price inflation to the one-year cumulative impulse response of the exchange rate change An alternative specification assumes that to shocks from country-specific factor-augmented vector autoregression models estimated for 51 economies (29 advanced economies and 22 EMDEs) over 1998-2017. A positive pass-through positive domestic demand shocks lead to a means that a currency depreciation is associated with higher inflation. Bars show the interquartile range and markers represent the median across countries. In the alternative specification, sign contemporaneous increase in domestic interest restrictions are applied to the current quarter and next quarter. Click here to download data and charts. rates (Annex Figure SF1.2.1.2). The structural FAVAR model framework has several advantages over the reduced-form approach where * stands for an unrestricted initial response. in estimating the exchange rate pass-through Although country-specific shocks do not affect (Rincón-Castro and Rodríguez-Niño 2018, global variables in the first four quarters, global Forbes, Hjortsoe, and Nenova 2017, Shambaugh shocks can affect country-specific variables (without any sign or zero restrictions). 1 Global shocks are derived from a separate tri-dimensional vector The identification strategy is based on the autoregression model that incorporates global output growth, global following assumptions, combining sign and short- in ation, and oil price changes, following the approach of term restrictions as shown above: Charnavoki and Dolado (2014) and Uhlig (2005). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 S P EC IAL FO CU S 1.2 81 2008). First, it seeks to account for the ANNEX FIGURE SF1.2.1.2 Robustness of pass-through endogenous nature of exchange rate movements, estimates: Additional sign restriction to identify whereas reduced-form models assume that domestic demand shocks exchange rates are exogenously determined. In A. Monetary policy shocks B. Global demand shocks practice, exchange rates are often a function of macroeconomic fundamentals and thus the pass- through will depend on the type of shock the economy is facing. Second, the FAVAR model allows for the estimation of exchange rate pass- throughs are conditional on a variety of global and domestic shocks in a unified framework. Finally, the identification using sign and zero restrictions employed in this Special Focus seeks to identify truly structural shocks, orthogonal to each other, C. Domestic demand shocks D. Global supply shocks and reduce potential estimation bias due to simultaneous interactions between the variables. The system is estimated on a country-by-country basis using quarterly data with two lags, as in Charnavoki and Dolado (2014). The Bayesian estimation used searches for 1,000 successful draws of at least 2,000 iterations with 1,000 burn- ins. The results shown in this Special Focus are based on the median of these 1,000 successful E. Demand supply shocks F. Oil price shocks draws and 68 percent confidence sets at the country level, although alternative presentation methodologies (for example, the median target, as in Fry and Pagan 2011) are considered as a robustness check. In the Bayesian estimation, Minnesota priors proposed by Litterman (1986) are used; since the Minnesota prior assumes that the variance-covariance matrix of residuals is known, we use the entire variance-covariance Source: World Bank. matrix of the vector autoregression estimated by Note: Pass-throughs are defined as the ratio of the one-year cumulative impulse response of consumer price inflation to the one-year cumulative impulse response of the exchange rate change ordinary least squares. For the actual estimation, to shocks from country-specific factor-augmented vector autoregression models estimated for 51 the identification strategy through the algorithm economies (29 advanced economies and 22 EMDEs) over 1998-2017. A positive pass-through means that a currency depreciation is associated with higher inflation. Bars show the interquartile introduced by Arias, Rubio-Ramirez, and range and markers represent the median across countries. In the alternative specification, an additional sign restriction was imposed, assuming that a positive domestic demand shock leads Waggoner (2014) is used, where the standard to a contemporaneous increase in domestic interest rates. Click here to download data and charts. Cholesky decomposition is employed together with an additional orthogonalization step that is necessary to produce a posterior draw from the correct distribution for structural vector Exchange rate pass-through definition autoregression coefficients. Following Shambaugh (2008) and Forbes, The results for the role of global and domestic Hjortsoe, and Nenova (2017), for each country, shocks in domestic inflation are presented as the exchange rate pass-through ratio (ERPTR) is median point estimates across countries. defined as the ratio of the response of country- Interquartile ranges indicate the range from the specific inflation to the response of the nominal 25th to the 75th quartile of country-specific exchange rate changes following a given shock. estimates (for example, Forbes, Hjortsoe, and Since the exchange rate is defined such that an Nenova 2017). increase denotes appreciation, the sign of the ratio • • • • • Yt i = Y ,i global f t Y ,global + etY ,i  ,i it = global f t  ,global + et,i • t t t t t Y t t t • t G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 S P EC IAL FO CU S 1.2 83 TABLE SF1.2.1 Countries and sample periods Country Sample period Country Sample period Australia 1970:2 - 2017:4 India 1993:3 - 2017:4 Austria 1990:1 - 2017:4 Israel 1985:3 - 2017:4 Azerbaijan 2005:3 - 2017:4 Italy 1979:2 - 2017:4 Belgium 1970:2 - 2017:4 Jordan 1999:3 - 2017:4 Bulgaria 1994:4 - 2017:4 Japan 1989:3 - 2017:4 Brazil 1998:3 - 2017:4 Korea, Republic of 1991:3 - 2017:4 Botswana 1994:4 - 2017:4 Luxembourg 1999:3 - 2017:4 Canada 1970:2 - 2017:4 Mexico 1989:1 - 2017:4 Switzerland 1970:3 - 2017:4 Malta 1999:3 - 2017:4 Chile 1986:3 - 2017:4 Malaysia 2004:4 - 2017:4 China 1984:4 - 2017:4 Morocco 1995:4 - 2017:4 Colombia 1994:4 - 2017:4 Netherlands 1982:3 - 2017:4 Costa Rica 1997:3 - 2017:4 North Macedonia 2008:1 - 2017:4 Czech Republic 1992:4 - 2017:4 Norway 1979:2 - 2017:4 Germany 1970:2 - 2017:4 New Zealand 1974:3 - 2017:4 Denmark 1970:2 - 2017:4 Philippines 1987:3 - 2017:3 Dominican Republic 2004:3 - 2017:3 Poland 1992:1 - 2017:4 Egypt 2002:4 - 2017:2 Portugal 1986:2 - 2017:4 Spain 1977:3 - 2017:4 Russia 2000:1 - 2017:4 Finland 1987:3 - 2017:4 Slovak Republic 1996:1 - 2017:4 France 1970:2 - 2017:4 Slovenia 2002:3 - 2017:4 United Kingdom 1970:2 - 2017:4 South Africa 1981:3 - 2017:4 Greece 1994:4 - 2017:4 Sweden 1983:3 - 2017:4 Honduras 2005:4 - 2017:4 Thailand 2000:4 - 2017:4 Hungary 1995:4 - 2017:4 Tunisia 2000:4 - 2017:4 Indonesia 1990:3 - 2017:4 Turkey 2007:1 - 2017:4 Ireland 1984:3 - 2017:4 United States 1970:2 - 2017:4 Iceland 1988:3 - 2017:4 General Equilibrium.” Review of Economic Studies 76 References (3): 851-78. 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B. 1986. “Forecasting with Bayesian Imperfect Pass-Through: Implications for the Vector Autoregressions: Five Years of Experience.” Monetary Policy.” Working Paper 216, Central Bank Journal of Business and Economic Statistics 4 (1): 25-38. of Chile, Santiago. McCarthy, J. 2007. “Pass-Through of Exchange Rates Stock, J. H., and M. W. Watson. 2012. “Disentangling and Import Prices to Domestic Inflation in Some the Channels of the 2007-2009 Recession.” NBER Industrialized Economies.” Eastern Economic Journal 33 Working Paper 18094, National Bureau of Economic (4): 511-37. Research, Cambridge, MA. Mishkin, F., and K. Schmidt-Hebbel. 2007. “Does Taylor, J. 2000. “Low Inflation, Pass-Through, and the Inflation Targeting Make a Difference?” NBER Pricing Power of Firms.” European Economic Review 44 Working Paper 12876, National Bureau of Economic (7): 1389-1408. Research, Cambridge, MA. Uhlig, H. 2005. “What Are the Effects of Monetary Nogueira, R., and M. Leon-Ledesmab. 2009. “Fear of Policy on Output? Results from an Agnostic Floating in Brazil: Did Inflation Targeting Matter?” Identification Procedure.” Journal of Monetary North American Journal of Economics and Finance 20 Economics 52 (2): 381-419. (3): 255-66. Wang, J., and N. Li. 2010. “Exchange Rate Pass- Reinhart, C., K. Rogoff, and M. Savastano. 2014. Through: The Case of China.” Frontiers of Economics in “Addicted to Dollars.” Annals of Economics and Finance China 5 (3): 356-74. 15 (1): 1-50. CHAPTER 2 REGIONAL OUTLOOKS Growth in the East Asia and Pacific region is projected to slow from 6.3 percent in 2018 to 5.9 percent in 2019-20, and to ease further to 5.8 percent in 2021. This will mark the first time since the 1997-98 Asian financial crisis that EAP growth dropped below 6 percent. In China, growth is expected to decelerate from 6.6 percent in 2018 to 6.2 percent in 2019, and gradually decline to 6.0 percent by 2021, reflecting softening manufacturing activity and trade amid domestic and external headwinds. In the rest of the region growth is also expected to moderate to 5.1 percent in 2019, before rebounding modestly to 5.2 percent in 2020-21, as global trade stabilizes. Risks to regional growth remain tilted to the downside and have intensified with the re- escalation of trade tensions. They include a sharper-than-expected slowdown in major economies, including China; an intensification of global trade tensions; and an abrupt change in global financing conditions and investor sentiment. Recent developments In China, the economy continues to slow and rebalance. Decelerating industrial production Growth in the East Asia and Pacific (EAP) region growth has been partly offset by more resilient is slowing, largely reflecting a deceleration in activity in the services sector (Figure 2.1.2.A). China. Growth in the rest of the region is also Fiscal policies have eased and monetary policies moderating, but less sharply, albeit with notable have been generally supportive, helping to balance heterogeneity (Table 2.1.1; Figure 2.1.1.A). the impact of external and domestic headwinds Regional trade, especially exports, has plummeted (Chapter 1). amid weakening global investment and elevated trade policy uncertainty related to ongoing U.S- China’s consumer price inflation has been China trade tensions. Export growth has declined trending up, but remains below the 3 percent sharply, in line with the slowdown in global target, while producer price inflation has growth of manufacturing, investment, and trade. bottomed out, partly reflecting some stabilization Import growth has also decelerated, but is still in the industrial sector. The current account solid, aided by robust domestic demand growth surplus widened in 2019Q1 (Figure 2.1.2.B). (Figure 2.1.1.B). Inflation is generally below Both export and import growth slowed sharply in targets across the region, but has been trending up late 2018, and despite some signs of stabilization, recently, reflecting higher food prices (Figure recent high-frequency indicators point to 2.1.1.C). External financing conditions have been continuing broad-based weakness in trade (Figure generally supportive, with narrowing bond spreads 2.1.2.C). and improved net capital inflows (Figure 2.1.1.D). Regional currencies and equity markets, however, Asset prices came under renewed pressure most are under renewed pressure, most recently recently, following a re-escalation of trade tensions following the re-escalation of trade tensions in early May (Figures 2.1.2.D-E). Sovereign bond (World Bank 2019a; Figures 2.1.1.E-F). spreads remain above their long-term averages, reflecting slowing growth prospects amid lingering domestic vulnerabilities and ongoing trade Note: This section was prepared by Ekaterine Vashakmadze. Research assistance was provided by Liu Cui. disputes with the United States. 90 CHAPTER 2.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE 2.1.1 EAP region excluding China: Recent Regulatory tightening has helped reduce leverage developments in some segments of the non-bank sector; Growth in the EAP region is slowing, albeit with notable heterogeneity. however, bank credit growth remains robust Regional export growth has declined sharply, while domestic demand and bond issuance has accelerated (Figure remains robust. Inflation has been trending downward across the region and is generally below targets. Net capital flows improved in 2019Q1. 2.1.2.F). Total leverage of the economy— Regional equity markets, however, are under renewed pressure, most measured as the ratio of total credit (general recently following the re-escalation of trade tensions. Financial conditions government and non-financial private sector) to remain supportive with bond spreads generally narrowing or below their long-term averages. gross domestic product—is estimated to have increased by about 2 percentage points of GDP in A. Growth B. Export and import growth the year to 2018Q4. Total debt has surpassed 250 percent of GDP. Growth in commodity importers remains robust but continues to moderate, reflecting weakening exports amid resilient domestic demand. Inflation is subdued or declining in most countries (Cambodia, the Philippines, Thailand, Vietnam), allowing monetary authorities to keep policy rates steady, generally at accommodative levels. In C. Inflation D. Balance of payments Thailand, domestic demand is supported by more accommodative fiscal policy. However, weakening export growth is weighing on activity. In the Philippines, private consumption is rebounding amid slowing inflation and improving employment conditions. In addition, election- related spending in the first half of 2019 is giving the economy an additional boost and is partly mitigating the impact of weakening exports. E. Equity prices F. Bond spreads In commodity exporters, the cyclical recovery is maturing, and the pace and composition of growth increasingly reflect country-specific factors. In larger and more diversified economies, where past terms-of-trade shocks were less acute and macroeconomic fundamentals are strong, steady growth has continued at rates of around 4.5-5 percent per year (Indonesia, Malaysia). In Source: Haver Analytics, International Monetary Fund, World Bank. Indonesia, growth has been supported by robust A. East Asian countries excl. China includes Cambodia, Indonesia, Lao PDR, Malaysia, Mongolia, private consumption and investment. In Malaysia, Myanmar, Palau, Philippines, Thailand, and Vietnam. Pacific Island excl. PNG includes Fiji, Kiribati, Marshall Islands, Micronesia, Palau, Samoa, Solomon Islands, Timor-Leste, Tonga, Tuvalu, and investment is rebounding, reflecting improved Vanuatu. 1990-2018 average for East Asian countries excl. China excludes Myanmar and 1990-2018 average for Pacific Island excl. PNG excludes Marshall Islands, Micronesia, Palau, financing conditions and business confidence, Timor-Leste, and Tuvalu due to data limitations. Aggregate growth rates are calculated using 2010 U.S. dollar GDP weights. Data in shaded areas are forecasts. offsetting the impact of moderating but still B. Export and import volumes. Data include only goods. 12-month moving average. Regional robust consumption growth. In smaller aggregate excludes Cambodia, Fiji, Lao PDR, Mongolia, Myanmar, Solomon Islands, Papua New Guinea, Timor-Leste, Vanuatu, and Vietnam due to data limitations. Dotted lines indicate January commodity exporters, the subdued recovery from 2000-March 2019 averages. Last observation is March 2019. C. Average year-on-year consumer price inflation. Mid-point of inflation for Indonesia, Philippines, and the 2015-16 downturn is resuming at a stronger- Thailand. Inflation target for China and Vietnam. For Malaysia, the low point of Bank Negara’s official forecast range of 2.5-3.5 percent in the 2019 budget is used. Last observation is April 2019. than-expected pace, helped by investments in new D. e=estimate. The aggregate includes Indonesia, Malaysia, Philippines, and Thailand. Net capital mining projects (Mongolia) and a rebound in the flows and change in reserves are staff estimates. Net capital inflows include net capital and financial account balance, errors and omissions. 2019Q1 data is not available for Philippines and Thailand. extractive sector following a devastating E. Equity index stands for the respective country composite index. Last observation is May 21, 2019. F. The spread of a country’s sovereign debt as measured by J.P. Morgan’s Emerging Markets Bond earthquake in 2018 (Papua New Guinea). Index over their equivalent maturity U.S. Treasury bond. Horizontal lines denote January 2000-May 2019 average rates. Last observation is May 21, 2019. Click here to download data and charts. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 EAST ASIA AND PACIFIC 91 FIGURE 2.1.2 China: Recent developments Outlook China’s growth continues to slow, reflecting a deceleration in manufacturing activity and trade. The current account surplus widened in After moderating from 6.3 percent in 2018 to 5.9 2019Q1. Recent high-frequency indicators point to a continuing broad- percent a year in 2019-20, regional growth is based weakness in trade. Equities and the renminbi have largely projected to ease further to 5.8 percent in 2021 recovered from losses incurred in 2018, but have come under renewed pressure recently. Growth of bank lending has remained strong, bond (Tables 2.1.1 and 2.1.2; Figure 2.1.3.A). Growth issuance has accelerated, but growth of other debt instruments has in China is projected to slow to 6.2 percent in slowed. 2019 amid continued domestic and external headwinds. The recent increase in tariffs on trade A. Manufacturing and B. Balance of payments with the United States is projected to weigh on nonmanufacturing PMI growth in 2020, which has been revised down to 6.1 percent. This outlook is predicated on a deceleration in global trade, no further escalation of trade tensions between China and the United States, broadly stable commodity prices, and supportive global financing conditions, especially in the near term. The baseline also assumes that authorities in C. Export and import volumes D. Bond spreads and equity prices China continue to calibrate supportive monetary and fiscal policies to address the challenging external environment and any other headwinds to activity (SCPRC 2019). Regional growth excluding China is projected to decline to 5.1 percent in 2019 before inching up to 5.2 percent in 2020-21 as global trade rebounds. Growth among commodity importers is expected to moderate in 2020-21, reflecting E. Exchange rate F. Aggregate financing capacity constraints and subdued external demand. Domestic demand will continue benefiting from favorable financing conditions amid low inflation and rising capital flows (Cambodia, the Philippines, Thailand, Vietnam). Regional economies will continue to benefit from pan-Asian infrastructure investments and expanding intra-regional trade, despite weaker- than-expected global growth and investment. The Source: Haver Analytics, National Bureau of Statistics of China, World Bank. investment outlook is favorable in commodity- A. Manufacturing and nonmanufacturing are measured by Purchasing Managers’ Index (PMI). PMI importing economies. Some countries will benefit readings above 50 indicate expansion in economic activity; readings below 50 indicate contraction. Horizontal line indicates expansionary threshold. Last observation is April 2019. from large public infrastructure projects coming B. e=estimate. Net capital flows and change in reserves are estimates. Net capital inflows include net capital and financial account balance, errors and omissions. onstream in 2020-21 (Thailand, the Philippines). C. Data include only goods. 12-month moving average. Export and import volumes are calculated as export and import values deflated by export and import price deflators. Export and import indices for some missing values and for April 2019 are estimates. Last observation is April 2019. Growth in commodity exporters is expected to D. Bond spread denotes the average spread of China’s sovereign debt (measured by J.P. Morgan’s Emerging Markets Bond Index) over its equivalent maturity U.S. Treasury bond. Equity index is remain stable at about 5.1 percent a year in 2019- represented by the Shanghai Stock Exchange Composite. Last observation is May 21, 2019. E. Nominal=exchange rate vis-à-vis U.S. dollar. NEER=Nominal Effective Exchange Rate. 21, in line with potential, but with significant REER=Real Effective Exchange Rate. Increase denotes appreciation. Last observation is cross-country differences. In particular, growth is May 20, 2019. F. Bonds include local government special bonds and net financing of corporate bonds. Other projected to diverge slightly between the two instruments include entrusted loans, trust loans and other instruments. Last observation is March 2019. largest commodity exporters in the region. In Click here to download data and charts. Indonesia, which is less open to trade, growth is 92 CHAPTER 2.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE 2.1.3 EAP region: Outlook and risks projected to accelerate marginally in 2020-21, EAP growth is projected to gradually decline, mainly reflecting the reflecting continued support from high continuing structural slowdown in China. Excluding China, is also slowing, infrastructure spending, robust private con- albeit with notable heterogeneity. The region is characterized by deep sumption. and solid growth of the working-age global integration, which makes countries vulnerable to external trade or financial shocks. Domestic and external vulnerabilities would amplify the population. In Malaysia, growth is expected to impact of such shocks, especially where policy buffers are limited. moderate slightly but remain robust, with weakening export growth largely offset by strong A. GDP growth B. Exports and openness to foreign domestic demand on the back of favorable inflows, 2013-18 financing conditions and low inflation. In smaller commodity exporters, growth is expected to remain strong in 2020, supported by continued investment in new mining projects (Mongolia, Papua New Guinea). While growth in the region is projected to remain robust in the near term, underlying potential growth—which has fallen considerably over the C. Total domestic and external debt D. Total public and non-public debt past decade, in part reflecting slowing productivity—is likely to decline further over the long term. This largely reflects deteriorating demographic trends, especially in China, Thailand, and Vietnam, combined with a projected slowdown in capital accumulation in China as credit growth is reined in (World Bank 2018a, 2018b). E. GDP growth and total debt in China F. Current account balance net of FDI Risks and GDP growth Risks to the forecast remain tilted to the downside. They include the possibility of a sharper-than- expected downturn in large economies, a further slowing of global trade, a possible intensification of trade tensions, and an abrupt change in global financing conditions and investor sentiment. Most of the region managed to weather the deterioration of external conditions in 2018. Source: Bank for International Settlements, Haver Analytics, International Monetary Fund, The However, worsening conditions would place Institute of International Finance, World Bank. A. East Asian countries excl. China includes Cambodia, Indonesia, Lao PDR, Malaysia, Mongolia, additional pressure on policymakers even though Myanmar, Palau, Philippines, Thailand, and Vietnam. Pacific Island excl. PNG includes Fiji, Kiribati, Marshall Islands, Micronesia, Palau, Samoa, Solomon Islands, Timor-Leste, Tonga, Tuvalu, and most countries having reasonably sound economic Vanuatu. 1990-2018 average for East Asian countries excl. China excludes Myanmar and fundamentals and robust domestic demand 1990-2018 average for Pacific Island excl. PNG excludes Marshall Islands, Micronesia, Palau, Timor-Leste, and Tuvalu due to data limitations. Yellow diamonds denote forecasts published in the (World Bank 2019a). The baseline also assumes January 2019 edition of the Global Economic Prospects report. Aggregate growth rates are calculated using 2010 U.S. dollar GDP weights. Data in shaded areas are forecasts. that global trade policy uncertainty will remain B. EA=East Asia. PI=Pacific Islands. EA1 comprises Brunei Darussalam, Cambodia, Malaysia, Mongolia, Thailand, and Vietnam; EA2 comprises Indonesia, Lao PDR, Myanmar and Philippines. elevated over the forecast horizon. PI1 comprises Kiribati, Marshall Islands, Micronesia, Timor-Leste, Tonga, and Tuvalu; PI2 comprises Palau and Vanuatu; PI3 comprises Fiji, Papua New Guinea, Samoa, and Solomon Islands. The linkages estimated in this chart only represent direct channels: spillovers may also propagate via Around 80 percent of advanced economies, as well indirect channels such as global and regional value chains. Diamonds denote direct cumulative exposure to China, Euro Area, and United States. as China, are expected to register slower growth in C. Total debt is defined as a sum of domestic and external debt. Data for 2018 are estimates. D. Non-public debt includes all debt excluding public debt. The general government debt data for 2019. In the baseline scenario, the impact of Mongolia is based on World Bank staff estimates. Data for 2018 are estimates. slower global growth and external demand on the E. Total debt is defined as a sum of domestic and external debt. F. CAB ex. FDI=Current Account Balance excluding Foreign Direct Investment. Orange dashes EAP region is assumed to be offset by more denote GDP growth in 2010; green hyphen—CAB ex. FDI in 2010. Data for 2019 are estimates. Click here to download data and charts. supportive financing conditions and stronger G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 EAST ASIA AND PACIFIC 93 policy stimulus in China. However, a sharper- States and China, as demonstrated by the most than-expected deceleration of activity in large recent escalation of trade tensions. Commitments economies—the Euro Area, China, and the by China to purchase U.S. goods as part of an United States—could have adverse repercussions interim agreement could lead to further global across the EAP region, mainly through weaker trade policy uncertainty and trade diversion for demand for exports and disruption of global value other countries. Failure to reach a long-term chains, as well as through financial, commodity, agreement between these two economies could and confidence channels (Chapter 1; World Bank lead to a further escalation in tariffs, with broad- 2016; Figure 2.1.3.B). ranging global and regional consequences. In the extreme case scenario, it could reduce global In particular, risks of a sharper-than-expected exports by up to 3 percent and global income by slowdown in China remain significant because of a 1.7 percent over the medium term, with the difficult external environment alongside notable largest decline (3.5 percent) occurring in China domestic challenges. Total non-financial-sector (Freund et al. 2018).1 The region may also be debt in China is above levels seen at the peak of negatively affected by a disorderly exit of the previous credit booms in other major EMDEs and United Kingdom from the European Union. The some advanced economies. High corporate U.K. is an important trading partner for several indebtedness in sectors with weak profitability is regional economies, especially Cambodia and of particular concern. Policymakers’ continued Malaysia. The materialization of a combination of reliance on credit expansion to support growth downside risks could trigger an even sharper may exacerbate domestic risks by adding further slowdown in regional growth. leverage to its already highly leveraged corporate sector, while also contributing to rising debt in the Notwithstanding the region’s strong funda- household sector. In addition, a sizable portion of mentals—solid growth, diversified economic base, recent stimulus has taken the form of expanding sound policy frameworks, and strong buffers— local government special bond quotas. This form EAP economies remain vulnerable to risks related of stimulus may eventually become less effective to abrupt changes in global financial conditions. because of diminishing returns to investment, and Many countries have pockets of vulnerabilities, may further amplify domestic risks. More than including elevated debt (China, Lao People’s half of the 2019 stimulus has taken the form of tax Democratic Republic, Malaysia, Mongolia, and fee cuts, whose impact on growth may be less Vietnam), sizable fiscal deficits (Cambodia, Lao predictable than that of changes in public PDR, Mongolia, Vietnam), or significant reliance investment. on potentially volatile capital flows (Cambodia, Indonesia; Figures 2.1.3.C-F). Renewed episodes A renewed spike in global policy uncertainty, of financial market stress could have pronounced including renewed trade tensions between major and widespread effects on countries with high economies, could cause a further deterioration in indebtedness (Chapter 1). Vulnerabilities among confidence, investment, and trade. Policy some EAP countries could amplify the impact of uncertainty in the region remains high amid external shocks, such as a sudden stop in capital unresolved trade dispute between the United flows or a rise in borrowing costs. 1 Assumes a 25 percent tariff surcharge on all products traded between China and the United States, combined with a decline in investor confidence, resulting in a 0.5 percentage point drop in global investment to GDP. 94 CHAPTER 2.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 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 2019 projections 2016 2017 2018e 2019f 2020f 2021f 2019f 2020f 2021f EMDE EAP, GDP1 6.3 6.5 6.3 5.9 5.9 5.8 -0.1 -0.1 0.0 (Average including countries with full national accounts and balance of payments data only)2 EMDE EAP, GDP2 6.3 6.5 6.3 5.9 5.9 5.8 -0.1 -0.1 0.0 GDP per capita (U.S. dollars) 5.6 5.8 5.7 5.4 5.3 5.3 0.0 -0.1 0.0 PPP GDP 6.3 6.4 6.3 5.9 5.9 5.8 0.0 0.0 0.0 Private consumption 7.1 6.5 8.1 7.0 7.0 7.0 -0.4 -0.1 -0.2 Public consumption 9.3 7.4 9.4 7.6 7.5 7.4 0.3 0.4 0.3 Fixed investment 6.6 5.3 5.3 5.1 5.1 4.9 -0.2 -0.1 -0.2 Exports, GNFS3 2.6 9.4 4.7 3.3 3.9 4.3 -1.4 -0.5 0.0 Imports, GNFS3 5.4 7.9 7.8 4.7 5.0 5.7 -1.8 -0.9 -0.1 Net exports, contribution to growth -0.8 0.4 -0.9 -0.4 -0.4 -0.5 0.1 0.1 0.0 Memo items: GDP East Asia excluding China 4.9 5.4 5.2 5.1 5.2 5.2 -0.1 0.0 0.0 China 6.7 6.8 6.6 6.2 6.1 6.0 0.0 -0.1 0.0 Indonesia 5.0 5.1 5.2 5.2 5.3 5.3 0.0 0.0 0.0 Thailand 3.4 4.0 4.1 3.5 3.6 3.7 -0.3 -0.3 -0.2 Source: World Bank. Note: e = estimate; f = forecast. EMDE = emerging market and developing economies. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time. 1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Democratic People’s Republic of Korea and dependent territories. 2. Sub-region aggregate excludes Democratic People’s Republic of Korea, dependent territories, Fiji, Kiribati, the Marshall Islands, the Federated States of Micronesia, Myanmar, Nauru, Palau, Papua New Guinea, Samoa, Timor-Leste, Tonga, and Tuvalu, for which data limitations prevent the forecasting of GDP components. 3. Exports and imports of goods and non-factor services (GNFS). Click here to download data. 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 2019 projections 2016 2017 2018e 2019f 2020f 2021f 2019f 2020f 2021f Cambodia 7.0 7.0 7.5 7.0 6.9 6.8 0.2 0.1 0.1 China 6.7 6.8 6.6 6.2 6.1 6.0 0.0 -0.1 0.0 Fiji 0.7 3.0 3.2 3.4 3.3 3.3 0.0 0.0 0.0 Indonesia 5.0 5.1 5.2 5.2 5.3 5.3 0.0 0.0 0.0 Lao PDR 7.0 6.9 6.5 6.6 6.7 6.6 0.0 0.0 0.0 Malaysia 4.2 5.9 4.7 4.6 4.6 4.6 -0.1 0.0 0.0 Mongolia 1.4 5.4 6.9 7.2 6.9 6.2 0.6 0.6 0.0 Myanmar 5.9 6.8 6.2 6.5 6.6 6.8 0.0 0.0 0.0 Papua New Guinea 4.1 2.3 -0.3 5.6 3.1 3.5 0.5 0.0 0.1 Philippines 6.9 6.7 6.2 6.4 6.5 6.5 -0.1 -0.1 -0.1 Solomon Islands 3.3 3.0 3.5 2.9 2.8 2.7 0.0 0.0 0.0 Thailand 3.4 4.0 4.1 3.5 3.6 3.7 -0.3 -0.3 -0.2 Timor-Leste 2 5.1 -3.5 -0.7 3.9 4.6 5.0 0.6 -0.3 0.0 Vietnam 6.2 6.8 7.1 6.6 6.5 6.5 0.0 0.0 0.0 Source: World Bank. Note: e = estimate; f = forecast. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. 1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. 2. Non-oil GDP. Timor-Leste’s total GDP, including the oil economy, is roughly four times its non-oil economy and is highly volatile as a result of sensitivity to changes in global oil prices and local production levels. Click here to download data. Growth in Europe and Central Asia is projected to fall sharply from 3.1 percent in 2018 to 1.6 percent in 2019. The slowdown partly reflects a sharp weakening of activity in Turkey, which fell into recession in the wake of acute financial market stress in 2018. Regional growth is projected to pick up in 2020-21 as Turkey recovers and the Russian Federation strengthens. Excluding these economies, the rest of the region is expected to moderate. In particular, growth in Central Europe is projected to soften as economies grapple with the slowdown in the Euro Area and binding domestic capacity constraints. Key external risks to the region include spillovers from weaker-than-expected activity in the Euro Area and from escalation of global policy uncertainty, particularly in relation to trade tensions and the United Kingdom’s exit from the European Union. Renewed financial pressures in Turkey could also disrupt regional growth. Recent developments In response to deteriorating global growth prospects, central banks in major economies have Growth in Europe and Central Asia (ECA) provided additional monetary policy moderated in 2018 to 3.1 percent—close to its accommodation since the start of 2019, resulting potential rate—while the start of 2019 has been in easing global financing conditions. The slow amid weakening investment and trade tightening cycle in monetary policy in 2018 has growth. The slowdown followed a strong paused in ECA, with some economies cutting expansion in 2017, driven by both domestic policy rates (Armenia, Azerbaijan, Georgia, demand and exports (Figure 2.2.1.A; World Bank Kazakhstan, Kyrgyz Republic, North Macedonia, 2019c). Regional growth in 2018 suffered from Ukraine) or leaving them unchanged in 2019, but marked weakness in Turkey, where GDP overall policy rates in some large ECA economies contracted sharply in the second half of 2018. remain higher than in 2018 (Figure 2.2.1.D; Activity in Central Europe also slowed toward the Russia, Turkey). Fiscal policy has also loosened in end of 2018, reflecting weakening domestic 2019, resulting in widening government deficit- demand and challenging external factors amid a to-GDP ratios (Belarus, Kyrgyz Republic, Poland, slowdown in the Euro Area (Poland, Romania). In Romania). Public debt has increased by over 10 contrast, growth in Russia accelerated due to percentage points of GDP since the global several temporary factors. financial crisis, reaching 45 percent at the end of 2018. Inflation has been trending up in the region Trade weakened across the region in early 2019, as since the start of 2019 (Armenia, Azerbaijan, goods trade volumes slowed in tandem with Bulgaria, Croatia, Georgia, Hungary, Kosovo, activity in the Euro Area, which is the region’s Moldova, Montenegro, Poland, Romania, Russia, largest export destination (Figure 2.2.1.B). The Serbia, Tajikistan), driven in part by rising oil region’s three largest economies—Russia, Turkey, prices (Figure 2.2.1.E). and Poland—faced softening trade prospects amid slowing industrial production growth (Figure Activity strengthened somewhat in Eastern 2.2.1.C). Europe, the South Caucasus, and Central Asia in 2018, with all three subregions benefiting from firming growth in Russia via close trade and Note: This section was prepared by Collette M. Wheeler. Research assistance was provided by Mengyi Li and Julia R.R. financial linkages. However, the earlier boosts in Norfleet. Eastern Europe from improved agricultural 96 CHAPTER 2.2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE 2.2.1 ECA: Recent developments harvests (Ukraine) and robust domestic demand Growth in ECA eased in 2018 and early 2019 on weakening exports to the (Moldova) have already begun to fade, as private tightly linked Euro Area. Inflation has risen owing to a combination of oil consumption is dampened by inflationary price movements and currency depreciations, which has forced many pressures and weaker remittances in 2019. Robust central banks to maintain higher policy interest rates in 2019. Turkey’s financial market stress was accompanied by large financial outflows, and services sector activity continues to underpin the subsequent weakness in Turkish economic activity has weighed on growth in the South Caucasus, with an additional regional growth. boost coming from manufacturing in Armenia. In Central Asia, strong production in the Kashagan A. Contribution to regional GDP B. Growth in goods trade, volumes oil field supported the cyclical recovery in growth Kazakhstan in 2018, but production has flattened in 2019 due to agreed upon cuts with OPEC, as Kazakhstan is a non-OPEC partner. Strong tourist arrivals have continued in early 2019 in the Western Balkans (Albania, Montenegro), while the rebound in Serbia from earlier weather-related disruptions fades. In Russia, growth picked up to a six-year high of 2.3 percent in 2018, despite tightening C. Industrial production growth and D. Bond spreads and policy interest manufacturing PMI in Russia, Turkey, rates international economic sanctions and financial and Poland market pressures. The acceleration of activity was supported by the rise in oil prices, a solid contribution from net exports, as well as one-off factors such as energy-related construction projects and the hosting of the World Cup. Industrial activity slowed at the start of 2019, as compliance with agreed upon oil production cuts took effect as a non-OPEC partner. Retail sales volume growth also declined with the onset of the value- E. Inflation and global oil prices F. Turkey portfolio flows and nominal added tax hike. effective exchange rate Following strong growth of 7.4 percent in 2017 and solid momentum at the start of 2018, the Turkish economy slowed sharply and entered a recession in the second half of 2018. The downturn was triggered by corporate fragility stemming from rising levels of debt, often denominated in foreign currency, and exacerbated by policy uncertainty. This led to significant Source: CPB Netherlands Bureau for Economic Policy Analysis, Haver Analytics, Institute of International Finance, J.P. Morgan, World Bank. pressure on financial markets and the value of the Note: For sample coverage, refer to Table 2.2.1. lira. Growth was 2.6 percent for 2018 as a whole. A. Aggregate growth rates calculated using 2010 constant U.S. dollar GDP weights. Data for 2018 are estimates. Sample includes 18 economies, for which GDP components are available. The deceleration of activity was partly driven by B. Last observation is March 2019. C. Manufacturing PMI are 3-month moving averages. PMI is the Purchasing Managers’ Index (PMI). significant financial outflows from Turkey amid Readings above 50 indicate expansion, readings below indicate contraction. The aggregates are calculated using constant 2010 U.S. dollar GDP weights. Last observation is April 2019 for market concerns about high current account manufacturing PMI, and March 2019 for industrial production growth. deficits and policy developments, which led to D. Data are 3-month moving averages and calculated using 2010 U.S. dollar GDP weights. Bond spread denotes the average spread of ECA sovereign debt (measured by J.P. Morgan’s Emerging sharp falls in investment and private consumption Markets Bond Index) over its equivalent maturity U.S. Treasury bond. Sample includes Georgia, Hungary, Kazakhstan, Poland, Russia, Serbia, Turkey, and Ukraine, for which EMBI spreads are (Figure 2.2.1.F). available. Last observation is April 2019. E. Figure shows median inflation values. Headline inflation measured as the percent change in the consumer price index. Sample includes Belarus, Croatia, Hungary, North Macedonia, Poland, Growth in Poland was a robust 5.1 percent in Romania, Russia, and Turkey, for which data are available. Last observation is April 2019. F. Cumulative weekly flows since April 20, 2018. Last observation is May 17, 2019. 2018, partly reflecting European Union (EU) Click here to download data and charts. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 E URO PE AND CE NTRAL AS IA 97 fund transfers and the strongest labor market since FIGURE 2.2.2 ECA: Outlook and risks the 1990s. Despite this, low inflation and Growth in ECA is projected to fall to 1.6 percent in 2019, reflecting the borrowing rates enabled the authorities to effects of Turkey’s financial stress and weakening activity in other large undertake accommodative monetary policy and economies. Capacity constraints are expected to hinder growth in Central Europe, while a further deceleration in the Euro Area or Russia could dent fiscal policy expansion. However, since the end of activity in tightly connected subregions. Large external debt leaves 2018, core inflation has nearly tripled, accelerating regional economies susceptible to sudden shifts in investor sentiment, while the realization of contingent liabilities could pose additional fiscal to a 6-year high in April. costs in ECA. Outlook A. GDP growth B. Capacity utilization and labor shortages in Central Europe Regional growth is projected to sharply decelerate to a four-year low in 2019, to 1.6 percent, down from 3.1 percent in 2018. This is 0.7 percentage point lower than previous forecasts, reflecting weaker-than-expected activity in Turkey and Russia, as well as some smaller economies. Energy exporters in the region (Azerbaijan, Kazakhstan, Russia) should benefit from the recent rise in oil prices. Regional growth is expected to firm in C. Share of export goods trade by D. Remittances and foreign direct 2020-21 as Turkey recovers (Figure 2.2.2.A). destination, 2017 investment inflows, 2018 Excluding Turkey, regional activity is expected to stabilize, with modest growth in domestic demand and a small drag from net exports. The baseline projection for regional growth is predicated on the assumption that Turkey’s economy bottoms out in 2019 and that spillovers from slowing growth in the Euro Area are limited. The baseline also assumes no further escalation in trade tensions between the United States and E. External debt, 2017 F. Average fiscal cost of realized contingent liability episodes China or other major trading partners, no disorderly exit from the European Union by the United Kingdom, and an absence of policy missteps in economies that recently suffered acute financial stress—mainly Turkey. Trade relations between the United States and China remain fragile, however, and further escalation in tariffs or retaliatory action could adversely affect economies in the region, particularly energy and metals exporters. Similarly, a deterioration in trade Source: Bova et al. (2016), European Commission, Kose et al. (2017), Organisation for Economic Co-operation and Development, United Nations Conference on Trade and Development, World Bank. relations between the United States and Europe, A. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. Shaded areas indicate forecasts. Data for 2018 are estimates. Green diamonds correspond to forecasts from the particularly with respect to auto tariffs, could also January 2019 edition of the Global Economic Prospects report. be detrimental to the ECA region. Regional B. Data are calculated using constant 2010 U.S. dollar GDP weights. Sample includes Hungary, Poland, and Romania. Labor shortage is the percentage of manufacturing firms pointing to labor growth also depends on oil prices remaining shortages as a factor limiting production. Last observation is 2019Q1. C. Shares are calculated from exports in millions of U.S. dollars. relatively stable, moderating gradually over the D. Figure shows the 2018 averages for remittances, and the 2016-17 averages for foreign direct investment, based on data availability. forecast horizon. E. Figure shows total public and private external debt stocks as a share of GDP in 2017, as in Kose et al. (2017). “Other EMDEs” are all other EMDEs that are not in the Europe and Central Asia region. F. Fiscal cost is measured as gross fiscal outlays and the change in the government financial position The projected weakening of growth is more due to a contingent liability realization, as estimated by Bova et al. (2016). The data cover episodes from 1990 to 2014. Types of contingent liabilities include those that involved public sector bailouts for pronounced in Central Europe than in other ECA the financial sector, SOEs, the private non-financial sector, PPPs, and others, as defined by Bove et al. (2016). subregions because of closer linkages with the Click here to download data and charts. 98 CHAPTER 2.2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 Euro Area and increasingly binding domestic North Macedonia, Serbia), while a deceleration in capacity constraints (Figure 2.2.2.B). Fiscal public and private investment will slow growth in stimulus, and the resulting boost to private others (Albania, Montenegro; World Bank consumption, will begin to fade in some of the 2019d). subregion’s largest economies by 2020 (Hungary, Poland, Romania). Shrinking working-age In Russia, the projection for 2019 has been populations, partly reflecting emigration to downgraded to 1.2 percent, reflecting oil western Europe in recent years, limits medium- production cuts. Tighter monetary policy, term growth prospects in Central Europe. Tepid combined with a value-added tax hike at the private investment growth could weaken further in beginning of 2019, are also contributing to weaker the absence of sustained progress on structural growth momentum in the remainder of 2019. reforms. Private investment remains tepid due to policy uncertainty and prospects for slowing potential Growth is expected to moderate over the forecast growth over the longer term due to worsening horizon in both Eastern Europe and Central Asia. demographic pressures. These regions face a more challenging external environment as growth decelerates in major In Turkey, growth is expected to be weighed trading partners, such as the Euro Area and down by increased inflation and associated Russia. The pace of future growth in both pressure on real incomes, banking and corporate subregions depends on the successful sector deleveraging following several years of rapid implementation of structural reforms to improve credit growth, and low business and consumer the business environment, achieve debt confidence. Activity is expected to bottom out in sustainability, and restructure state-owned 2019, with annual growth contracting 1 percent, enterprises (Belarus, Kyrgyz Republic, Moldova, but the recent flare up in financial market Ukraine, Uzbekistan; EBRD 2017; Funk, Isakova, pressures highlight that downside risks remain and Ivanyna 2017). In Central Asia, modest sharply elevated. The recovery is assumed to growth in Russia and low productivity will weigh strengthen in 2020 through gradual improvement on activity in the region’s largest economy, in domestic demand and continued strength in Kazakhstan. net exports, provided that fiscal and monetary policy avert further sharp falls in the lira and Growth in the South Caucasus subregion is corporate debt restructurings help avoid serious projected to strengthen to 4.2 percent by 2021, damage to the financial system. from 2.6 percent in 2018, assuming the continued implementation of domestic reforms and In Poland, growth in 2019-20 will be buoyed by a infrastructure investment. Activity in the region’s recently announced fiscal stimulus package, largest economy, Azerbaijan, will be boosted by a amounting to roughly 2 percent of GDP. This new natural gas pipeline coming on stream, fiscal expansion aims to boost private although this will be partly offset by the effects of consumption through various social transfers and weak credit growth arising from problems in the income tax reduction schemes. Nevertheless, financial sector. In Armenia and Georgia, growth growth is expected to slow over the forecast is expected to firm, partly on account of increased horizon, to 3.3 percent by 2021 from a peak of government investment. 5.1 percent in 2018, as domestic capacity constraints and slowing investment weigh on Growth in the Western Balkans is projected to be growth. broadly stable, dipping to 3.5 percent in 2019 but returning to 3.9 percent by 2021. This forecast is Over the long term, regional growth could be predicated on political stability and policy hindered by worsening demographic trends, in uncertainty remaining in check. Infrastructure conjunction with tepid productivity and investment and private consumption will help investment growth (World Bank 2018c; Bussolo, deliver robust growth in some economies (Kosovo, Koettl, and Sinnott 2015; EBRD 2018). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 E URO PE AND CE NTRAL AS IA 99 Structural reforms that close remaining investment sizable foreign-currency-denominated debt gaps, encourage privatization, and promote FDI (Belarus, Croatia, Georgia, Kyrgyz Republic, and greater participation in global value chains Moldova, Tajikistan, Ukraine; Figure 2.2.2.E). could help boost productivity in the region (EBRD 2015; Gould 2018; Chapter 1). Greater Increases in policy uncertainty could undermine economic integration and regional coordination business and investor confidence in the region. could also help spur innovation and competition, Policy disagreements between the European unleashing the region’s growth potential (Kunzel Union and some Central European countries et al. 2019). could deter international investors and reduce fiscal transfers. Election outcomes in some of the region’s largest economies could also elevate policy Risks uncertainty. Further escalation of international The region’s outlook remains subject to significant trade restrictions could have a negative impact on downside risks. Chief among these is a sharper- the region, given its openness to trade and capital than-expected slowdown in ECA’s most important flows. A reversal of structural reforms remains a trading partner, the Euro Area. The Euro Area risk in many countries, especially Armenia, purchased the majority of ECA exports in 2017, Azerbaijan, Belarus, Turkey, and Ukraine. while total foreign direct investment inflows Renewed conflict in the Syrian Arab Republic or accounted for over 7 percent of GDP in Central Ukraine could trigger new sanctions. Europe (Figure 2.2.2.C). In Central Asia and Fiscal risks have increased in the ECA region Eastern Europe, slowing activity in Russia could despite more benign global financing conditions impact remittance inflows, which account for an in 2019, as corporate debt has risen, with large important proportion of income (Kyrgyz shares of foreign-currency-denominated debt Republic, Moldova, Tajikistan, Ukraine; Figure 2.2.2.D). (Belarus, Kyrgyz Republic, Moldova, Ukraine). The rapid increase in private sector debt in ECA The financial stress in Turkey has had limited over the past decade has come with growing spillovers to the other economies in the region. contingent liabilities for the public sector— However, the experience of Turkey is a stark potential bailouts of systemic private liabilities reminder of the risk of sudden shifts in investor would come at a high cost. Past episodes of sentiment—in particular for countries with large realized contingent liabilities have imposed large current account deficits or reliance on potentially fiscal costs in the region (Figure 2.2.2.F; Bova et volatile capital inflows, high external debt loads, or al. 2016). 100 CHAPTER 2.2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 TABLE 2.2.1 Europe and Central Asia forecast summary Percentage point differences (Real GDP growth at market prices in percent, unless indicated otherwise) from January 2019 projections 2016 2017 2018e 2019f 2020f 2021f 2019f 2020f 2021f EMDE ECA, GDP 1 1.9 4.1 3.1 1.6 2.7 2.9 -0.7 0.0 0.0 EMDE ECA, GDP excl. Turkey 1.5 3.0 3.3 2.4 2.6 2.6 -0.2 0.0 0.1 (Average including countries with full national accounts and balance of payments data only) 2 EMDE ECA, GDP2 1.8 4.1 3.1 1.5 2.6 2.9 -0.8 -0.1 0.0 GDP per capita (U.S. dollars) 1.4 3.7 2.7 1.2 2.4 2.7 -0.8 0.0 0.0 PPP GDP 1.8 3.9 3.1 1.6 2.7 2.9 -0.7 0.0 0.0 Private consumption 1.4 4.8 3.0 1.4 2.6 2.7 -1.0 -0.6 -0.2 Public consumption 3.1 3.1 1.6 1.6 1.6 1.8 -0.9 -0.6 -0.3 Fixed investment -0.1 6.3 2.6 -0.8 3.3 3.6 -3.1 -1.3 -1.2 Exports, GNFS3 4.0 7.1 5.7 4.0 4.2 4.0 -1.3 -0.1 -0.5 Imports, GNFS 3 3.5 10.7 3.2 3.2 5.4 5.8 -1.9 -0.4 0.0 Net exports, contribution to growth 0.3 -0.7 1.0 0.5 -0.2 -0.4 0.2 0.0 -0.2 Memo items: GDP Commodity exporters4 0.7 2.1 2.7 1.8 2.2 2.3 -0.2 0.0 0.0 Commodity importers5 3.1 6.0 3.6 1.4 3.1 3.5 -1.2 -0.1 -0.1 Central Europe6 3.4 5.0 4.6 3.7 3.3 3.1 0.1 0.0 0.1 Western Balkans7 3.2 2.6 3.9 3.5 3.8 3.9 0.0 0.0 0.1 Eastern Europe 8 0.9 2.6 3.2 2.4 2.7 3.0 -0.5 -0.4 -0.4 South Caucasus9 -1.6 2.0 2.6 3.7 3.9 4.2 -0.3 0.1 0.8 Central Asia 10 2.9 4.6 4.7 4.2 4.0 4.1 0.0 0.0 0.0 Russia 0.3 1.6 2.3 1.2 1.8 1.8 -0.3 0.0 0.0 Turkey 3.2 7.4 2.6 -1.0 3.0 4.0 -2.6 0.0 -0.2 Poland 3.1 4.8 5.1 4.0 3.6 3.3 0.0 0.0 0.0 Source: World Bank. Note: e = estimate; f = forecast. EMDE = emerging market and developing economies. 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, Moldova, Montenegro, North Macedonia, Poland, Romania, Serbia, and Turkey. 6. Includes Bulgaria, Croatia, Hungary, Poland, and Romania. 7. Includes Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia. 8. Includes Belarus, Moldova, and Ukraine. 9. Includes Armenia, Azerbaijan, and Georgia. 10. Includes Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. Click here to download data. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 E URO PE AND CE NTRAL AS IA 101 TABLE 2.2.2 Europe and Central Asia country forecasts1 Percentage point differences (Real GDP growth at market prices in percent, unless indicated otherwise) from January 2019 projections 2016 2017 2018e 2019f 2020f 2021f 2019f 2020f 2021f Albania 3.3 3.8 4.1 3.7 3.7 3.8 0.1 0.2 0.3 Armenia 0.2 7.5 5.2 4.2 4.9 5.2 -0.1 0.3 0.6 Azerbaijan -3.1 0.1 1.4 3.3 3.5 3.7 -0.3 0.2 1.0 Belarus -2.5 2.5 3.0 1.8 1.3 1.2 -0.9 -1.2 -1.3 Bosnia and Herzegovina2 3.1 3.2 3.1 3.4 3.9 4.0 0.0 0.0 0.0 Bulgaria 3.9 3.8 3.1 3.0 2.8 2.8 -0.1 -0.2 0.0 Croatia 3.5 2.9 2.6 2.5 2.5 2.4 -0.3 -0.3 -0.2 Georgia 2.8 4.8 4.7 4.6 4.8 5.0 -0.4 -0.2 0.0 Hungary 2.3 4.1 4.9 3.8 2.8 2.6 0.6 0.0 0.2 Kazakhstan 1.1 4.1 4.1 3.5 3.2 3.2 0.0 0.0 0.0 Kosovo 4.1 4.2 4.2 4.4 4.5 4.5 -0.1 0.0 0.0 Kyrgyz Republic 4.3 4.7 3.5 4.3 4.0 4.1 0.9 0.1 0.1 Moldova 4.4 4.7 4.0 3.4 3.6 3.8 -0.4 0.1 0.6 Montenegro 2.9 4.7 4.9 2.9 2.4 2.3 0.1 -0.1 -0.2 North Macedonia 2.8 0.2 2.7 2.9 3.2 3.6 0.0 0.0 0.3 Poland 3.1 4.8 5.1 4.0 3.6 3.3 0.0 0.0 0.0 Romania 4.8 7.0 4.1 3.6 3.3 3.1 0.1 0.2 0.3 Russia 0.3 1.6 2.3 1.2 1.8 1.8 -0.3 0.0 0.0 Serbia 3.3 2.0 4.3 3.5 4.0 4.0 0.0 0.0 0.0 Tajikistan 6.9 7.1 7.3 6.0 6.0 6.0 0.0 0.0 0.0 Turkey 3.2 7.4 2.6 -1.0 3.0 4.0 -2.6 0.0 -0.2 Turkmenistan 6.2 6.5 6.2 5.6 5.1 4.9 0.0 0.0 0.0 Ukraine 2.4 2.5 3.3 2.7 3.4 3.8 -0.2 0.0 0.0 Uzbekistan 6.1 4.5 5.1 5.3 5.5 6.0 0.2 0.0 0.0 Source: World Bank. Note: 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. Click here to download data. Growth in Latin America and the Caribbean is expected to be subdued in 2019, at 1.7 percent, reflecting challenging conditions in several of the largest economies. Gradually building momentum in Brazil and a recovery in Argentina are projected to contribute to a pickup in regional growth to 2.5 percent in 2020 and 2.7 percent in 2021. Financial conditions in the region have eased markedly since early 2019. Despite soft global trade, regional export growth has picked up, boosted by trade diversion in response to bilateral tariffs by the United States and China, and by solid growth in the United States. As these effects wane and global trade decelerates further, export growth in the region is projected to slow. Risks to the growth outlook remain tilted to the downside. Sharper-than-projected slowdowns in the United States and China could have negative spillovers on regional growth through trade, financial, and commodity market channels. Adverse market responses to weak fiscal conditions and disruptions from natural disasters are other important risks. The crisis in Venezuela also presents risks. Manufacturing activity in the region decelerated at Recent developments the start of 2019, echoing a soft patch in global Following weak growth of 1.6 percent in 2018, industrial production around the turn of the year activity indicators in Latin America and the (Figure 2.3.1.B). Mining (including oil) sector Caribbean (LAC), in aggregate, have been activity in LAC continues to contract. Supply subdued in the first half of 2019.1 However, disruptions in Brazil due to the Vale dam accident conditions in the largest economies are uneven. In and in Chile due to heavy rains contributed to the Brazil, although labor and financing conditions contraction in early 2019, while declines in oil and have improved, activity indicators remain sluggish. gas production in Mexico persist. Chile and Mexico are both experiencing slowdowns, and the Argentine economy continues Compared to the industrial sector, activity in the to contract. Recent data for Colombia indicates a services sector in LAC has been much more gradually building expansion, however. supportive of growth (Figure 2.3.1.C). However, services growth softened in late 2018, largely due In contrast to global trends, trade in the region to the weak performance in Argentina; the drag continues to expand. Goods export volumes have should diminish as this economy recovers. grown steadily since early 2018, recently overtaking import growth (Figure 2.3.1.A). There Financing conditions in the region have eased is evidence that trade diversion, following the markedly in recent months, with a general fall in imposition of bilateral tariffs by the United States bond yields and credit default swap (CDS) and China, has benefited some LAC countries spreads, even though in some cases bond yields (Brazil, Mexico). However, export orders in some remain substantially higher than in 2017 large economies have moderated in recent months, (Argentina, Mexico, Venezuela; Figure 2.3.1.D). consistent with weakening global trade growth. Equity price indexes in major economies are higher than in late 2018, reflecting improved investor sentiment. Capital inflows have picked up Note: This section was prepared by Dana Vorisek. Research assistance was provided by Mengyi Li. after slowing in much of 2018. 1 Due to lack of data, the World Bank has ceased producing a growth forecast for Venezuela and has removed Venezuela from all Inflows of remittances to LAC have been robust, growth aggregates in which it was previously included. in part reflecting strong U.S. labor market 104 CHAPTER 2.3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE 2.3.1 LAC: Recent developments conditions. In several of the countries where Export growth momentum has picked up in LAC in recent months. An remittances account for large shares of domestic expanding services sector continues to be a source of growth. Industrial GDP, remittance growth was more than 10 production has been weak, however, especially mining production. percent in 2018 (the Dominican Republic, Financing conditions in the region have eased markedly since the start of the year. The financial stress in Argentina last year and the subsequent Guatemala, Honduras; World Bank 2019d). output contraction has had an impact on neighboring countries through Strong remittance inflows have helped offset specific sectors, such as tourism, but has not generated widespread intraregional spillovers. The humanitarian and economic crisis in Venezuela challenging social and economic conditions in has deepened, and oil production has further collapsed. several Central American countries in 2018 (e.g., political and social unrest in Honduras and B. Manufacturing and mining Nicaragua). A. Trade volume growth production With some key exceptions (Argentina, Venezuela), inflation in LAC remains moderate, in part due to stable or strengthening exchange rates against the U.S. dollar, following significant depreciations in 2018. Headline inflation has fallen in most of the region during the past year, while core inflation has been more stable. In most countries, policy interest rates have been on hold or have been adjusted downward since the end of 2018. Among C. Services sector growth D. Bond yields the central banks in the regions using inflation targets, inflation is in the target range in all but one (the Dominican Republic). Although the 2018 crisis in Argentina did not have broad-ranging spillovers within the region, there have been some negative repercussions in neighboring countries. The value of Brazil’s exports to Argentina fell by 15 percent in 2018. Within Brazil’s industrial sector, vehicles, E. Tourism expenditures in Uruguay F. Oil production in Venezuela automobile parts, and machinery are estimated to have been most affected (Central Bank of Brazil 2019). Uruguay and Paraguay also experienced slowdowns in export growth—in particular, tourism exports—due to strong bilateral currency appreciation against the Argentine peso (Figure 2.3.1.E). Remittance inflows to Paraguay, the large majority of which come from Argentina, fell sharply in 2018, by about 19 percent. Source: CPB Netherlands Bureau for Economic Policy Analysis, Haver Analytics, International In Venezuela, the humanitarian and economic Energy Agency, JP Morgan, World Bank. A. Lines show 3-month moving average growth of aggregate volumes for 13 countries representing crisis is deepening. The population is experiencing 97 percent of regional GDP. Last observation is February 2019. B. Lines show 3-month moving average of 2018 industrial production-weighted averages of Brazil, frequent electricity outages and water shortages; Chile, Colombia, Ecuador, Mexico, Peru, and Uruguay for manufacturing and Brazil, Chile, Colombia, Mexico, and Peru for mining. Last observation is March 2019. widespread scarcity of basic goods, including food C. LAC line shows 2018 GDP-weighted averages of Brazil, Chile, Colombia, Mexico, and Peru. Last and medicine; and sharp increases in infant and observation is 2018Q4. D. LAC line shows median of 16 countries; others show medians excluding the indicated countries. maternal mortality rates, malnutrition, and cases Last observation is May 10, 2019. E. Lines show 4-quarter moving averages. Last observation is 2018Q4. of preventable diseases. An estimated 3.7 million F. Last observation is April 2019. people had left the Venezuela as of early 2019— Click here to download data and charts. approximately 12 percent of the country’s population in 2015 (UNHCR 2019). This creates challenges both in Venezuela and in host G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 LATIN AME RIC A AN D THE C ARIBBE AN 105 countries. Mismanagement in the economically FIGURE 2.3.2 LAC: Outlook and risks vital oil sector, together with insufficient Growth in LAC is expected to continue to be weak in 2019, and to recover maintenance and investment, have contributed to moderately during the forecast period. A rebound in fixed investment after a precipitous decline in oil production—to 1 an extended period of weakness is expected to underpin the improved regional growth forecast in 2020 and 2021. The outlook is subject to million barrels per day in April, compared to an several downside risks, however. They include the possibility of sharper- average of 2.7 million barrels per day in 2010–15 than-projected slowdowns in the United States and China, which could have spillover effects, as well as adverse market responses to poor fiscal (Figure 2.3.1.F). Large-scale electricity blackouts conditions and disruptions from natural disasters. The growing crisis in in the first quarter of the year resulted in a further Venezuela also presents risks for other countries in the region. collapse of the industrial sector. A. Growth outlook B. Growth forecast downgrades Outlook The region is projected to post subdued growth in 2019, of 1.7 percent, and to gain momentum thereafter, with growth reaching 2.5 percent in 2020 and 2.7 percent in 2021 (Figure 2.3.2.A and Table 2.3.1). However, growth prospects for 2019 and 2020 have been downgraded, reflecting weaker-than-expected activity in Brazil and Mexico, but also in smaller economies (Table C. Investment D. Impact of a 1-percentage point growth slowdown in major economies 2.3.2). The growth forecast for 2019 has been downgraded for close to half of LAC economies (Figure 2.3.2.B). The regional recovery will be driven predom- inantly by private consumption as inflation remains moderate and confidence returns and, in 2020-21, by a rebound in fixed investment growth. Net exports are projected to subtract slightly from growth in 2020 and 2021, as E. Government debt F. Natural disasters external demand weakens and import demand strengthens. The forecast recovery in investment growth is particularly welcome after weak investment performance in recent years (Figure 2.3.2.C). Falling investment-to-GDP ratios, weak productivity growth, and unfavorable demographic developments have all contributed to slowing potential output growth in recent years. With the prices of commodities projected to be Source: Bloomberg, Centre for Research on the Epidemiology of Disasters, Haver Analytics, International Monetary Fund, World Integrated Trade Statistics, World Bank. relatively stable, following substantial volatility in B. Figure shows share of countries with growth downgrades for the current year. prior years, the importance of commodity price C. Investment refers to real gross fixed capital formation (public and private combined). Investment- to-GDP ratio and investment growth are 2010 real GDP-weighted averages. Sample includes 17 changes for regional economic developments economies representing 98 percent of regional GDP. D. Bars represent medians and error bars 33-66 percent confidence bands. Spillover estimates are should diminish. derived from cumulative impulse responses after two years from a Bayesian structural vector autoregression estimated using quarterly seasonally adjusted GDP data. The maximum data coverage is 1998Q1-2018Q2. Coverage for some countries is shorter: from 2000Q1 for Colombia, Among the largest economies in the region, and from 2000Q2 for Honduras. The model is estimated for each spillover destination country and the variables include, in this Cholesky ordering: U.S. real GDP growth, EMBI, China’s real GDP growth prospects are uneven. In Brazil, a weak growth, Brazil’s real GDP growth (for South American economies) or Mexico’s real GDP growth (for Central American economies), the country’s trade-weighted commodity price growth, the country’s cyclical recovery already underway is expected to real GDP growth, and the country’s real effective exchange rate appreciation. E. Sample includes 31 economies. Venezuela is excluded. slowly gain traction, with growth rising to 1.5 F. Annual averages for the periods indicated. Sample includes 32 LAC economies. “Other” events percent in 2019 and 2.5 percent in 2020. Easing are earthquakes, tsunamis, landslides, mudslides, and fires. 1980s bar shows events that occurred between 1980 and 1989, 1990s bar shows those between 1990 and 1999, 2000s shows those credit conditions, rising real wages, and, by 2020, between 2000 and 2009, and 2010s bar shows those between 2010 and February 2019. Click here to download data and charts. 106 CHAPTER 2.3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 reduced political uncertainty contribute to this Risks outlook. In Argentina, the pace of contraction is expected to ease in 2019, and the economy is e outlook for LAC is subject to predominantly expected to resume expanding in 2020. The downside risks, emanating from both external and recovery will be supported by robust export domestic sources. Intensifying policy and political growth, partly reflecting much higher agricultural uncertainty, including a further escalation of trade production after the drought in 2018. Investment restrictions between major economies, could and government spending are expected to shrink weigh on investment and trade. Further, as the at faster rates in 2019 than in 2018, however. scal stimulus in the United States winds down Growth in Colombia is also forecast to continue and creditworthiness deteriorates in the corporate to strengthen. Corporate tax reforms, together sector, slowing U.S. growth could be sharper than with the implementation of large-scale road expected, with possible negative spillovers for LAC infrastructure projects, will support a pickup in economies with strong trade, nancial, and investment growth. remittances linkages to the United States (Figure In other large economies, growth is projected to 2.3.2.D). is risk is compounded by the decelerate for at least part of the forecast period. In possibility of a larger-than-expected deceleration Mexico, growth is projected to ease for a fourth in economic activity in China. e United States consecutive year in 2019, to 1.7 percent, as a and China have both accounted for growing shares decelerating U.S. economy slows export demand of regional goods exports in recent years, although and uncertainty about key policy decisions by the there are di erences within LAC subregions. new administration constrain fixed investment. As Roughly 80 percent of exports from Mexico and policy uncertainty fades, growth in Mexico is Central America go to the United States, while expected to pick up moderately, to 2 percent in China has become the largest export destination of 2020 and 2.4 percent in 2021. Growth in Chile is several South American economies (Brazil, Chile, expected to be dampened by slowing export Peru, Uruguay). demand through 2021, together with planned Government debt has risen steadily in much of the fiscal tightening. region during the past decade, to an average of 60 Growth in Central America is projected to percent of GDP in 2018, with negative accelerate moderately in the forecast period as the implications for regional growth if borrowing costs subregion moves past a difficult 2018. The were to rise suddenly (Figure 2.3.2.E). Sovereign exception is Nicaragua, where a political crisis that credit ratings for several countries have been began in early 2018 has severely dented investor downgraded since late 2018 (Argentina, Costa and consumer sentiment and is contributing to a Rica, Nicaragua). A downgrade of Mexico’s very sharp contraction in investment. national oil company, Pemex, has raised concerns about how much more support the government In the Caribbean, growth is projected to slow to can provide to the ailing company without risking 3.4 percent in 2019, from 4.3 percent in 2018. In a sovereign downgrade. Although slightly smaller the Dominican Republic, growth in the industrial fiscal deficits are expected to contribute to a and services sectors is expected to moderate leveling off of average government debt in the slightly, consistent with softer external demand as region during the forecast period, average debt global activity decelerates. And in Haiti, the stands at the highest level since 2005. lingering effects of social unrest in 2018, together with projected fiscal tightening in the context of The worsening crisis in Venezuela is pressuring an IMF program, are weighing on growth. Rapid fiscal accounts and social programs in other LAC development of the offshore oil industry in countries (World Bank 2018d). If economic Guyana will be the key driver of faster growth in conditions in Venezuela (e.g., oil production and the Caribbean in 2020, to about 4.1 percent. prices, and remittance inflows) worsen, emigration G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 LATIN AME RIC A AN D THE C ARIBBE AN 107 could rise significantly further, producing addi- Disruptions related to climate change and natural tional pressures. Within Venezuela, falling oil disasters are a persistent source of downside risk to production or remittances would limit the the regional growth outlook. Hurricanes, floods, availability of foreign currency and make droughts, and earthquakes have had detrimental importing basic goods, including food, more impacts on growth in numerous economies in the challenging (Bahar and Barrios 2018). Regional region in recent years, and the region remains challenges related to growing outward migration highly vulnerable to such events (Figure 2.3.2.F). from Central America may also become more acute. TABLE 2.3.1 Latin America and the Caribbean forecast summary (Real GDP growth at market prices in percent, unless indicated otherwise) Percentage point differences from January 2019 projections 2016 2017 2018e 2019f 2020f 2021f 2019f 2020f 2021f EMDE LAC, GDP1 -0.3 1.7 1.6 1.7 2.5 2.7 -0.4 -0.2 0.0 (Average including countries with full national accounts and balance of payments data only) 2 EMDE LAC, GDP2 -0.3 1.7 1.6 1.7 2.5 2.7 -0.4 -0.2 0.0 GDP per capita (U.S. dollars) -1.4 0.7 0.5 0.8 1.6 1.7 -0.3 -0.1 0.0 PPP GDP 0.1 1.9 1.6 1.8 2.6 2.7 -0.3 -0.1 0.0 Private consumption -0.3 2.4 2.0 1.8 3.2 2.9 -0.3 0.3 0.0 Public consumption 1.0 0.6 0.7 -0.2 1.2 1.2 -0.3 1.0 0.8 Fixed investment -5.3 -0.2 2.2 1.3 3.1 4.4 -1.0 -1.8 -0.3 Exports, GNFS3 2.6 3.8 4.3 4.1 3.7 3.8 -0.7 -0.2 -0.1 Imports, GNFS3 -1.3 5.8 5.5 3.0 4.7 4.6 -1.0 -0.1 -0.3 Net exports, contribution to growth 0.8 -0.4 -0.3 0.2 -0.2 -0.2 0.0 0.0 0.0 Memo items: GDP South America4 -1.7 1.5 1.2 1.6 2.6 2.7 -0.4 -0.1 0.0 Central America5 3.9 3.8 2.7 3.1 3.4 3.6 -0.3 -0.1 0.0 Caribbean 6 2.3 2.5 4.3 3.4 4.1 4.1 -0.1 0.1 0.2 Brazil -3.3 1.1 1.1 1.5 2.5 2.3 -0.7 0.1 -0.1 Mexico 2.9 2.1 2.0 1.7 2.0 2.4 -0.3 -0.4 0.0 Argentina -2.1 2.7 -2.5 -1.2 2.2 3.2 0.5 -0.5 0.1 Source: World Bank. Note: e = estimate; f = forecast. EMDE = emerging market and developing economies. 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. Due to lack of data, the World Bank has ceased producing a growth forecast for Venezuela and has removed Venezuela from all growth aggregates in which it was previously included. 1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. 2. Aggregate includes all countries in Table 2.3.2 except Dominica, Grenada, Guyana, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, Trinidad and Tobago, and Venezuela, for which data limitations prevent the forecasting of demand-side GDP components. 3. Exports and imports of goods and non-factor services (GNFS). 4. Includes Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, and Uruguay. 5. Includes Costa Rica, El Salvador, Guatemala, Honduras, 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. Click here to download data. 108 CHAPTER 2.3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 TABLE 2.3.2 Latin America and the Caribbean country forecasts1 Percentage point differences (Real GDP growth at market prices in percent, unless indicated otherwise) from January 2019 projections 2016 2017 2018e 2019f 2020f 2021f 2019f 2020f 2021f Argentina -2.1 2.7 -2.5 -1.2 2.2 3.2 0.5 -0.5 0.1 Belize -0.6 1.4 3.0 2.3 2.1 1.9 0.4 0.4 0.2 Bolivia 4.3 4.2 4.2 4.0 3.6 3.4 -0.3 -0.2 0.0 Brazil -3.3 1.1 1.1 1.5 2.5 2.3 -0.7 0.1 -0.1 Chile 1.7 1.3 4.0 3.5 3.1 3.0 0.0 -0.2 -0.2 Colombia 2.1 1.4 2.6 3.5 3.7 3.7 0.2 0.0 0.1 Costa Rica 4.2 3.4 2.7 3.0 3.1 3.4 0.3 0.3 0.4 Dominican Republic 6.6 4.6 7.0 5.2 5.0 5.0 0.1 0.0 0.2 Ecuador -1.2 2.4 1.4 0.0 0.4 0.8 -0.7 -0.3 -0.4 El Salvador 2.5 2.3 2.5 2.6 2.5 2.4 0.1 0.1 0.0 Grenada 3.7 5.1 5.2 3.9 3.7 3.7 -0.3 0.9 0.9 Guatemala 3.1 2.8 3.1 3.3 2.7 3.0 0.4 -0.3 -0.1 Guyana 3.4 2.1 4.1 4.6 33.5 22.9 0.0 3.5 -1.9 Haiti2 1.5 1.2 1.5 0.4 1.6 1.3 -1.9 -0.8 -1.2 Honduras 3.9 4.8 3.7 3.6 3.8 3.9 -0.2 0.0 0.2 Jamaica 1.4 1.0 1.9 1.6 1.7 1.9 -0.2 -0.3 -0.1 Mexico 2.9 2.1 2.0 1.7 2.0 2.4 -0.3 -0.4 0.0 Nicaragua 4.6 4.7 -3.8 -5.0 1.1 1.3 -4.5 -1.5 -2.3 Panama 5.0 5.3 3.7 5.0 5.4 5.2 -1.0 0.0 0.0 Paraguay 4.3 5.0 3.6 3.3 4.0 4.0 -0.6 0.0 0.0 Peru 4.0 2.5 4.0 3.8 3.9 4.0 0.0 0.1 0.3 St. Lucia 3.9 3.7 1.5 3.4 3.5 2.4 0.7 0.7 0.1 St. Vincent and the Grenadines 1.3 0.7 2.0 2.1 2.3 2.3 0.5 0.7 0.3 Suriname -5.6 1.4 2.0 2.0 2.1 2.1 0.4 0.3 0.2 Trinidad and Tobago -6.5 -1.9 0.7 0.9 1.5 2.1 0.0 0.3 0.9 Uruguay 1.7 2.6 1.6 1.5 2.3 2.5 -0.6 0.0 0.0 Source: World Bank. Note: e = estimate; f = forecast. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. 1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. 2. GDP is based on fiscal year, which runs from October to September of next year. Click here to download data. Growth in the Middle East and North Africa is projected to remain subdued in 2019, at 1.3 percent. Activity in oil exporters has slowed due to weak oil sector output and the effects of intensified U.S. sanctions on Iran, despite an easing of fiscal stance and positive prospects in non-oil sectors in some countries. Many oil importers continue to benefit from business climate reforms and resilient tourism activity. Regional growth is projected to pick up to around 3 percent a year in 2020-21, supported by capital investment and policy reforms. Risks to the outlook are tilted to the downside, including geopolitical tensions, reform setbacks, and a further escalation of global trade tensions. Recent developments large GCC economies is picking up amid easier fiscal stances and higher government spending Growth is expected to remain subdued in the (Figure 2.4.1.B). Oil exporters’ growth this year is Middle East and North Africa (MENA) in 2019 also being dragged down by a further economic (Figure 2.4.1.A).1 Among oil exporters, oil contraction in Iran as the effects of U.S. sanctions production cuts and a contraction in economic intensify and private consumption weakens. While activity in Iran due to U.S. sanctions have weighed high government spending has supported activity on activity. Growth is improving modestly in oil in Algeria, hydrocarbon sector activity has been importers as policy reforms progress, despite long- muted. Current account balances have improved term structural challenges. While easing external among oil exporters, supported by high oil prices financing conditions have supported regional in most of 2018. growth, weakening external demand has softened Growth has been steadily improving among oil export prospects. importers, led by the largest economies. In Egypt, Oil exporters’ growth has remained subdued. Oil the largest country in this group, investment and production cuts implemented by OPEC and some natural gas output have remained strong. Tourism non-OPEC members (OPEC+) to rebalance activity has been resilient and has supported the global oil markets have constrained oil sector growth prospects of oil importers (Figure 2.4.1.C). growth in the Gulf Cooperation Council (GCC) However, export growth has softened somewhat as economies; however, as suggested by rising global demand weakened, particularly among Purchasing Managers’ Indexes, non-oil activity in small countries in this group (Figure 2.4.1.D). Oil importers continue to proceed with long-term adjustments, including areas that amend gaps in human capital development (Figure 2.4.1.E; Note: This section was prepared by Lei Sandy Ye. Research World Bank 2019e). assistance was provided by Liu Cui. 1 The World Bank’s Middle East and North Africa aggregate includes 16 economies and is grouped into three subregions. Bahrain, Inflation is contained in most of the MENA Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates region, with rates averaging less than 3 percent in comprise the Gulf Cooperation Council (GCC); all are oil exporters. Other oil exporters in the region are Algeria, the Islamic Republic of the past year in the GCC countries and falling Iran, and Iraq. Oil importers in the region are Djibouti, the Arab recently to about 3 percent in the smaller oil Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, and West importers (Figure 2.4.1.F). Policy interest rates in Bank and Gaza. Syrian Arab Republic, the Republic of Yemen, and Libya are excluded from regional growth aggregates due to data these economies have mostly remained neutral. limitations. Moreover, in Egypt, inflation has subsided to 110 CHAPTER 2.4 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE 2.4.1 MENA: Recent developments about 13 percent (year-on-year) recently from a Growth in the MENA region is projected to remain subdued at 1.3 percent peak above 30 percent in July 2017; and the in 2019. In the large oil exporters, oil production cuts and U.S. sanctions on central bank cut interest rates in February 2019. Iran have weighted on activity, despite positive momentum in non-oil In contrast, Iran’s inflation (year-on-year) has sectors. Activity among oil importers has been supported by policy reforms and improved tourism prospects, but is constrained by weaker external risen sharply from about 10 percent in mid-2018 demand. A number of countries continue to tackle long-term issues, such to about 52 percent in April 2019, contributed by as the need for human capital investment, through structural adjustment programs. Inflation has eased in Egypt over the past year, but has risen a depreciation of the rial in the parallel market of substantially over the past year in Iran, while remaining generally low and more than two-fold compared to levels prior to the stable elsewhere. announcement of U.S. sanctions in April 2018. A. GDP growth B. Composite PMI Financing conditions have eased this year as U.S. policy rate hikes pause and renewed risk appetite by international investors emerge. Bond issuance in the GCC remained robust this year, supported in part by Saudi Aramco’s bond debut. Government debt in many oil importers remains high, in some instances exceeding 100 percent of GDP, and continues to challenge their access to finance internationally via high credit risk. C. Tourism growth D. Goods exports growth: oil importers Outlook Growth in the region is projected to decrease to 1.3 percent in 2019 and to pick up to about 3 percent in 2020-21. The projected pickup over the next two years is largely driven by an assumed rebound in activity in Iran as the impact of recent U.S. sanctions wanes, and by an expected ramping up of infrastructure investment in GCC economies. Growth in the rest of the region is E. World Bank Human Capital Index F. Inflation projected to remain stable, with broadly resilient domestic demand in key economies partly offset by slowing external demand growth. Medium- term growth prospects are contingent on geopolitical tensions remaining contained and regional spillovers from conflict-ridden economies remaining limited. For oil exporters, growth in 2019 is expected to Sources: Haver Analytics, International Monetary Fund, World Bank. decrease slightly to 0.7 percent, with strengthening A. Shaded area indicates forecasts. Aggregate growth rates calculated using constant 2010 GDP non-oil activity only partly offsetting constraints weights. B. Figure shows composite Purchasing Managers' Index (PMI). PMI readings above 50 indicate on oil sector activity. Growth is projected to pick expansion in economic activity; readings below 50 indicate contraction. Last observation is April 2019. up to 2.9 percent in 2020 before tapering slightly C. Figure shows average year-on-year growth of 3-month moving sum of tourism arrival for the denoted periods. Last observation is end-2018. in 2021. The rebound in 2020 is partly driven by D. Figure shows average year-on-year growth of 3-month moving sum of goods exports values. rising growth in Iraq as oil production increases. Large oil importers are Egypt, Morocco, and Tunisia; small oil importers are Jordan and Lebanon. “2019Q1” denotes January and February. Stronger infrastructure investment (including an E. The Human Capital Index ranges between 0 and 1. The index is measured in terms of productivity of the next generation of workers relative to the benchmark complete education and full health. An expansion of natural gas capacity in some economy in which a child born today can expect to achieve complete education and full health will score 1 on the Index. Includes 6 GCC economies, 3 non-GCC oil exporters, and 6 oil importers. economies), higher oil production, and eased F. CPI inflation rates. Other oil importers include Jordan, Lebanon, Morocco, and Tunisia, Last financing conditions associated with slowed rate observation is April 2019. Click here to download data and charts. hikes are expected to support higher growth in G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 MID D LE E AS T AN D NO RTH AFRIC A 111 GCC economies (World Bank 2019f; Figure FIGURE 2.4.2 MENA: Outlook and risks 2.4.2.A).2 An improved regulatory and business Stronger momentum in the non-oil sector in the GCC, aided by a pause in environment in the GCC will remain supportive rate hikes, is expected to support activity. There are several risks to the of private sector activity. Growth in Iran is growth outlook, however. Slower-than-expected reforms could hamper not only structural adjustment, but also efforts to diversify away from commodi- expected to resume in 2020-21, albeit at weak ties. Trade disputes among major economies could weigh on external de- rates, as the impact of U.S. sanctions tapers and mand for both oil exporters and importers. Persistently lower-than- expected growth in the Euro Area would constrain external demand for oil inflation stabilizes. Algeria’s growth is expected to importers. remain subdued as an expected return to fiscal consolidation weighs on non-oil activity. A. GCC interest rates B. Political stability and business climate Growth in oil importers is expected to rise steadily from 3.9 percent in 2018 to 4.7 percent in 2021, led by expansions in the larger economies. These projections are predicated on business climate reforms to support investment, healthy tourism activity, and a slight easing in political risks. Growth prospects in smaller oil importers (Jordan, Lebanon, West Bank and Gaza) are highly uncertain, however, as business and consumer C. Export Market Penetration Index D. Euro Area trade exposure confidence are contingent on anticipated reforms or foreign financial assistance. Banking sector weakness and high public debt form significant constraints on growth in smaller oil importers. Nonetheless, tourism and renewed bilateral trade opportunities (for instance, between Syria and Jordan), aided by the easing of conflicts and by policy initiatives, are expected to continue supporting activity in most oil importers. Sources: Haver Analytics, International Country Risk Guide, International Monetary Fund, World Bank. Continued IMF- and World Bank-supported A. GCC economies include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. Bahrain and Qatar have the same deposit rate values during the period denoted. Last policy programs in many economies (e.g., Egypt, observation is April 2019. B. Political stability rating denotes the political risk rating of the International Country Risk Guide. Morocco) will promote structural adjustment, Business climate score denotes the overall Doing Business “distance to frontier” of the World Bank’s Doing Business report. Figure shows unweighted averages. Latest observation in 2018. such as stronger fiscal management frameworks, C. Export Market Penetration index is based on the number of countries to which the reporter exports more vibrant small business entrepreneurship, and a particular product divided by the number of countries that report importing the product from global suppliers that year. Based on 2017 or latest available year of data. Includes 20 MENA economies. electricity access; however, in other cases economic D. Goods trade to Euro Area as a percent of total exports or imports for each subgroup denoted. Based on 2018 data. Includes 6 GCC economies, 3 non-GCC oil exporters, and 7 oil importers. prospects are contingent upon successful policy Click here to download data and charts. resolution in some newly formed governments (for instance, Lebanon). New reforms, such as the corporate sector and support investor investment, industrial licensing and procurement confidence. laws in Egypt; small and medium enterprise financing liberalizations in the United Arab Emirates; and participation of Djibouti in the Risks Convention on the Settlement of Investment Risks remain tilted to the downside for both oil Disputes between States and Nationals of Other exporters and importers, but for different reasons. States, are expected to help relieve constraints in Geopolitical risks are elevated in some oil exporters, while political challenges remain high in oil importers. Peace remains fragile in conflict- 2 The OPEC+ cuts are scheduled to expire in June and talks for affected economies (e.g., uncertainty over the UN- renewal will commence soon thereafter. The recent decision by the U.S. to end its Iran sanctions waivers and OPEC’s reaction on oil coordinated truce in the Yemen war), and prices are expected to serve as inputs to these meetings. economic and social mobility of refugees (e.g., 112 CHAPTER 2.4 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 Syria) are still highly constrained (World Bank Further escalation of trade tensions remains a key 2019g). Further amplification of U.S.-Iran risk. Increased trade restrictions could dampen tensions would pose risks for the region’s external demand from major trading partners, economies other than Iran. including the Euro Area (Figure 2.4.2.D). Relatedly, persistently weaker-than-expected Developments in oil production in Iran, activity in major trading partners, particularly the Venezuela, and the United States could add Euro Area, could weigh further on external volatility to oil prices, and this could complicate or demand from these economies and weaken stall fiscal adjustment in both oil exporters and oil remittance flows (World Bank 2019d). This risk importers, including their subsidy reforms and may be partly mitigated by enhanced regional other fiscal adjustment programs. Uncertainty trade capacity (for instance, Djibouti export about oil prices may dampen oil exporters’ logistics hub development). investment and social programs. Impact on oil exporters could also dampen capital inflows and Interest rates in the GCC economies have moved investment to oil importers via FDI and broadly in tandem with U.S. rates, reflecting the remittance linkages. Moreover, oil price volatility general pegging of their currencies to the U.S. may also translate to significant adjustment costs dollar. The recent pause of advanced-economy for oil importers, including in countries with still monetary policy normalization and renewed risk elevated energy subsidies. appetite for GCC assets have been supportive for GCC financial assets. Nonetheless, GCC Slower-than-expected reforms would weigh on economies have relatively open capital accounts, regional activity, especially for oil importers. and a resumed tightening of external financing Although some political uncertainties in the conditions is a downside risk to capital flows. In region have been resolved (for example, formation non-GCC economies, banking sectors are of new governments), risks of reform delays or vulnerable in some cases due to exposure to reversals remain, owing to budgetary concerns and sovereign risks associated with high public debt lack of political consensus. Higher political risk, and policy uncertainty. Among oil importers, by generating uncertainty and dampening investor average public debt level is about 90 percent of confidence, has been associated with weaker GDP, exposing these economies to rollover risks business climate in the region (Figure 2.4.2.B). and fluctuations in global interest rates. In GCC Reconstruction in Iraq has been proceeding at a economies, public debt levels are lower but moderate pace, and materialization of its benefits increased capital market access (e.g., large bond in 2020 remains uncertain. Sustained issuances) will subject them to volatility in global implementation of reforms in oil importers is financial markets alongside the beneficial effects of crucial for their medium-term growth, and financial market deepening. backloaded fiscal consolidation under high debt levels in these economies may worsen the risk On the upside, rising spending on infrastructure overhang for the private sector and generate in conflict-affected countries (e.g., Iraq) may additional uncertainty. Sustained structural generate positive spillovers to neighboring reforms are also necessary to put MENA economies. These include spending in soft economies’ current accounts on a more sustained infrastructure, such as broadband internet and path (Arezki et al. 2019) and to more fully untap mobile phone, that may broaden access to service their export potential, such as higher market delivery in areas like education, health, and penetration (Youssef and Zaki 2019; Figure financial services. 2.4.2.C). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 MID D LE E AS T AN D NO RTH AFRIC A 113 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 2019 projections 2016 2017 2018e 2019f 2020f 2021f 2019f 2020f 2021f EMDE MENA, GDP1 5.1 1.2 1.4 1.3 3.2 2.7 -0.6 0.5 0.0 (Average including countries with full national accounts and balance of payments data only) 2 EMDE MENA, GDP2 4.7 1.4 1.5 1.1 2.9 2.7 -0.5 0.2 0.0 GDP per capita (U.S. dollars) 2.8 -0.3 -0.1 -0.4 1.5 1.4 -0.5 0.2 0.0 PPP GDP 5.0 1.7 1.6 1.1 3.0 2.8 -0.5 0.2 0.0 Private consumption 2.9 2.2 0.8 1.3 1.9 2.1 -0.3 -0.4 -0.2 Public consumption -6.3 2.9 0.9 1.4 1.4 1.0 0.3 -0.5 -0.9 Fixed investment -0.3 2.4 3.7 4.4 5.7 6.4 0.8 1.0 1.6 Exports, GNFS3 9.6 4.1 3.8 0.4 3.9 3.6 -1.4 0.5 0.2 Imports, GNFS 3 -0.8 6.3 1.4 1.9 3.3 3.8 0.0 0.2 0.7 Net exports, contribution to growth 4.8 -0.2 1.4 -0.5 0.8 0.4 -0.7 0.3 -0.1 Memo items: GDP Oil exporters4 5.6 0.7 0.9 0.7 2.9 2.2 -0.7 0.6 -0.1 GCC countries5 2.4 -0.3 1.9 2.1 3.2 2.7 -0.5 0.5 0.0 Saudi Arabia 1.7 -0.7 2.2 1.7 3.1 2.3 -0.4 0.9 0.1 Iran 13.4 3.8 -1.9 -4.5 0.9 1.0 -0.9 -0.2 -0.1 Oil importers6 2.9 3.8 3.9 4.1 4.5 4.7 -0.1 -0.1 0.0 Egypt 4.3 4.8 5.4 5.7 5.9 6.0 0.0 0.0 0.0 Fiscal year basis7 4.3 4.2 5.3 5.5 5.8 6.0 -0.1 0.0 0.0 Source: World Bank. Note: e = estimate; f = forecast. EMDE = emerging market and developing economies. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time. 1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Libya, Syria, and Yemen due to data limitations. 2. Aggregate includes all countries in notes 4 and 6 except Djibouti, Iraq, Qatar, and West Bank and Gaza, for which data limitations prevent the forecasting of GDP components. 3. Exports and imports of goods and non-factor services (GNFS). 4. Oil exporters include Algeria, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. 5. The Gulf Cooperation Council (GCC) includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. 6. Oil importers include Djibouti, Egypt, Jordan, Lebanon, Morocco, Tunisia, and West Bank and Gaza. 7. The fiscal year runs from July 1 to June 30 in Egypt; the column labeled 2018 reflects the fiscal year ended June 30, 2018. Click here to download data. 114 CHAPTER 2.4 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 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 2019 projections 2016 2017 2018e 2019f 2020f 2021f 2019f 2020f 2021f Algeria 3.2 1.4 1.5 1.9 1.7 1.4 -0.4 -0.1 -0.4 Bahrain 3.5 3.8 1.8 2.0 2.2 2.8 -0.6 -0.6 0.0 Djibouti 9.1 4.1 6.0 7.0 7.5 8.0 -0.3 0.0 0.5 Egypt 4.3 4.8 5.4 5.7 5.9 6.0 0.0 0.0 0.0 Fiscal year basis 2 4.3 4.2 5.3 5.5 5.8 6.0 -0.1 0.0 0.0 Iran 13.4 3.8 -1.9 -4.5 0.9 1.0 -0.9 -0.2 -0.1 Iraq 13.6 -1.7 0.6 2.8 8.1 2.3 -3.4 5.2 -0.5 Jordan 2.0 2.1 2.0 2.2 2.4 2.6 -0.1 0.0 -0.1 Kuwait 2.9 -3.5 1.2 1.6 3.0 2.9 -2.0 -0.6 -0.7 Lebanon 1.6 0.6 0.2 0.9 1.3 1.5 -0.4 -0.2 0.0 Morocco 1.1 4.1 3.0 2.9 3.5 3.6 0.0 0.0 0.1 Oman 5.0 -0.9 2.1 1.2 6.0 2.8 -2.2 3.2 0.0 Qatar 2.1 1.6 1.4 3.0 3.2 3.4 0.3 0.2 0.4 Saudi Arabia 1.7 -0.7 2.2 1.7 3.1 2.3 -0.4 0.9 0.1 Tunisia 1.1 2.0 2.5 2.7 3.2 3.5 -0.2 -0.2 -0.1 United Arab Emirates 3.0 0.8 1.7 2.6 3.0 3.2 -0.4 -0.2 0.0 West Bank and Gaza 4.7 3.1 0.9 0.5 1.0 1.6 -1.4 -0.9 -0.3 Source: World Bank. Note: e = estimate; f = forecast. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of economies’ prospects do not significantly differ at any given moment in time. 1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Libya, Syria, and Yemen due to data limitations. 2. The fiscal year runs from July 1 to June 30 in Egypt; the column labeled 2018 reflects the fiscal year ended June 30, 2018. Click here to download data. South Asia continued to enjoy solid economic activity in 2018, posting 7 percent GDP growth due to robust domestic demand. Pakistan was a notable exception, with a broad-based weakening of domestic demand over the past year against the backdrop of tightening policies aimed at addressing the country’s macroeconomic imbalances. Regional growth is projected to remain close to 7 percent a year over the forecast horizon, as it continues to benefit from strong private consumption and investment. The main risks to the outlook include a re-escalation of political uncertainty and regional tensions, financial sector weakness due to nonperforming assets, fiscal challenges amid elections in several countries, and a sharper-than-expected weakening of growth in major economies. Recent developments divergent developments. India has announced a package of direct benefits to farmers and some tax South Asia’s growth remains robust despite breaks for the middle class while others (Pakistan, headwinds from the global economy amid Sri Lanka) are on paths of fiscal consolidation to weakening trade and manufacturing. Regional tackle sizable deficits. Current account deficits output is estimated to have expanded by 7 percent broadly widened last year, but recent data show in 2018 (Figure 2.5.1.A). Economic activity was signs of narrowing in a context of more stable oil underpinned by strong private domestic demand. prices (Figure 2.5.1.D). Private consumption and investment remained robust in much of the region, offsetting a In India, the largest economy in the region, GDP slowdown in Pakistan. Government spending grew by 7.2 percent in FY2018/19 (April 1, 2018 growth moderated in 2018, expanding closer to to March 31, 2019)—the same pace as shown for historical averages following rapid growth in 2017. the previous year by upwardly revised data. A Net exports continued to contribute negatively to slowdown in government consumption was offset regional growth, with import growth remaining by solid investment, which benefited from both stronger than export growth amid solid domestic private investment and public infrastructure demand (World Bank 2019h). spending. Urban consumption was supported by a pickup in credit growth, whereas rural Regional inflation has remained moderate in most consumption was hindered by soft agricultural countries, partly reflecting broadly stable prices. On the production side, robust growth was commodity prices (Figure 2.5.1.B). However, broad-based, with a slight moderation in services Pakistan has recently experienced a significant rise and agricultural activity accompanied by an in inflation driven by currency depreciation, acceleration in the industrial sector. Weakening which was followed by several policy rate hikes agricultural production reflected subdued harvest over the course of FY2018/19. in major crops on the back of less rainfalls. Services activity softened mainly due to slowing There has been limited progress in fiscal trade, hotel, transport, and communication consolidation in the region (Figure 2.5.1.C). activity. The industrial sector benefited from Recently announced budget plans indicate strong manufacturing and construction with solid demand for capital goods. The slowing Note: This section was prepared by Temel Taskin. Research momentum in economic activity in late 2018 assistance was provided by Ishita Dugar. carried into the first quarter of 2019, as suggested 116 CHAPTER 2.5 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE 2.5.1 SAR: Recent developments FY2018/19 (July 16, 2018 to July 15, 2019) from Growth in South Asia picked up to 7 percent in from 6.7 percent in 2017. 5.8 percent in the previous fiscal year.1 This Inflation has softened in most countries, partly reflecting broadly stable slowdown reflects a broad-based weakening of commodity prices. There has been limited progress in fiscal consolidation domestic demand amid monetary and fiscal policy in the region. Current account deficits mostly widened last year, but recent data show signs of narrowing amid more stable oil prices. PMIs have tightening designed to address macroeconomic softened in the first half of 2019. Remittances inflows broadly picked up in imbalances, particularly large fiscal and current 2018. account deficits. These have contributed to a considerable decline in international reserves to A. Growth B. Inflation levels that would cover less than three months of imports (World Bank 2018c). On the production side, recent high-frequency data indicate a notable weakening in both manufacturing and agricultural sectors. Inflation increased considerably during the past fiscal year, reflecting currency depreciation. Recently, financial assistance from Gulf countries and China, as well as an IMF program have helped partially rebuild confidence. C. Fiscal balances D. Current account balances In Bangladesh, GDP is estimated to expand by 7.3 percent in FY2018/19 (July 1, 2018 to June 30, 2019), 0.3 percentage point higher than the previous projection, as a recovery in remittance inflows, stemming from improving economic activity in source countries (Figure 2.5.1.F) supported private consumption. While private investment benefited from the improved outlook for political stability, public investment was underpinned by progress in infrastructure projects. E. Purchasing Managers’ Indexes F. Net remittance inflow growth In the first half of FY2018/19, exports to the United States and China increased significantly, especially textile and apparel, in part reflecting trade diversion due to bilateral tariff increases between these two countries (World Bank 2018f). Growth in Sri Lanka slowed marginally to 3.2 percent in 2018, on account of weaker domestic demand. Decline in international reserves and Source: Haver Analytics, World Bank. elevated political controversy contributed to A. SAR = South Asia Region. Shaded areas indicate forecasts. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. Data for 2018 are estimates. depressed investor sentiment and Sri Lanka’s B. Last observation is March 2019 for Bangladesh and April 2019 for India, Pakistan, and Sri Lanka. The 2019 data represent average y/y inflation year-to-date. The data refer to fiscal years of countries sovereign credit rating was downgraded by one except for Sri Lanka, as described in Table 2.5.1. notch by some rating agencies in 2018 (World C. D. Shaded areas indicate forecasts. Data for 2018 are estimates. The data refer to fiscal years of countries except for Sri Lanka, as described in Table 2.5.1. Bank 2019i). Activity remained soft in the first E. PMI readings above 50 indicate expansion in economic activity; readings below 50 show contraction. Last observation is April 2019. quarter of 2019, constrained by tight monetary F. Data present the workers' remittances and compensation received by countries. The last available policy. While last year’s political turbulence has observation is 2018Q4 for India and 2019Q1 for Bangladesh, Pakistan, and Sri Lanka. Click here to download data and charts. largely been resolved, recent security-related incidents are weighing on confidence and activity. by softening services and manufacturing Purchasing Managers’ Indexes (Figure 2.5.1.E). 1 Pakistani authorities have revised the growth estimate for FY2017/18 from 5.8 percent to 5.2 percent in February 2019. Elsewhere in the region, Pakistan’s growth is However, the complete revised national accounts have not yet been estimated to decelerate to 3.4 percent in published, which is why the earlier figure is used in this document. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 SOUTH ASIA 117 In Afghanistan, GDP growth decelerated to 1 FIGURE 2.5.2 SAR: Outlook and risks percent in 2018, partly owing to a severe drought Domestic demand is expected to remain solid next year, with support from and increased political uncertainty. Nepal’s GDP monetary and fiscal policies in some cases, whereas contribution of net expanded by 6 percent in FY2018/19 on the back exports will be limited with the subdued global trade outlook. The elevated tension between major South Asian economies in mid-February did not of solid services and industrial sector growth have a major immediate effect on financial markets, but a re-escalation (World Bank 2018g). In Bhutan and Maldives, might reduce confidence and weigh on investment. Nonperforming assets could remain elevated and weigh on credit growth unless further steps are economic growth in 2018 continued to be taken to enhance effectiveness of the resolution mechanisms. Uncertainty underpinned by infrastructure projects and about the Brexit process poses a risk to some South Asian economies that tourism. Maldives’ GDP expanded 7.9 percent in have preferential trade agreements with the European Union. A higher-than -expected increase in oil prices would increase current account deficits 2018, reflecting solid tourism receipts and a strong and inflation in the region. construction sector growth with robust credit growth and infrastructure projects. In Bhutan, A. Growth components B. Stock market indexes economic activity decelerated to an estimated 5.4 percent in FY2018/19 (July 1, 2018 to June 30, 2019) as investment softened with delayed hydropower projects. Outlook The outlook for South Asia over the forecast horizon is expected to remain solid. Regional GDP is expected to expand 6.9 percent in 2019, C. Nominal exchange rates D. Nonperforming assets 0.2 percentage point down from previous projections owing to downward revisions for Pakistan, but to pick up to 7 percent in 2020 and 7.1 percent in 2021. Domestic demand growth is expected to remain solid, with support from monetary and fiscal policies in some cases (such as India). The contribution of exports to economic activity is expected to remain weak with moderate global trade growth. (World Bank 2018h; Figure 2.5.2.A). E. Shares of exports to the United F. Oil prices and share of oil in Kingdom imports In India, growth is projected at 7.5 percent in FY2019/20 (April 1, 2019 to March 31, 2020), unchanged from the previous forecast, and to stay at this pace through the next two fiscal years. Private consumption and investment will benefit from strengthening credit growth amid more accommodative monetary policy, with inflation having fallen below the Reserve Bank of India’s target. Support from delays in planned fiscal Source: Export Promotion Bureau of Bangladesh, Haver Analytics, International Monetary Fund, World Bank. consolidation at the central level should partially A. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. Data for 2018 offset the effects of political uncertainty around are estimates. B. SENSEX and KSE are major stock market indexes of India and Pakistan, respectively. The vertical elections in FY2018/19 (Beyer and Milivojevic line marks February 15, 2019. Last observation is May 22, 2019. C. The foreign exchange rates are Indian rupee and Pakistan rupee per U.S. dollar. The vertical line 2019; World Bank, forthcoming). marks February 15, 2019. Last observation is May 21, 2019 for India and May 22, 2019 for Pakistan. D. Last observation is 2018Q2 for Afghanistan, Bhutan, India, Pakistan, Maldives, and 2018Q1 for Sri Lanka. Bangladesh observation is 2017. Pakistan’s growth is expected to slow further, to E. Last observation is 2017 for Sri Lanka and 2018 for the rest. Data show exports to the United Kingdom as a share of total exports. 2.7 percent, in FY2019/20 with domestic demand F. Oil imports data cover Bangladesh, India, Pakistan, and Sri Lanka. Blue bars show oil imports as a remaining depressed. Current account and fiscal share of total imports. Oil price data are the simple average of Dubai, Brent, and West Texas Intermediate. Shaded areas indicate forecasts. Click here to download data and charts. 118 CHAPTER 2.5 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 deficits are projected to diminish only gradually. Risks Workers’ remittances are expected to help improve both growth performance and the current account The main domestic risks to the outlook include a balance next year, reflecting economic recovery in re-escalation of political turbulence amid elections source countries (Figure 2.5.2.C). This, together in some countries (Afghanistan, Sri Lanka); fiscal with a broadly stable external environment and a slippages with expanding public spending; and a reduction in macroeconomic imbalances, is resurgence of non-bank financial sector funding expected to lead to an increase in growth to 4.0 issues. percent beginning in FY2020/21. Military skirmishes between major South Asian In Bangladesh, annual growth is projected to countries in mid-February remained contained, average 7.3 percent over the forecast horizon. and economic repercussions were minor. Activity will be underpinned by strong However, a re-escalation of tensions between the infrastructure spending and solid private two countries could increase uncertainty, depress investment with some easing of infrastructure confidence, and weigh on investment in the region constraints. Slowing activity in major trade (Figures 2.5.2.B and 2.5.2.C). In Sri Lanka, a rise partners’ economies (such as the Unites States and in political uncertainty in the months leading up the Euro Area) will constrain the contribution of to presidential and parliamentary elections, which net exports to growth next fiscal year. will take place in 2019 and 2020, respectively, could weigh on business confidence. In addition, Economic activity in Sri Lanka is expected to recent security-related incidents could dampen accelerate to 3.5 percent in 2019 and to average investor sentiment and perceptions. 3.6 percent over the forecast horizon. This modest acceleration will be supported by a pickup in In India, the new GST (goods and services tax) services sector activity and solid infrastructure regime is still in the process of being fully investment. established, creating some uncertainty about projections of government revenues. Fiscal deficits Afghanistan’s growth is projected to accelerate continue to exceed official targets in some over the forecast horizon, reaching 3.6 percent by countries (India, Pakistan). Supply bottlenecks 2021, on the assumption that political stability such as infrastructure gaps, and relatively weak will be restored by presidential elections in July. business climates continue to depress domestic The business environment, and thus economic and foreign investment potential in the region activity, is expected to benefit from an easing of (Grainger and Zhang 2017; Aritua et al. 2018). the domestic armed conflict. Setbacks in reforms to address these issues would likely weigh on activity. In Nepal, growth of 6.1 percent a year is projected over the medium term. The services sector will be Nonperforming assets remain high in South Asia supported by tourism, and manufacturing will be (Figure 2.5.2.D). While recent measures helped bolstered by the opening of the country’s largest the recognition of these assets in India, the cement factory next year. frameworks could still be improved by accelerating the resolution process. Unless further steps are Bhutan’s growth is expected to remain solid at 5.4 taken to enhance effectiveness of the resolution percent in FY2019/20 (July 1 to June 30) and to mechanisms, nonperforming assets could remain continue at around this annual rate over the elevated and pose a risk to financial stability and forecast horizon, supported particularly by tourism credit growth, weighing on activity in the region. and retail trade. Economic growth in the Maldives is forecast at 5.7 percent in 2019, and is projected External risks include weakening global growth to moderate to 5.3 percent over the medium term and rising policy uncertainty. A sharper-than- as investment growth in the tourism sector expected deceleration in major economies or a converges to historical averages. new escalation of trade-related tensions among G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 SOUTH ASIA 119 major economies would likely result in adverse exports of those countries to the UK in the trade and financial market spillovers to the region. absence of new trade agreements (Figure 2.5.2.E). High external debt and low international reserves could limit the policy room to address external South Asia, as a net oil-importing region, is shocks in some countries (Pakistan, Sri Lanka). vulnerable to oil price spikes. A sudden increase in oil prices would tend to worsen current account Uncertainty about the Brexit process poses a risk balances and elevate inflation in the region (Figure to some South Asian economies which have 2.5.2.F). South Asia is also vulnerable to the preferential trade agreements or generalized system effects of climate change, such as natural disasters, of preferences with the European Union and which tend both to increase inflation and weigh significant exports to United Kingdom on activity through supply disruptions, especially (Bangladesh, India, Pakistan, Sri Lanka). A no- in the agricultural sector. deal Brexit could have a significant impact on TABLE 2.5.1 South Asia forecast summary Percentage point differences (Real GDP growth at market prices in percent, unless indicated otherwise) from January 2019 projections 2016 2017 2018e 2019f 2020f 2021f 2019f 2020f 2021f EMDE South Asia, GDP1, 2 8.1 6.7 7.0 6.9 7.0 7.1 -0.2 -0.1 0.0 (Average including countries with full national accounts and balance of payments data only)3 EMDE South Asia, GDP3 8.2 6.7 7.1 6.9 7.0 7.1 -0.2 -0.1 0.0 GDP per capita (U.S. dollars) 6.9 5.5 5.8 5.7 5.8 5.9 -0.2 -0.1 -0.1 PPP GDP 7.6 6.2 7.6 6.9 7.0 7.1 -0.2 -0.1 0.0 Private consumption 7.6 6.2 8.3 7.0 6.9 7.0 0.0 -0.1 0.0 Public consumption 8.5 11.1 8.5 7.6 6.9 7.1 -1.5 -1.6 -1.4 Fixed investment 9.3 7.5 8.4 7.6 7.8 7.8 -0.3 0.1 0.3 Exports, GNFS 4 1.9 6.0 7.8 5.4 5.2 5.5 -0.2 -0.7 -0.5 Imports, GNFS4 2.7 13.0 14.0 6.2 5.8 6.1 -0.1 -0.9 -0.7 Net exports, contribution to growth -0.3 -2.0 -2.1 -0.6 -0.6 -0.6 0.0 0.0 0.0 Memo items: GDP2 16/17 17/18 18/19e 19/20f 20/21f 21/22f 19/20f 20/21f 21/22f South Asia excluding India 5.8 6.0 5.4 4.8 5.0 5.3 -0.7 -0.6 -0.3 India 8.2 7.2 7.2 7.5 7.5 7.5 0.0 0.0 0.0 Pakistan (factor cost) 5.4 5.8 3.4 2.7 4.0 4.7 -1.5 -0.8 -0.1 Bangladesh 7.3 7.9 7.3 7.4 7.3 7.3 0.6 0.5 0.5 Source: World Bank. Note: e = estimate; f = forecast. EMDE = emerging market and developing economies. 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). Click here to download data. 120 CHAPTER 2.5 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 TABLE 2.5.2 South Asia country forecasts Percentage point differences (Real GDP growth at market prices in percent, unless indicated otherwise) from January 2019 projections 2016 2017 2018e 2019f 2020f 2021f 2019 2020f 2021f Calendar year basis 1 Afghanistan 2.3 2.7 1.0 2.4 3.2 3.6 -0.3 0.0 0.4 Maldives 7.3 6.9 7.9 5.7 5.2 5.3 -0.6 -0.4 -0.3 Sri Lanka 4.5 3.3 3.2 3.5 3.6 3.7 -0.5 -0.5 -0.4 Fiscal year basis1 16/17 17/18 18/19e 19/20f 20/21f 21/22f 19/20f 20/21f 21/22f Bangladesh 7.3 7.9 7.3 7.4 7.3 7.3 0.6 0.5 0.5 Bhutan 6.3 5.8 5.4 5.4 5.2 5.2 -1.0 -1.2 -1.2 India 8.2 7.2 7.2 7.5 7.5 7.5 0.0 0.0 0.0 Nepal 8.2 6.7 7.1 6.4 6.5 6.5 0.4 0.5 0.5 Pakistan (factor cost) 5.4 5.8 3.4 2.7 4.0 4.7 -1.5 -0.8 -0.1 Source: World Bank. Note: e = estimate; f = forecast. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. 1. Historical data is reported on a market price basis. National income and product account data refer to fiscal years (FY) for the South Asian countries with the exception of Afghanistan, Maldives, and Sri Lanka, which report in calendar year. The fiscal year runs from July 1 through June 30 in Bangladesh, Bhutan, and Pakistan, from July 16 through July 15 in Nepal, and April 1 through March 31 in India. Click here to download data. The recovery in Sub-Saharan Africa has disappointed, with weakening external demand, supply disruptions, and elevated policy uncertainty weighing on activity in major economies. Growth in the region is projected to pick up from 2.5 percent in 2018 to 2.9 percent this year and an average of 3.4 percent in 2020-21, as domestic demand gathers pace and oil production recovers in large exporting economies. However, this expected recovery is significantly slower than previously projected, reflecting persistent headwinds in major economies, and it is largely insufficient to make progress in poverty reduction. Downside risks to the outlook include weaker-than-expected external demand, lower commodity prices, renewed stress in global financial markets, fiscal slippages, political uncertainty, armed conflicts, and adverse weather conditions. Recent developments administration’s fast-tracking of long-delayed reforms gradually improves the business The economic environment in Sub-Saharan Africa environment. Angola is expected to emerge from (SSA) remains challenging, with external and three years of contraction, with the recent growth domestic headwinds that caused the slowdown in momentum in the non-oil sector partly reflecting 2018 dissipating more slowly than previously reforms to bolster the business environment. envisaged (Figure 2.6.1.A). Weakening external However, a faster-than-expected decline in demand from major economies, persistent policy production from decaying oil fields and lower uncertainty, and domestic growth bottlenecks production from marginal oil fields have led to have been only partly offset by an easing of significantly weaker-than-expected growth in external financing conditions and recovering 2019. commodity prices. Elsewhere in the region, growth has been robust In Angola, Nigeria, and South Africa—the three among non-resource-rich countries, supported by largest economies in the region—growth has sustained public investment (Rwanda, Uganda; remained subdued in 2019. In Nigeria, the Figure 2.6.1.B). In some countries, consecutive anticipated recovery in the oil sector—the main years of good harvests have boosted agricultural source of government revenue—has been weaker exports (Benin, Côte d’Ivoire, Rwanda), and than expected as policy uncertainty continues to supported robust consumption growth (Burkina constrain investment in new capacity. Weak Faso, Kenya). In Ethiopia, however, weaker domestic demand amid high unemployment and a agricultural commodity prices, particularly coffee, challenging business environment has dampened and persistent foreign exchange shortages have growth in the non-oil sector. In South Africa, weighed on activity. continued policy uncertainty and rolling power Southern and East Africa was hit by two blackouts have slowed economic activity in the devastating cyclones—Idai and Kenneth—in first half of 2019; however, it is expected to March and April 2019, which took a heavy strengthen aided by somewhat easier external human toll and severely affected economic activity financing conditions and as the new in the Comoros, Malawi, Zimbabwe, and in particular, Mozambique. Among industrial- Note: This section was prepared by Rudi Steinbach. Research commodity exporters, growth has generally assistance was provided by Mengyi Li. strengthened—despite decelerating external 122 CHAPTER 2.6 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE 2.6.1. SSA: Recent developments year as high inflation, chronic food and fuel The recovery in Sub-Saharan Africa has lost momentum, reflecting shortages, and elevated political uncertainty subdued activity in Angola, Nigeria, and South Africa—the region’s largest present significant headwinds to activity. Growth economies. More robust growth among non-resource-intensive economies is also expected to contract in Zimbabwe in 2019, has been supported by sustained public investment, although the related capital goods imports have contributed to widening current account as sharply higher inflation curtails real income and deficits. External financing conditions have become more benign, and private consumption. In contrast, growth in the inflation has moderated across most of the region, but remains elevated in a number of countries. Interest burdens are exacerbating fiscal deficits. Democratic Republic of Congo continues to firm, with mining production rising sharply due to investment in new capacity. A. GDP growth B. Public sector investment, share of GDP Current account deficits have widened across the region, partly reflecting weaker exports (Guinea, The Gambia), and sizable capital goods imports related to large investment projects (Côte d’Ivoire, Mozambique, Niger; Figure 2.6.1.C). In non- resource-rich countries, sustained public investment spending is contributing to elevated deficits (Kenya, Tanzania, Uganda). International bond issuance activity has been slow to recover C. Current account balances D. Financing conditions: 10-year government bond yields after weakening in the second half of last year, and FDI inflows in the region remain mixed—despite easier financing conditions and a partial recovery in commodity prices. Capital inflows are nevertheless expected to sufficiently finance current account deficits—especially in countries with large infrastructure investment programs. Exchange rates have been broadly stable this year, or have strengthened somewhat, amid improved E. Inflation, annual rate F. Fiscal balances external financing conditions (Botswana, Kenya, South Africa; Figure 2.6.1.D). This has, in part, supported moderating inflation in many countries in early 2019 (Angola, South Africa, Tanzania, Uganda; Figure 2.6.1.E). Reduced inflationary pressures have allowed authorities to pause monetary policy tightening in some countries (Lesotho, South Africa, Uganda), and ease their Source: Haver Analytics; International Monetary Fund, World Economic Outlook; World Bank. stance in others (Angola, Ghana, Nigeria). In Note: Non-resource-intensive countries represent agricultural commodity-exporting and commodity- importing countries. Industrial commodity exporters represent oil- and metal-exporting countries. Zambia, however, monetary policy was tightened A. Aggregate growth rates calculated using 2010 U.S. dollar GDP weights. B. GDP-weighted averages. Sample includes 22 non-resource-intensive countries and 15 industrial- as renewed currency weakness is expected to lift commodity exporters. C. Simple averages of country groupings. inflation above the central bank’s target. In Sudan, F. Simple averages. repeated devaluations as well as monetization of Click here to download data and charts. the fiscal deficit have fueled inflation rates in excess of 40 percent, while the removal of demand—as oil and mining production continued to benefit from investment in new capacity (Chad, subsidies and foreign-currency shortages have led Democratic Republic of the Congo, Mauritania). to comparable double-digit inflation rates in However, in Sudan—the fourth largest economy Zimbabwe. Recent oil price increases are expected in the region—economic activity contracted in to put renewed upward pressure on inflation in 2018 and is expected to continue doing so in this many countries during 2019. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 SUB-SAHARAN AFRICA 123 Public debt vulnerabilities in the region remain a FIGURE 2.6.2 SSA: Outlook and risks concern. While primary deficits are expected to The recovery in the region is projected to strengthen moderately, as oil continue gradually narrowing to 1.2 percent of production improves in Angola and Nigeria and investor confidence firms GDP in 2019, overall deficits are expected to in South Africa. However, per capita growth is expected to remain low, and downside risks dominate, including the possibility of a sharper-than- remain in excess of 3 percent, reflecting the expected slowdown in key partner economies. Rising public debt burdens increases in interest burdens arising from the are an increasing source of vulnerability across the region. Banking sectors have become more vulnerable in some countries. A return to El Niño growth in government debt (Figure 2.6.1.F). conditions in 2019 could weigh on agricultural production. Higher interest burdens also reflect the shifting composition of debt toward more expensive non- A. GDP growth B. GDP growth per capita concessional financing, which has increased to about 60 percent of total external debt—about one-third higher than in the 2000s (World Bank 2019j). These higher debt-servicing costs tend to constrain non-interest expenditures and raise concerns about debt sustainability. In non- resource-intensive economies, increased indebtedness has largely reflected continued strong public investment (Burkina Faso, Rwanda, C. Shares of SSA exports to large D. Government debt Uganda). Among industrial-commodity exporters, economies rising government debt has been more acute, reflecting persistently large deficits amid expenditure overruns and revenues weighed down by softer export earnings and slower growth (Namibia, Nigeria, South Africa, Zambia; World Bank 2019k). Outlook E. Nonperforming loans F. Agricultural production growth Growth in the region is projected at 2.9 percent and El Niño this year, up from 2.5 percent in 2018, but half a percentage point lower than previously forecast, reflecting more pronounced domestic headwinds and weaker-than-expected external demand. This translates into per capita growth of a mere 0.2 percent for 2019, following three consecutive years of contraction. Growth in the region is expected to improve Source: Haver Analytics; International Monetary Fund, World Economic Outlook; NOAA/National gradually over the forecast horizon, reaching 3.3 Weather Service Climate Prediction Center; World Bank. A.-B. Aggregate growth rates calculated using 2010 U.S. dollar GDP weights. Non-resource-intensive percent in 2020 and 3.5 percent in 2021 (Figure countries represent agricultural commodity-exporting and commodity-importing countries. Industrial- commodity exporters represent oil- and metal-exporting countries. 2.6.2.A). This cyclical recovery is weaker than D. Simple averages of country groupings. E. Nonperforming loans are expressed relative to total gross loans. 2019Q1 for South Africa reflects previously envisioned—despite some increase in data for January 2019. commodity prices—reflecting in part weaker F. ONI is the Oceanic Niño Index that measures sea surface temperature anomalies in degrees Celsius within the Niño 3.4 region of the eastern Pacific Ocean. Sustained ONI values outside of the demand growth in major trading partners and, in +/- 0.5 threshold indicate El Niño or La Niña events. Click here to download data and charts. particular, an increasingly challenging business environment in Sudan amid heightened political uncertainty. The forecast assumes that investor sentiment will improve in some of the large growth in non-resource-intensive economies will economies in the region, that oil production in be underpinned by continued strong agricultural large oil exporters will recover, and that robust production and sustained public investment. 124 CHAPTER 2.6 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 While per capita GDP growth is expected to new capacity comes on stream (Democratic improve somewhat, rising to 0.7 percent in 2020 Republic of the Congo, Guinea). In Sierra Leone, and 0.9 percent in 2021, it will remain insufficient however, mine closures will remain a drag on to significantly reduce poverty in the region metals production. Among non-resource-intensive (Figure 2.6.2.B). In countries where progress is economies, sustained strong public infrastructure being made in poverty reduction, increased spending, combined with increased private sector prosperity is not always shared, as economic participation, will continue to support economic growth is often concentrated in urban areas with activity (Ethiopia, Rwanda, Tanzania, Uganda). In little benefit to the rural poor. the West African Economic and Monetary Union, these factors will contribute to growth remaining In South Africa, growth is expected to pick up above 6 percent over the next two years. from 1.1 percent in 2019, to 1.5 percent in 2020 and 1.7 percent in 2021. This forecast is Risks predicated on fading policy uncertainty and on a gradual growth dividend from reforms to improve The outlook is subject to several downside risks. the business environment. Slower growth in the On the external front, a sharper-than-expected Euro Area—South Africa’s main export deceleration in activity in key trading partners, destination—is expected to be counterbalanced, in including China, the Euro Area, and the United part, by more benign external financing conditions States, could weigh on growth. These three and rising investment spending, reflecting the economies together account for more than one- government’s commitment to accelerate public third of the region’s exports and one-fifth of FDI investment projects in cooperation with the inflows (Figure 2.6.2.C). The slowdown in the private sector. Euro Area could be aggravated by a disorderly exit Similarly, growth in Angola is expected to of the United Kingdom from the European strengthen from 1 percent in 2019 to around 2.9 Union, while a further escalation of trade tensions percent in both 2020 and 2021. The improved between the United States and China could outlook, particularly for 2020, reflects an adversely impact activity in both economies. A increasingly favorable business environment along sharper-than-projected slowdown in China would with a boost from the oil sector as new capacity hit metal exporting countries particularly hard as it comes on stream. accounts for more than one-half of global metals demand (World Bank 2016, 2018i). Lower-than- In Nigeria, growth is expected at 2.1 percent this expected commodity prices pose an additional risk year—a weaker-than-expected pace reflecting the to the outlook, as the region remains highly reliant continued constraints from foreign exchange on commodity export revenues. restrictions, supply disruptions in the oil sector, and a lack of much-needed reforms to spur new Domestically, various developments could weaken capacity. Growth is projected to remain broadly fiscal positions. First, while external financing stable in 2020, before strengthening to 2.4 percent conditions have recently become more benign, in 2021. they could tighten again if investor sentiment were to deteriorate. This could pose a significant risk to Excluding Angola, Nigeria, and South Africa, the outlook for countries with elevated debt regional growth is expected to be more robust, burdens or where a large share of debt is rising from 4.6 percent in 2019 to an average of 5 denominated in foreign currency, as higher percent in 2020-21. The cyclical recovery among interest rates and weaker currencies would raise industrial-commodity exporters will be supported debt-servicing and refinancing costs, absorb over the forecast period by investment in new oil revenues, and constrain poverty-reducing and natural gas capacity in several oil exporters expenditures (Figure 2.6.2.D). Second, state- (Cameroon, Ghana), and increased mining owned enterprises in some countries (Angola, production in some metal-exporting countries, as Ethiopia, Ghana, Mozambique, South Africa), G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 SUB-SAHARAN AFRICA 125 particularly in the energy sector, have sizable debts Nevertheless, if slower-than-expected growth were that pose an additional contingent liability risk to to materialize, banking sectors could become even already indebted governments (Bova et al. 2019). more vulnerable and likely amplify the growth Third, countries holding elections during the next slowdown (Mpofu and Nikolaidou 2018). two-and-a-half years together account for one- quarter of the region’s GDP, and the risk of fiscal Risks that political instability, armed conflicts, or slippages is particularly high, as domestic political insurgencies may weigh on economic activity are considerations could undermine fiscal particularly elevated in some economies consolidation efforts (Ethiopia, Ghana, Tanzania, (Cameroon, Nigeria, Sudan, Zimbabwe). Zambia; Neumann and Ssozi 2015). Fourth, in Conflicts and insurgencies, in particular, could countries where continued public investment is lead to forced displacements and hit agricultural expected to support growth, the sustainability production especially hard, reducing incomes and thereof could weaken if not accompanied by heightening food insecurity in many areas (Adelaja strong public investment management. and George 2019). In some countries, a continuation of disappointing growth could Regarding banking sector vulnerabilities, become self-perpetuating. As slower growth stifles nonperforming loan (NPL) ratios have risen, or social progress and poverty reduction efforts, remain elevated, among some industrial- discontent and populist policies could become commodity exporters (Cameroon, Namibia, more widespread. This could further elevate policy Nigeria, South Africa), as weaker growth and uncertainty and undermine investor confidence. softer export revenues have translated into The extreme weather events that have afflicted increasingly impaired private sector balance sheets agricultural sectors in Southern and East Africa (Figure 2.6.2.E). In Ghana, the large stocks of during the first half of this year include the return NPLs are mostly related to state-owned of El Niño conditions (Figure 2.6.2.F). More enterprises, and the authorities’ continued severe droughts than assumed could further measures to help clear them have been suppress agricultural output and exacerbate contributing to improved credit extension. poverty. 126 CHAPTER 2.6 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 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 2019 projections 2016 2017 2018e 2019f 2020f 2021f 2019f 2020f 2021f EMDE SSA, GDP1 1.3 2.6 2.5 2.9 3.3 3.5 -0.5 -0.3 -0.2 (Average including countries with full national accounts and balance of payments data only)2 EMDE SSA, GDP2,3 1.3 2.6 2.5 2.9 3.3 3.5 -0.5 -0.3 -0.2 GDP per capita (U.S. dollars) -1.4 -0.1 -0.2 0.2 0.7 0.9 -0.6 -0.2 -0.1 PPP GDP 1.6 2.9 2.8 3.1 3.5 3.7 -0.6 -0.3 -0.2 Private consumption 0.0 2.2 2.0 2.2 2.7 2.8 -0.6 -0.2 0.3 Public consumption -0.4 1.1 2.6 2.6 2.5 2.7 -0.3 -0.5 -0.1 Fixed investment -0.6 4.7 5.8 5.9 6.1 6.7 -1.0 -0.9 -0.8 Exports, GNFS4 2.3 6.7 2.1 2.3 3.1 3.0 -0.8 -0.3 -0.1 Imports, GNFS4 -3.0 2.7 4.2 3.0 3.4 3.7 -0.5 -0.2 -0.1 Net exports, contribution to growth 1.6 1.2 -0.6 -0.2 -0.1 -0.2 -0.1 0.0 0.1 Memo items: GDP SSA excluding Nigeria, South Africa, 4.2 4.8 4.4 4.6 4.9 5.0 -0.8 -0.5 -0.4 and Angola Oil exporters5 -0.7 1.5 1.4 2.1 2.5 2.6 -0.8 -0.3 -0.2 CFA countries 6 2.9 3.4 4.3 5.0 5.0 5.1 0.1 0.3 0.5 CEMAC -0.8 -0.2 1.7 3.1 3.1 3.3 0.1 0.5 1.0 WAEMU 6.4 6.6 6.5 6.6 6.5 6.5 0.2 0.1 0.2 SSA3 -0.8 0.9 1.0 1.6 2.0 2.2 -0.3 -0.1 0.1 Nigeria -1.6 0.8 1.9 2.1 2.2 2.4 -0.1 -0.2 0.0 South Africa 0.6 1.4 0.8 1.1 1.5 1.7 -0.2 -0.2 -0.1 Angola -2.6 -0.1 -1.7 1.0 2.9 2.8 -1.9 0.3 0.0 Source: World Bank. Note: e = estimate; f = forecast. EMDE = emerging market and developing economies. 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. Sub-region growth rates may differ from the most recent edition of Africa's Pulse (https://www.worldbank.org/en/region/afr/publication/africas-pulse) due to data revisions and the inclusion of the Central African Republic and São Tomé and Principe in the sub-region aggregate of that publication. 4. Exports and imports of goods and non-factor services (GNFS). 5. Includes Angola, Cameroon, Chad, Republic of Congo, Gabon, Ghana, Nigeria, and Sudan. 6. Includes Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Republic of Congo, Côte d’Ivoire, Equatorial Guinea, Gabon, Mali, Niger, Senegal, and Togo. Click here to download data. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 SUB-SAHARAN AFRICA 127 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 2019 projections 2016 2017 2018e 2019f 2020f 2021f 2019f 2020f 2021f Angola -2.6 -0.1 -1.7 1.0 2.9 2.8 -1.9 0.3 0.0 Benin 4.0 5.8 6.5 6.5 6.5 6.5 0.3 0.0 -0.1 Botswana 4.3 2.9 4.5 4.2 3.9 4.0 0.3 -0.2 -0.1 Burkina Faso 5.9 6.3 6.8 6.0 6.0 6.0 0.0 0.0 0.0 Burundi -0.6 0.5 1.6 1.8 2.1 2.0 -0.5 -0.4 -0.8 Cabo Verde 4.7 4.0 4.5 4.4 4.6 4.7 -0.3 -0.3 -0.2 Cameroon 4.6 3.5 4.0 4.2 4.4 4.6 0.0 -0.1 0.1 Chad -6.3 -3.0 2.6 3.4 5.6 4.8 -1.2 -0.5 -0.1 Comoros 2.2 2.7 2.8 3.1 3.2 3.2 0.0 0.1 0.1 Congo, Dem. Rep. 2.4 3.7 5.8 5.9 6.5 6.8 1.3 1.0 0.9 Congo, Rep. -2.8 -3.1 0.8 5.4 1.5 1.9 2.2 1.6 3.4 Côte d’Ivoire 8.0 7.7 7.4 7.4 7.3 7.3 0.1 -0.1 0.5 Equatorial Guinea -8.8 -4.7 -2.9 -2.2 -1.9 -1.8 -0.1 3.9 4.0 Eswatini 3.2 1.9 0.5 1.1 1.6 1.7 -0.6 -0.2 -0.1 Ethiopia2 7.6 10.2 7.9 7.9 8.2 8.2 -0.9 -0.7 -0.7 Gabon 2.1 0.5 0.8 2.8 3.7 3.9 -0.2 0.0 0.2 Gambia, The 0.4 4.6 6.6 5.4 5.2 5.0 0.0 0.0 -0.2 Ghana 3.4 8.1 6.3 7.6 7.0 5.8 0.3 1.0 -0.2 Guinea 10.5 10.6 5.8 5.9 6.0 6.0 0.0 0.0 0.0 Guinea-Bissau 6.3 5.9 3.8 4.3 4.8 5.5 0.1 0.4 1.0 Kenya 5.9 4.9 6.3 5.7 5.9 6.0 -0.1 -0.1 0.0 Lesotho 3.1 -0.4 1.7 1.5 0.4 4.1 0.3 0.2 2.3 Liberia -1.6 2.5 1.2 0.4 1.6 1.3 -4.1 -3.2 -3.5 Madagascar 4.2 4.3 5.2 5.2 5.3 5.1 -0.2 0.0 -0.2 Malawi 2.5 4.0 3.5 4.5 4.7 5.1 0.2 -0.6 -0.4 Mali 5.8 5.3 4.9 5.0 4.9 4.8 0.0 0.0 0.0 Mauritania 2.0 3.0 3.6 6.7 5.8 6.0 1.8 -1.1 -0.9 Mauritius 3.8 3.8 3.8 3.9 3.9 3.5 -0.1 0.3 -0.1 Mozambique 3.8 3.7 3.3 2.0 3.5 4.2 -1.5 -0.6 0.1 Namibia 1.1 -0.9 -0.1 0.9 1.5 1.9 -0.9 -0.6 -0.2 Niger 4.9 4.9 5.2 6.5 6.0 5.6 0.0 0.0 0.0 Nigeria -1.6 0.8 1.9 2.1 2.2 2.4 -0.1 -0.2 0.0 Rwanda 6.0 6.1 8.6 7.8 8.0 7.5 0.0 0.0 -0.5 Senegal 6.2 7.2 6.8 6.8 7.0 7.0 0.2 0.2 0.1 Seychelles 4.5 5.3 3.6 3.4 3.0 3.2 0.0 -0.3 0.3 Sierra Leone 6.4 3.8 3.7 5.4 5.4 5.2 0.3 -0.9 -1.1 South Africa 0.6 1.4 0.8 1.1 1.5 1.7 -0.2 -0.2 -0.1 Sudan 4.7 4.3 -2.3 -1.9 -1.3 -0.8 -5.5 -5.1 -4.6 Tanzania 6.9 6.8 6.0 5.4 5.7 6.1 -1.4 -1.3 -0.9 Togo 5.2 4.3 4.9 5.0 5.2 5.1 0.2 0.1 0.0 Uganda 2 4.6 3.9 5.9 6.1 6.5 5.8 0.1 0.1 -0.7 Zambia 3.6 3.4 3.5 2.5 2.8 2.8 -1.1 -1.0 -1.0 Zimbabwe 0.8 4.7 3.5 -3.1 3.5 4.9 -6.8 -0.5 0.9 Source: World Bank. 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Commodity Market Outlook. The ———. 2019. Forthcoming. India Development Changing of the Guard: Shifts in Commodity Demand. Update. World Bank, Washington DC. October. Washington, DC: World Bank. Youssef, H., and C. Zaki. 2019. “From Currency ———. 2019a. East Asia and Pacific Economic Update. Depreciation to Trade Reform: How to Take Egyptian April. Washington, DC: World Bank. Exports to New Levels?” Policy Research Working Paper 8809, World Bank, Washington, DC. ———. 2019b. Europe and Central Asia Economic Update: Financial Inclusion. April. Washington, DC: World Bank. SPECIAL FOCUS 2.1 Growth in Low-Income Countries: Evolution, Prospects, and Policies G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 S P EC IAL FO CU S 2.1 133 Growth in Low-Income Countries: Evolution, Prospects, and Policies There are currently 34 countries classified as low-income, about half the number in 2001. Rapid growth in low-income countries from 2001-18 allowed many to progress to middle-income status, supported by a pre-crisis commodity price boom, the MDRI and HIPC debt relief initiatives, increased investment in human and physical capital, improved economic policy frameworks, and recoveries from the deep recessions in transition economies during the 1990s. However, the prospects for today’s LICs appear much more challenging. Compared to the LICs in 2001 that became middle-income countries, today’s LICs are further below the middle-income threshold and more often fragile than were LICs in 2001. Their heavy reliance on agriculture makes them vulnerable to climate change and extreme weather events, and their scope to boost external trade is limited by geography. Coordinated and multi-pronged policy efforts are required to address these challenges. Introduction deep recessions in the 1990s.2 Among non- transition 2001 LICs, rapid investment growth Since 2001, the number of low-income countries boosted overall economic growth, on average (LICs) has almost halved, to 34 in 2019 from 64 contributing more than one-third to output in 2001 (Figure SF2.1.1.A).1 During this period, growth during 2001-18. In six of these countries their number rose to a peak of 66 in 2003 before (Cameroon, the Democratic Republic of Congo, falling to a trough of 31 in 2016. Since then, Guinea, Indonesia, Mauritania, Mozambique), however, the decline has stalled, if not reversed, investment booms followed new resource with four countries—Senegal, the Syrian Arab discoveries. Debt relief in the early 2000s, and the Republic, Tajikistan, and the Republic of fiscal space created by it, supported government Yemen—relapsing into LIC status amid armed spending on non-interest expenditure.3 In addi- conflict and terms of trade shocks, while only one tion, business climates and policy frameworks country (Cambodia) reached middle-income improved in most of the 2001 LICs. status. The countries classified as LICs in 2001 Rapid economic growth in LICs has contributed that have converged to middle-income (MIC) to poverty reduction. The share of extreme poor status experienced average growth of 5.8 percent a in the population of 2001 LICs has fallen by 16 year during 2001-2018—about one-half faster percentage points, on average, and this has than non-LIC EMDEs over the same period and contributed 20 percentage points—about one one-quarter faster than those 2001 LICs that have third—to the decline in the global poverty remained in the group (4.5 percent), although headcount between 2001 and 2015. This with wide heterogeneity (Figure SF2.1.1.B). contribution, however, mostly reflects sharp declines in the poverty headcount of the 2001 Several factors have contributed to the rapid LICs that reached middle-income levels, while economic growth of the 2001 LICs. Twelve 2001 masking broadly unchanged poverty headcounts LICs were transition economies, of which nine among the countries that have remained, or rebounded sharply during the 2000s from their became, LICs (Figure SF2.1.1.C). Today’s LICs Note: This Special Focus was prepared by Rudi Steinbach. Research assistance was provided by Mengyi Li. 1 LICs in 2019 reflect the country classification of the 2018/19 2 Transition economies are economies that changed from centrally- World Bank fiscal year and are defined as countries with GNI per planned to market-oriented economic systems. Those that were LICs capita (World Bank Atlas method) of $995 or less in 2017; 2001 in 2001 include Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, LICs reflect the country classification of the 2000/01 fiscal year and Cambodia, Lao People’s Democratic Republic, Moldova, Tajikistan, had GNI per capita of $755 or less in 1999. New thresholds are Turkmenistan, Ukraine, Uzbekistan, and Vietnam. On average, their determined at the start of each World Bank fiscal year. Of the 64 economies contracted by an estimated 30 percent during 1990-1996. 3 Government non-interest expenditure rose by 2 percentage points 2001 LICs, 32 moved to middle-income country status while 32 remained classified as LICs in 2019. of GDP, on average, between the year of debt relief and 2018. 134 S P EC IAL FO CU S 2.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 FIGURE SF2.1.1 LIC growth since 2001 LIC EMDEs to meet the Sustainable The number of LICs has declined from 64 in 2001 to 34 in 2019. Growth in Development Goals by the end of next decade, LICs benefited from several factors and has allowed 32 countries to underscoring the need for sustained and robust progress to middle-income status. Sharp declines in LIC poverty rates growth (Gaspar et al. 2019). have contributed one-third to the decline in the global poverty headcount since 2001. However, these declines mask broadly unchanged headcounts among countries that have remained LICs. While the share of Against this backdrop, this Special Focus examines LICs in the global population has declined by three-quarters—from 41 the following questions. percent in 2001 to 10 percent in 2015—they are home to more than 40 percent of the world’s poor. • What has driven and supported growth in A. Number of LICs by region B. Average annual GDP growth, LICs since 2001? 2001-18 • How have these factors affected LIC progression to MIC status? • What are the prospects for future progression among today’s LICs? This Special Focus presents the following findings. First, growth in low-income countries—and, especially those that have progressed to middle- C. LIC poverty rates and headcounts D. World poverty and LIC share of income status—has benefited from a confluence of world population favorable developments since 2001. Second, prospects for further progress by today’s LICs toward middle-income status are challenging. Compared to the LICs of 2001 that became MICs, today’s LICs have per capita incomes that are even further below the middle-income threshold, more likely to be fragile, more often landlocked and clustered with other LICs, heavily reliant on agriculture, and face weaker prospects Source: United Nations, World Bank. for long-term commodity demand.4 Third, since A. LICs = low-income countries. LICs in 2001 had per capita GNI (US$, current) at $755 or below, while LICs in 2019 have per capita GNI at $995 or below in 2017. today’s LICs account for 40 percent of the global B. Other EMDEs exclude 2001 LICs. extreme poor, challenging prospects for LIC C. Latest reflects 2015 data. Due to data limitations, poverty share for “LICs turned MICs” includes 26 of 32 countries and reflects 94.1 percent of the sample population in 2015; “Continued LICs” includes growth will set back progress towards eliminating 25 of 32 countries and reflects 79.8 percent of the sample population. D. Latest reflects 2015 data. Due to data limitations, poverty share for “LICs turned MICs” includes 26 extreme poverty globally. of 32 countries and reflects 94.1 percent of the sample population in 2015; “Today’s LICs” includes 34 of 34 countries. Click here to download data and charts. This Special Focus extends previous analysis of LIC growth (World Bank 2015a). First, a broader set of factors that have contributed to LIC growth account for less than one-tenth of the global since 2001 is considered—in particular, the roles population (one-quarter their share in 2001). of investment in human and physical capital, However, they are home to around 40 percent of greater trade integration, and improved business the world’s extreme poor (Figure SF2.1.1.D). This climates and policy frameworks. Since three- share is expected to remain elevated amid quarters of LICs rely heavily on commodity continued fragility in many of these economies, exports and revenues, the impact of the 2014-16 while the poverty headcount is expected to commodity price plunges is examined. Second, continue to decline elsewhere. and in contrast to the earlier work which examined the fates of the 64 LICs of 2001, Today’s LICs face severe challenges that threaten to hold back convergence of their per capita incomes with those in MICs. Today’s LICs also 4 Fragile LICs are those affected by fragility, conflict, and violence, face significantly larger spending needs than non- according to the World Bank’s Harmonized List of Fragile Situations. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 S P EC IAL FO CU S 2.1 135 the study here zooms in on the drivers of growth FIGURE SF2.1.2 Cyclical and structural factors in the smaller group of 34 LICs of 2019, supporting LIC growth including the four countries that have become Growth in the LICs of 2001 was supported over the next decade by LICs in recent years amid weaker commodity booming commodity prices, increased resource production amid large prices and increased fragility. Third, this Special investments in mineral exploration, debt relief under the MDRI and HIPC initiatives, and receding conflicts, particularly in Africa. Conflict-related Focus highlights the implications for global casualties have, however, risen sharply in the Middle East where several poverty goals. countries have tipped into the low-income bracket. What has supported growth A. Annual GDP growth in LICs of 2001 B. Agricultural, energy, and industrial metals prices in LICs since 2001? The 64 countries classified as LICs in 2001 experienced growth of 5.3 percent a year, on average, during 2001-18—considerably faster than the 3.6 percent growth in non-LIC EMDEs (Figure SF2.1.2.A). For those LICs, this was a sharp improvement from their tepid growth of 1.6 percent annually during the 1990s. C. Resource production in LICs of D. Annual average conflict-related 2001 deaths Growth in the 64 2001 LICs was supported by several cyclical and structural factors. The 2001-11 commodity price boom lifted growth in the one- third of LICs that were—or became—industrial commodity exporters. In the nine LICs transitioning into market-oriented economies, the deep recessions of the 1990s were followed by cyclical rebounds. In five countries, armed conflicts eased in the 2000s after inflicting heavy human and economic losses during the 1990s. E. Gross government debt in LICs of F. MDRI and HIPC relief in LICs of Debt relief for about half of the 2001 LICs helped 2001 and LICs of 2019 2001 put these economies on a more sustainable financial footing. Business climates and governance, especially the rule of law, improved significantly in more than half of the 2001 LICs. Cyclical factors Commodity price boom. Around three-quarters of 2001 LICs benefited from the commodity price Source: Haver Analytics; International Monetary Fund, World Economic Outlook; Peace Research Institute of Oslo (PRIO), Roser (2019); World Bank Pink Sheet; World Bank staff calculations; World boom of 2001-11. During the commodity price Bureau of Metal Statistics. B. Agriculture includes 23 commodities, industrial metals includes 7 metals, and Energy includes boom, energy and industrial metals prices more coal, crude oil, and natural gas. Index 100=2000. than tripled and agricultural prices rose by around D. Only conflicts in which at least one party was the government of a state and which generated more than 25 battle-related deaths are included. The data refer to direct violent deaths only and 150 percent (Figure SF2.1.2.B). The boom, along exclude outbreaks of disease or famine. Data up to 2016. Country-level data unavailable. E. Unweighted averages. 2001 LICs includes 61 countries and the 2019 LICs includes 31 countries. with a decline in easily accessible mineral and gas F. Committed debt relief under the assumption of full participation of creditors. Bars represent deposits in advanced economies and more cost- average debt relief per region in US$ billions for all HIPC and MDRI LICs. Diamonds reflect average debt relief per region relative to countries’ GDP. effective transport through advances in bulk Click here to download data and charts. shipping fueled unprecedented investment in commodity exploration and production in the metals and oil prices—declined sharply with the 2001 LICs (Figure SF2.1.2.C; Lusty and Gunn onset of the global financial crisis, but recovered to 2015). In 2008, commodity prices—particularly pre-crisis levels within about a year. However, by 136 S P EC IAL FO CU S 2.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 2011, commodity prices began to slide again, and Rebounds in transition economies. Nine of the they fell by 30-60 percent to a low in 2016 before 2001 LICs were, in the early 2000s, rebounding gradually and only partially recovering. By 2018, from the deep recessions into which their industrial metals and energy prices were at their economies had plunged as they made the 2005-06 levels in real terms while agricultural transition from centrally planned to market-based prices remained near their 2016 lows. economies. By the time their economies had bottomed out in the mid- to late-1990s, their Two-thirds of the 2001 LICs were already heavily output had declined from its pre-recession levels reliant on commodity exports and revenues in by one fifth in Uzbekistan, by more than a third 2001—the majority of them on metals and energy in Kazakhstan, and by at least one half in exports, and the rest on agricultural commodity Armenia, Azerbaijan, Georgia, the Kyrgyz exports. Another one-tenth of the 2001 LICs Republic, Moldova, Tajikistan, and Ukraine subsequently became reliant on commodity (Iradian 2007).5 As a result, per capita incomes exports, specifically metals and energy, after had fallen below the low-income threshold. discoveries and exploitation of major commodity deposits. Several “giant” oil and gas fields— However, despite the drop in output these conventional fields with recoverable reserves of economies continued to have a foundation of solid 500 million barrels or more—have been human and physical capital, with near-universal discovered offshore of East, West, and Central literacy rates, triple the average secondary Africa, to the benefit of many 2001 LICs in these enrollment ratio of the average 2001 LIC, and regions (Côte d’Ivoire, Cameroon, Ghana, power-generating capacity similar to those of Mozambique, Tanzania). During the 2000s, advanced economies. Governments in many of major new commodity deposits were also these countries were implementing growth- discovered in Indonesia (oil and gas), Lao PDR enhancing structural reforms to accelerate the (copper, gold), Mauritania (copper, gold, and oil), transition, including privatization of state-owned Republic of Congo (oil), and Zambia (copper). assets (for example, agricultural land reform in From 2003-12, new commodity discoveries in Azerbaijan); establishment of legal systems and Sub-Saharan Africa accounted for 22 percent of property rights (the Kyrgyz Republic); the design global discoveries and 15 percent of global of more efficient social safety nets (Armenia); exploration expenditures (Schodde 2013). strengthening of financial systems; greater openness to international trade, including through The commodity boom of 2001-11 supported accession to the WTO (Georgia); and the above-average growth in those 2001 LICs that improvement of business environments through were, or became, commodity exporters. Exports of substantive regulatory simplification (Moldova). primary commodities in these countries rose by These reforms helped boost productivity growth, one-half of GDP between 2001 and 2011. Higher including by promoting investment and exports export earnings helped improve fiscal positions, (Loukoianova and Unigovskaya 2004). Growth with government revenues of commodity- since 2001 was further supported by the exporting LICs rising by close to 4 percentage commodity boom, as seven of these nine points of GDP, on average, and fiscal deficits transition economies were also heavily reliant on narrowing by around 1 percentage point of GDP, commodity exports.6 between 2001 and 2011. This, as well as debt relief, allowed a doubling of social expenditures between the 2000s and 2010s. The commodity- 5 It is likely that the real GDP declines in these transition driven growth surge was accompanied by a decline economies were overstated in the official data of the early 1990s, as in inflation to single digits and an annual 3 the private sectors that were emerging at that time were typically not percent real exchange rate appreciation between fully included in the statistical base during the early days of the 2001 and 2011, on average, in commodity- transition (Iradian 2007). 6 The commodity-exporting transition-economy LICs of 2001 exporting LICs (Trevino 2011; Guillaumont, were Armenia, Azerbaijan, the Kyrgyz Republic, Tajikistan, Jeanneny, and Hua 2015). Turkmenistan, Ukraine, and Uzbekistan. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 S P EC IAL FO CU S 2.1 137 Structural factors FIGURE SF2.1.3 Domestic factors supporting LIC growth The reduction of debt burdens has helped put public finances in the LICs Receding conflicts. Five of the LICs of 2001—all of 2001 on a sounder footing. Policy frameworks have also improved, and of which remain LICs today—emerged from governments have become more effective. Investments in human and severe conflicts in the 1990s and early 2000s physical capital have contributed to higher secondary school enrollment ratios and greater access to electricity. In addition, more effective health (Burundi, the Democratic Republic of Congo, care interventions have raised average life expectancy in these countries. Liberia, Rwanda, and Sierra Leone). The conflict in the Democratic Republic of Congo is estimated A. Public finances before and after B. Share of population with access to debt relief electricity in 2001 LICs to have cost 2.5 million lives when deaths related to conflict-induced disease and famine are included—equivalent to 3 percent of today’s population (Lacina and Gleditsch 2004; Roberts et al. 2001). Conflicts in Burundi, Liberia, Rwanda, and Sierra Leone inflicted losses of human life equivalent to between 1 and 10 percent of their populations. While most of these economies are still considered fragile, conflict- related casualties in Africa have been on a D. Average life expectancy in 2001 C. Average secondary school declining trend since the 1990s (Figure enrollment rates in 2001 LICs LICs SF2.1.2.D). This has provided a more favorable setting for a growth rebound. Debt relief. Thirty-five of the 2001 LICs (of which 26 remain LICs today) received debt relief during the early 2000s in the context of the Multilateral Debt Relief Initiative (MDRI) and Highly-Indebted Poor Country (HIPC) initiative. Between the year preceding debt relief and two years after it, government debt in these countries E. Share of 2001 LICs with flexible F. Government effectiveness in 2001 exchange rate arrangements LICs declined by 53 percentage points of GDP, on average, to 31 percent of GDP (Figures SF2.1.2.E and SF2.1.2.F). Rapid growth from 2001, more broadly, also supported the reduction of debt ratios. In the median 2001 LIC, government debt declined by 35 percentage points of GDP, from 84 percent of GDP in 2001 to 49 percent of GDP in 2018. Source: International Monetary Fund, World Economic Outlook; Reinhart and Rogoff (2004); This reduction of debt burdens has helped put Worldwide Governance Indicators; World Development Indicators. Note. “LICs turned MICs” are those LICs in 2001 that have achieved MIC per capita incomes by 2019; public finances on a sounder footing. While “Continued LICs” are LICs that have remained LICs since 2001. A. Poverty-reducing expenditure represents public spending on health and education. Unweighted government deficits increased slightly (by about 1 average for 26 LICs that received MDRI or HIPC debt relief. percentage point of GDP), non-interest B.-F. Unweighted averages. B. 2010s includes data up to 2016. 2001 LICs, “LICs turned MICs”, and “Continued LICs”, include 62, government expenditures rose by 5 percentage 32, and 30 countries, respectively. C. 2010s includes data up to 2017. 2001 LICs, “LICs turned MICs”, and “Continued LICs”, include 55, points of GDP, and combined health and 26, and 29 countries, respectively. education expenditures rose by one-fifth between D. 2010s includes data up to 2017. 2001 LICs, “LICs turned MICs”, and “Continued LICs”, include 64, 32, and 32 countries, respectively. the five years preceding debt relief and the five E. Following the coarse exchange rate regime classification of Reinhart and Rogoff (2004), where categories 1-2 represents fixed, and 3-6 represent more flexible arrangements. 2010s includes data years following it (Figure SF2.1.3.A). More up to 2016. 2001 LICs, “LICs turned MICs”, and “Continued LICs”, include 63, 32, and 31 countries, respectively. sustainable public finances supported macro- F. 2001 LICs, “LICs turned MICs”, and “Continued LICs”, include 64, 32, and 32 countries, economic stability (Bayraktar and Fofack 2011; respectively. Click here to download data and charts. Marcelino and Hakobyan 2014). 138 S P EC IAL FO CU S 2.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 Since 2013, the downward trend in 2001 LICs’ From 2001 to 2016, access to electricity in the debt has reversed, with government debt rising in median 2001 LIC increased from 30 to 53 the median 2001 LIC by 14 percentage points of percent of the population and, in one-quarter GDP to 49 percent of GDP in 2018. That said, of LICs, from 52 to 84 percent (Figure only two of the 2001 LICs—Benin and Chad— SF2.1.3.B).7 Communications infrastructure have returned to debt ratios near those before debt has improved rapidly, helped in part by the relief. The composition of this debt has become spread of mobile phone networks (Aker and increasingly non-concessional as countries have Mbiti 2010; World Bank 2016b). The use of accessed capital markets and borrowed from non- mobile phones has reduced information Paris Club creditors (World Bank 2019a). In inefficiencies and transaction costs, benefitting 2018, 44 percent of the external debt of the particularly businesses and small-scale farmers median LIC of 2001 was on non-concessional in rural areas where distances from markets terms, compared with 30 percent in 2001. are large (Aker 2011). Transaction costs could be lowered even further if broad-band internet Trade integration. Many of the 2001 LICs have network infrastructure was increased from its reaped benefits from greater trade integration by current low coverage of 1 percent of the entering into free trade agreements. Moldova’s population in the median LIC in 2016 trade agreement with the European Union has (World Bank 2019b). supported export growth and is encouraging reforms, in particular related to governance, the • Human capital. In the median 2001 LIC, financial sector, and the business environment secondary education net enrollment ratios rose (European Commission 2018). In Sub-Saharan from 24 to 47 percent of the school-age Africa, membership in free trade areas has boosted population between 2001 and 2016, intra-regional trade (Burundi, Kenya, Rwanda, supported by a 25 percent increase in Tanzania, Uganda), and supported FDI inflows, government spending on education (Figure industrialization, and integration into global value SF2.1.3.C). This, combined with improve- chains (e.g., Lesotho; Buigut 2016, Morris and ments in average life expectancy in LICs—in Staritz 2017). Similarly, Nicaragua reaped growth part due to the improved prevention and dividends and attracted stronger FDI inflows more effective treatment of widely-prevalent between 2005 and 2011 as a result of the Central conditions such as malaria, HIV, and AIDS— America-Dominican Republic Free Trade is creating the preconditions for an Agreement (Hornbeck 2012). The India-ASEAN increasingly productive future workforce agreement that went into effect in 2009-10 has (Figure SF2.1.3.D; Asiki et al. 2016; Barofski, benefited the 2001 LICs that became members Anekwe, and Chase 2015). (Bhutan, Bangladesh, India; Bhattacharyya and Mandal 2016). Improved business climates and policy frameworks. The business climate has improved Investment in human and physical capital. Most in the majority of the 2001 LICs between the 2001 LICs boosted their investment in human 1990s and the 2010s. More specifically, the ease of and physical capital during the period of rapid starting a business, obtaining credit, and trading growth from 2001. Between 2001 and 2017, the across borders has, on average, increased by 20-30 ratio of total investment to GDP in these index points since 2006 (World Bank 2019c). countries increased by 5 percentage points, of Similarly, the Worldwide Governance Indicator which one-third represented increased public scores for the rule of law have strengthened by investment. about 20 percent, and there have been more moderate improvements in regulatory quality and • Infrastructure. Infrastructure in sectors such as political stability. electricity and communications has improved significantly among LICs (Calderón and 7 That said, access to electricity in some countries still remains Servén 2010; Kumar and Rauniyar 2018). below 10 percent of the population (Burundi, Chad, South Sudan). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 S P EC IAL FO CU S 2.1 139 A growing number of LICs have strengthened FIGURE SF2.1.4 Factors supporting LIC progression to their fiscal management through medium-term MIC income levels debt management strategies (World Bank 2019a). A quarter of the 2001 LICs that have become MICs were transition Some have strengthened their monetary policy economies that recovered from deep recessions after the end of socialism throughout much of the world. Improvements in per capita income were frameworks and their buffers against shocks by more pronounced in the LICs that have reached MIC status. A few rapid- adopting flexible exchange rate arrangements and growing LICs have not been able to reach MIC status, partly due to very using their policy instruments to target low low starting positions in 2001. In countries that have reached MIC status, school enrollment ratios, government effectiveness, and the rule of law domestic inflation; more than one-quarter of 2001 improved as they neared the year of moving to MIC status, as well as in the LICs had flexible exchange rate regimes in 2016, years thereafter. At the point of becoming a MIC, these measures were compared to fewer than one-fifth during 2001-10, consistently better than the LIC median. on average (Figure SF2.1.3.E).8 Improved policy frameworks and increased resilience to external A. Low-income countries, 2001 and B. Growth in 2001 LIC per capita 2019 incomes between 2001 and 2019 shocks among the 2001 LICs have also been supported by increases in foreign exchange reserves from 8 percent of GDP in 2001 to 14 percent of GDP, on average, in 2017. How have these factors affected LIC progression to MIC income levels? C. Progression of 2001 LIC per capita D. Secondary school enrollment in The 2001 LICs that became MICs benefited incomes LICs turned MICs somewhat more from the factors discussed above than those that remained (Figures SF2.1.3.B- 2.1.3.F). On average, the 2001 LICs that became MICs had stronger policy frameworks, better governance and business environments, better- developed infrastructure, larger improvements in human capital, and more fiscal resources due to revenue bases being significantly larger—by at least one fifth of GDP. The 2001 LICs that E. Government effectiveness in LICs F. Rule of law in LICs turned MICs became MICs also had a geographical advantage, turned MICs as around one-third were landlocked compared to almost half of today’s LICs. Furthermore, the 2001 LICs that were landlocked but became MICs had, on average, neighbors with per capita incomes that were 36 percent higher than current incomes among the neighbors of today’s landlocked LICs. LICs that achieved MIC per capita income levels. Source: Worldwide Governance Indicators (WGI), World Bank staff calculations, World Development Indicators. Between 2001 and 2019, 32 LICs achieved C. Sample includes 59 2001 LICs. GNI per capita according to the World Bank Atlas method. GNI per middle-income status (Figure SF2.1.4.A). The capita for 1999 was published in August 2000 and reflects the original data used for country income classification in the 2001 World Bank fiscal year, while GNI per capita for 2017 was published in progress made by LICs that have become MICs October 2018 and reflects the data used for the 2019 World Bank fiscal year. Exceptions are Liberia and Myanmar, for which GNI per capita in 2002 is used as a proxy for 1999. Rapid-growing LICs with low starting points are defined as LICs that had per capita incomes below one-third of the $755 LIC threshold in 2001, and these incomes have increased to above two-thirds of the $995 LIC threshold in 2019. D. Sample includes 13 LICs that became MICs, due to data limitations. Year turned MIC reflects the 8 Exchange rate regimes are grouped according to the classification World Bank fiscal year. in Ilzetski, Reinhart and Rogoff (2017), with the only exception that E.-F. WGI index scores are standard normal units that range between -2.5 and 2.5, with zero mean. A negative score implies government effectiveness or rule-of-law below the global average. Sample freely falling currencies are also regarded as flexible exchange rate includes all 32 LICs that became MICs. Year turned MIC reflects the World Bank fiscal year. arrangements. Click here to download data and charts. 140 S P EC IAL FO CU S 2.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 has helped lift 20 percent of the global poor in partly as a result of new commodity 2001 out of poverty by 2016, more than offsetting discoveries or the exploitation of commodity the increasing poverty headcount among the resources. Large investments in the resource countries that remained LICs.9 sectors of Azerbaijan, Cameroon, and Mongolia facilitated their progression to • Favorable initial conditions. The 2001 LICs middle-income status (World Bank 2015a). that have become MICs were some of those The countries that became MICs amid the countries closest to the middle-income commodity price boom often had stronger threshold to begin with: their average per institutional quality and governance than capita income in 2001 was about 80 percent those that remained LICs, and were therefore higher than that of the LICs that have less likely to fall victim to the resource curse remained LICs (Table SF2.1.1). LICs that that erodes non-resource competitiveness achieved MIC status also grew somewhat (Dauvin and Guerreiro 2017). more rapidly during 2001-18 (Figure SF2.1.4.B; Johnson and Papageorgiou, • Rebounding transition economies. Another one- forthcoming).10 However, the growth differ- quarter of the LICs that have progressed to ential between these two LIC groups masks MIC status since 2001 were the remaining substantial dispersion within each group. transition-economy LICs. All but one Despite exceptionally fast and sustained (Tajikistan) have returned to middle-income growth—more than tripling per capita per capita income levels. incomes between 2001 and 2018—several 2001 LICs remain LICs today (Figure • Trade integration, peace, and reforms. Of the SF2.1.4.C; Ethiopia, Rwanda, Tanzania). 27 LICs of 2001 that have subsequently This mostly reflects their low 2001 per capita signed trade agreements, 20 achieved incomes (70 percent below the 2001 threshold MIC status as entry into large free trade LIC income). In these countries, robust areas catalyzed export spurts (Moldova, growth was supported by improving macro- Nicaragua).11 Others reached MIC status after economic environments, institutional and emerging from conflict (Côte d’Ivoire, business climate reforms, and strong public Solomon Islands), or undertaking substantial investment (Government of Rwanda and public infrastructure investment (Bhutan).12 World Bank 2019; Möller and Wacker 2017). The 2001 LICs that reached MIC status have steadily strengthened human capital • Commodity discoveries and exploitation. Of the development, the effectiveness of their 32 LICs that became MICs, about one half governments, business climates, and the benefited from discoveries of commodity quality of their institutions in the years before deposits or expanded exploitation of metals, progression and thereafter. In fact, these oil, or gas resources. Today, many former countries have consistently outperformed the 2001 LICs—such as Angola, the Republic of median LIC on measures of these factors Congo, Equatorial Guinea, Ghana, Lesotho, (Figures SF2.1.4.D-2.1.4.F). Indonesia, Lao PDR, Mauritania, Nigeria, Sudan, Timor-Leste, Uzbekistan, and Zambia—have achieved middle-income status 11 Excludes “region-region” agreements such as the Cotonou agreement between the European Union and the 78 economies in the African, Caribbean and Pacific Group of States. 12 During the 2000s, the government of Bhutan transformed the 9 Due to data limitations, poverty headcount data excludes the economy’s growth prospects by investing heavily in hydropower following 11 LICs of 2001: Afghanistan, Azerbaijan, Haiti, infrastructure, taking advantage of the country’s mountainous terrain Cambodia, Myanmar, Democratic People’s Republic of Korea, and high average annual rainfall. Electricity capacity in Bhutan Somalia, Sudan, Turkmenistan, Uzbekistan, and Zimbabwe. In tripled and the share of the population with access to it rose from 39 2001, their combined population accounted for 8 percent of the total percent in 2001 to 100 percent by 2016. Surplus electricity is 2001 LICs population. exported and accounts for a third of exports and almost half of 10 In terms of per capita growth, the difference was more government revenue, while overall power generation is estimated to pronounced (Figure 2.1.4B). contribute 1 percent of GDP annually (World Bank 2015b). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 S P EC IAL FO CU S 2.1 141 New LICs: 2016-19. Countries that have reached FIGURE SF2.1.5 Features of today’s LICs MIC status often face structural challenges that For today’s LICs, prospects of becoming MICs are dim. More than half of constrain their prospects for continued strong them are affected by fragility, conflict, and violence, their governments are growth, while those MICs with incomes near the less effective than those of the 2001 LICs that became MICs, and public spending on health care is lower. Many countries are landlocked, and their LIC threshold risk falling back into the LIC neighbors are mostly low-income or lower-middle-income countries. LICs bracket (EBRD 2019). Four countries were are heavily dependent on agriculture, which faces severe challenges as extreme weather events become more frequent. classified as LICs between 2016 and 2019 from middle-income levels: Senegal, Syria, Tajikistan, and Yemen. While Syria was classified A. LICs affected by fragility, conflict, B. Distribution of LICs per capita and violence incomes as percent of non-LIC as a LIC for the first time, Senegal, Tajikistan, EMDEs average and Yemen relapsed into LIC status after some of the growth-enhancing factors discussed above had helped them move to middle-income status in earlier years. • Senegal suffered a series of adverse shocks in the years leading up to its relapse, which weighed heavily on per capita incomes. The decline in commodity prices from 2011 was C. Average share of public healthcare D. Per capita incomes in LICs’ aggravated by two consecutive droughts that spending in LIC GDP neighbors severely disrupted agricultural production between 2011 and 2014 and also led to widespread famine, while a long-lasting domestic energy crisis repeatedly disrupted economic activity until the mid-2010s. • In Tajikistan, robust growth was accompanied by a halving of its currency’s value stemming from the 2014-16 commodity price slump and by rapid population growth; as a result, E. Share of agriculture in the economy F. Extreme weather events in LICs per capita incomes declined. • Armed conflicts in Syria and Yemen caused sharp declines in per capita incomes in both countries by severely disrupting activity, destroying physical infrastructure, and forcibly displacing more than one-half of Syria’s population and almost a tenth of the Source: The Emergency Events Database—Universite Catholique de Louvain, World Bank, World population in Yemen (World Bank 2017a, Bank Doing Business, World Bank staff calculations, World Development Indicators. 2019d). In both countries, oil production has Note: “LICs turned MICs” are those LICs in 2001 that have achieved MIC per capita incomes by 2019; “Continued LICs” are LICs that have remained LICs since 2001. FCV = fragility, conflict, and violence. fallen by 90 percent from pre-war levels, UMIC = upper-middle-income country. A. Bars for 2001 “LICs turned MICs” reflect shares in 2001, bars for 2019 LICs reflect latest shares. sharply constraining fiscal positions. Due to data limitations, official FCV country classifications for 2001 are not available. This share is based on the World Bank FCV country classification of the 2005/06 fiscal year that has been amended to include countries that had the presence of UN peace-keeping missions between 1999 and 2001. Prospects for further LIC B. Blue bars represent share of 2001 LICs in 2001, red bars represent share of 2019 LICs in 2017. X-axis reflects ranges of LIC per capita incomes relative to that of the US, in percent. 2001 LICs progression includes 58 countries, 2019 LICs includes 28 countries. C. Unweighted averages. 2001 LICs, “LICs turned MICs” and “Continued LICs” include 60, 32, and 28 countries, respectively. 2019 LICs, non-FCV and FCV LICs include 31, 14, and 17 countries, respectively. Challenges for future progression towards MIC D. Unweighted averages. Neighbors of LICs only include countries with shared land borders. Sample includes 16 landlocked 2001 “LICs turned MICs”, 15 2019 landlocked LICs and 8 2019 landlocked per capita income levels. Prospects for most of non-FCV LICs. today’s LICs to progress to MIC levels in the near E. Unweighted averages. F. Data reflect annual averages of extreme weather events in the LICs of 2019. future are dim, as the factors that may hold back Click here to download data and charts. 142 S P EC IAL FO CU S 2.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 progression are more pervasive today than they by high trade costs and behind-the-border were in the 2001 LICs (Figure SF2.1.5.A). non-tariff barriers—limits LICs’ ability to unleash a growth burst by encouraging trade • Weaker starting positions. The gaps between with large trading partner economies (Arvis, per capita incomes in today’s LICs and in Raballand, and Marteau 2010; Arvis et al. middle-income countries are larger than the 2013; Paudel and Cooray 2018). corresponding gaps faced by the LICs of 2001 that subsequently became MICs (Figure • Heavily reliant on agriculture. All but two SF2.1.5.B). Comparing today’s LICs with (Yemen, Zimbabwe) of today’s LICs are those that have become MICs, public heavily dependent on the agricultural sectors spending on health care relative to GDP is which accounts for almost 30 percent of GDP lower by one-quarter, the share of their on average compared with 9 percent of GDP populations with access to electricity is lower in the average non-LIC EMDE (Figure by one-third, and measures of financial SF2.1.5.E). In 70 percent of today’s LICs inclusion are lower by one-half to one- quarter (considerably more than the 40 percent of (Figure SF2.1.5.C).13 2001 LICs that became MICs) agriculture accounts for more than one-quarter of the • Fragile or in conflict. 56 percent of today’s economy. Climate change is presenting many LICs are countries affected by fragility, of these agricultural sectors with severe conflict, and violence (FCV)—about one- challenges as mean temperatures continue to third more than the share of countries in rise and extreme weather events such as conflict among the 2001 LICs that became droughts, floods, and heatwaves occur more MICs.14 In these FCVs, weak governments frequently and with greater intensity than in and poor institutions are endemic. the 1980s and 1990s (Figure SF2.1.5.F; Government revenues in these countries are World Bank 2017b; IPCC 2014; Chaney et often lower than in other LICs, leaving them al. 2014; Hoeppe 2014). Recoveries from heavily dependent on foreign aid to finance droughts appear to be taking longer, resulting critical government spending (IMF 2014). in less time for livelihoods to be restored Their economies are volatile and prone to between droughts and thereby rendering collapses (World Bank 2017b). Since 1990, countries even more vulnerable to the adverse chronic FCVs—countries that have been impacts of climate change (Schwalm 2017). FCVs for at least five years—have faced Climate-related destruction of crops and annual output contractions of 3 percent or livelihoods could push many LIC populations more at least once every decade. further into poverty and this is aggravated by the limited capacity and resources of LICs to • Clustered. More than half of the LICs that are counter the adverse effects of climate change not FCVs are landlocked, and their neighbors (Hallegatte et al. 2016). are mostly other LICs or countries with per capita incomes just above middle-income • Weaker prospects for commodity demand. To thresholds (Figure SF2.1.5.D). This transform recent resource discoveries in LICs geographical disadvantage—often exacerbated into strong, sustained economic growth will require continued robust commodity demand growth, as well as strong governance and 13 While mobile payment systems have improved financial inclusion in LICs, limited access to electricity, particularly in rural areas, severely constrains the charging of mobile phones (Max and 15 Mozambique’s deep-water gas fields are estimated to hold more Berman 2018; Riley and Kulathunga 2017, World Bank Group and oil-equivalent reserves than are held by Angola or Nigeria—Sub- China Development Bank 2017). Saharan Africa’s two largest oil producers—and production is set to 14 Due to data limitations, official FCV country classifications for start by 2022/23 (World Bank 2015a). Oil reserves in Uganda are 2001 are not available. This share is based on the World Bank FCV estimated to be the fourth-largest in Sub-Saharan Africa, and country classification of the 2005/06 fiscal year that has been production could start within the next three years (Alkadiri and amended to include countries with UN peace-keeping missions Tesfay 2014). Large off-shore gas fields were recently discovered in between 1999 and 2001. Tanzania. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 S P EC IAL FO CU S 2.1 143 institutions to manage the associated revenue FIGURE SF2.1.6 Challenges LICs face in reducing windfalls (Addison and Roe 2018).15 poverty However, long-term prospects for commodity For the world to reach the Sustainable Development Goal of reducing demand are weakening as growth in China— extreme poverty to 3 percent, per capita incomes will need to grow by 6 the largest source of commodity demand— percent per year until 2030, but with the condition that incomes in the bottom 40 percent of the income distribution grow by 8 percent per year. slows and shifts towards less resource-intensive Growth is expected to fall well short of this requirement. sectors (World Bank 2018a). A. Projections of global extreme B. LIC growth poverty • Debt vulnerabilities on the rise. While gov- ernment debt ratios in most of today’s LICs are significantly lower than in 2001—helped largely by debt relief initiatives—their general rise since 2013 has contributed to increased vulnerabilities (World Bank 2019a). The interest burden brought about by greater indebtedness could constrain poverty- reducing expenditures, particularly on health Source: World Bank, World Bank (2018b). and education. A. Data based on global real per capita growth. 8 percent growth assumes average annual growth in per capita incomes of 6 percent for all countries, but that incomes of the bottom 40 percent of the distribution grow at 8 percent, while those in the top 60 percent grow at 4.7 percent. Conclusion B. Bars represented GDP-weighted aggregates. Diamonds represent GDP aggregates weighted according to each country’s share in total poverty. Click here to download data and charts. Growth in low-income countries has benefited from a confluence of favorable cyclical and average poverty rates in excess of 40 percent. structural developments since 2001 that have Subdued prospects for lifting average per capita reduced the number of LICs by almost one-half. incomes in most of today’s 34 LICs to middle- These factors have, at various points, included a income levels pose a challenge for achieving the commodity price boom, cyclical rebounds from Sustainable Development Goals and reducing the collapse of centrally-planned regimes in the global extreme poverty to 3 percent by 2030. To early-1990s, debt relief, fewer armed conflicts reach this goal, per capita GDP would need to (especially in Africa), trade integration, and grow by 6 percent per year up to 2030 and per improved business climates and policy capita incomes of the bottom 40 percent of the frameworks. However, the cyclical factors that income distribution would need to grow at 8 contributed to LICs reaching MIC status were percent per year (Figure SF2.1.6.A; World Bank either unique events (transition rebounds) or are 2018b). Even during the global economic unlikely to be repeated over the foreseeable future expansion that preceded the global financial crisis, (commodity boom), while structural factors that per capita growth in LICs fell well below such could support growth present lasting policy rates (1.9 percent during 2001-07). Overall challenges that will require various policy reform growth in LICs since the global financial crisis has efforts. Prospects for progression of today’s LICs been lower when growth is weighted according to to middle-income status are, therefore, more the share of the world’s extreme poor as opposed challenging. Compared to the LICs of 2001 that to output shares, implying that growth has been became MICs, today’s LICs have per capita slower where it is needed most: in countries with incomes that are further below the middle-income the largest numbers of extreme poor (Figure threshold, are more likely to be fragile, are more SF2.1.6.B). often landlocked and clustered with other LICs, are heavily reliant on agriculture, and face weaker Policy implications. Coordinated and multi- prospects for long-term commodity demand. pronged policy efforts are needed to boost both domestic and external drivers of LICs growth. Poverty implications. Today’s LICs account for Efforts to harness external drivers of growth about 40 percent of the global poor and have include integrating LICs into global trade, 144 S P EC IAL FO CU S 2.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 diversifying exports, and encouraging foreign informality (EBRD 2019; World Bank 2017c; direct investment (Lee and Zhang 2019). 2018c; 2019a). Enhanced competition policies, Domestically, this can help embody upgrades to including the liberalization of unwarranted price skills and technologies, but needs to be supported controls, can encourage innovation, boost by continued investment in human and physical productivity and improve international compet- capital, while maintaining sustainable government itiveness (World Bank 2016c; 2017d). Growth debt profiles. Further efforts to foster domestic could further be supported by measures aimed at sources of growth include developing stronger and ending conflicts and reducing social tensions, deeper financial systems, ensuring greater financial mobilizing domestic resources more effectively for inclusiveness, and strengthening governance and sustainable government finances, and managing business climates to help the private sector to and adapting to growing climate risks. thrive while overcoming some of the challenges of TABLE SF2.1.1 Low-income countries GNI per capita used for Latest GNI per GNI per capita used for 2001 Share of agriculture in Share of primary 2019 income classification capita income classification GDP (percent) commodity exports (2017, USD) (2017, USD) (1999, USD) in GDP (percent) 2001 LICs turned MICs Turkmenistan 6,650 6,380 660 … … Azerbaijan 4,080 4,080 550 5.6 30.2 Armenia 4,000 3,990 490 14.9 8.3 Georgia 3,790 3,780 620 6.9 6.2 Indonesia 3,540 3,540 580 13.1 5.9 Angola 3,330 3,570 220 10.0 28.4 Mongolia 3,290 3,270 350 10.3 46.7 Bhutan 2,720 2,660 510 17.4 … Ukraine 2,390 2,390 750 10.2 13.8 Sudan* 2,380 2,380 330 30.5 11.2 Lao PDR 2,270 2,270 280 16.2 8.0 Moldova, Rep. 2,180 2,200 370 … 3.5 Vietnam 2,170 2,160 370 15.3 5.1 Nicaragua 2,130 2,130 430 15.5 1.5 Nigeria 2,080 2,100 310 20.8 11.4 Uzbekistan 1,980 2,000 720 … … Solomon 1,920 1,920 750 … 27.8 Islands* India 1,820 1,800 450 15.5 1.2 São Tomé and 1,770 1,770 270 11.5 … Príncipe Pakistan 1,580 1,580 470 22.9 0.3 Côte d’Ivoire* 1,540 1,580 710 21.6 5.7 Ghana 1,490 1,880 390 19.7 7.1 Bangladesh 1,470 1,470 370 13.4 0.1 Kenya 1,440 1,460 360 34.6 1.4 Cameroon 1,360 1,370 580 14.4 12.7 Congo, Rep.* 1,360 1,430 670 6.4 44.0 Zambia 1,300 1,290 320 6.7 25.4 Lesotho 1,280 1,210 550 6.1 … Cambodia 1,230 1,230 260 23.4 1.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 S P EC IAL FO CU S 2.1 145 TABLE SF2.1.1 Low-income countries (continued) GNI per capita used for Latest GNI per GNI per capita used for 2001 Share of agriculture in Share of primary 2019 income classification capita income classification GDP (percent) commodity exports (2017, USD) (2017, USD) (1999, USD) in GDP (percent) 2001 LICs turned MICs Myanmar* 1,190 1,210 … 23.3 … Kyrgyz Republic 1,130 1,130 300 12.3 4.1 Mauritania 1,100 1,100 380 23.1 16.3 2001 Continued LICs Tajikistan 990 990 290 … … Senegal 950 1,240 510 16.0 2.3 Tanzania 910 910 240 … 0.7 Zimbabwe* 910 1,170 520 8.3 3.8 Benin 800 800 380 23.0 4.3 Guinea 800 790 510 16.4 6.9 Nepal 790 800 220 26.2 0.3 Mali* 770 770 240 38.3 1.1 Comoros* 760 1,280 350 29.9 0.0 Haiti* 760 760 460 17.6 … Ethiopia 740 740 100 34.0 0.0 Rwanda 720 720 250 31.0 1.3 Guinea-Bissau* 660 660 160 49.0 0.0 Chad* 630 640 200 49.1 … Burkina Faso 610 590 240 28.7 5.4 Togo* 610 610 320 41.8 3.9 Uganda 600 600 320 24.6 0.8 Afghanistan* 570 560 … 20.5 … Sierra Leone 510 510 130 60.3 0.7 Congo, Dem. 450 460 110 19.9 … Rep.* Gambia, The* 450 680 340 23.0 0.5 Mozambique* 420 420 230 21.3 31.1 Madagascar 400 400 250 20.0 6.0 Central African 390 390 290 39.6 … Republic* Liberia* 380 620 … 37.1 … Niger 360 360 190 39.7 4.1 Malawi 320 320 190 26.1 0.9 Burundi* 290 280 120 … 0.3 Eritrea* … … 200 … … Korea, Dem. … … … … … People’s Rep. Somalia* … … … … … Yemen* … … 350 6.0 … New LICs Syria* … … 970 … … Source: World Bank World Development Indicators, World Integrated Trade Statistics. Notes: Asterisks indicate economies affected by fragility, conflict, and violence (FCV). Ellipses indicate data unavailability. GNI per capita according to the World Bank Atlas method. GNI per capita for 1999 was published in August 2000 and reflects the original data used for country income classification in the 2001 World Bank fiscal year, while GNI per capita for 2017 was published in October 2018 and reflects the data used for the 2019 World Bank fiscal year. Latest GNI per capita incorporates data revisions that have occurred since the release of original GNI per capita data that was used for income classifications. South Sudan is also a new LIC, but not included in the table because it only gained independence in 2011; data not available. 146 S P EC IAL FO CU S 2.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019 Chaney, N. 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D.C: World Bank. 2017. Leapfrogging: The Key to Africa's Development? Washington, DC: World Bank. ———. 2018a. Global Economic Prospects: The Turning of the Tide. June. Washington, DC: World Bank. STATISTICAL APPENDIX G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 19 S T A TI S T I C A L A P P E N D IX 151 Real GDP growth Annual estimates and forecasts 1 Quarterly estimates 2 (Percent change) (Percent change, year-on-year) 2016 2017 2018e 2019f 2020f 2021f 17Q4 18Q1 18Q2 18Q3 18Q4 19Q1e World 2.6 3.1 3.0 2.6 2.7 2.8 3.4 3.2 3.2 2.9 2.7 .. Advanced economies 1.7 2.3 2.1 1.7 1.5 1.5 2.5 2.4 2.4 2.0 1.9 2.0 United States 1.6 2.2 2.9 2.5 1.7 1.6 2.5 2.6 2.9 3.0 3.0 3.2 Euro Area 2.0 2.4 1.8 1.2 1.4 1.3 2.7 2.4 2.2 1.6 1.2 1.2 Japan 0.6 1.9 0.8 0.8 0.7 0.6 2.3 1.4 1.4 0.1 0.2 0.8 Emerging market and developing economies 4.1 4.5 4.3 4.0 4.6 4.6 4.8 4.9 4.8 4.4 4.2 .. East Asia and Pacific 6.3 6.5 6.3 5.9 5.9 5.8 6.4 6.6 6.4 6.2 6.1 6.1 Cambodia 7.0 7.0 7.5 7.0 6.9 6.8 .. .. .. .. .. .. China 6.7 6.8 6.6 6.2 6.1 6.0 6.7 6.8 6.7 6.5 6.4 6.4 Fiji 0.7 3.0 3.2 3.4 3.3 3.3 .. .. .. .. .. .. Indonesia 5.0 5.1 5.2 5.2 5.3 5.3 5.2 5.1 5.3 5.2 5.2 5.1 Lao PDR 7.0 6.9 6.5 6.6 6.7 6.6 .. .. .. .. .. .. Malaysia 4.2 5.9 4.7 4.6 4.6 4.6 5.7 5.3 4.5 4.4 4.7 4.5 Mongolia 1.4 5.4 6.9 7.2 6.9 6.2 6.3 6.3 6.1 6.6 7.7 8.6 Myanmar 5.9 6.8 6.2 6.5 6.6 6.8 .. .. .. .. .. .. Papua New Guinea 4.1 2.3 -0.3 5.6 3.1 3.5 .. .. .. .. .. .. Philippines 6.9 6.7 6.2 6.4 6.5 6.5 6.6 6.5 6.2 6.0 6.3 5.6 Solomon Islands 3.3 3.0 3.5 2.9 2.8 2.7 .. .. .. .. .. .. Thailand 3.4 4.0 4.1 3.5 3.6 3.7 4.0 5.0 4.7 3.2 3.6 2.8 Timor-Leste 5.1 -3.5 -0.7 3.9 4.6 5.0 .. .. .. .. .. .. Vietnam 6.2 6.8 7.1 6.6 6.5 6.5 7.7 7.4 6.9 6.8 7.3 6.8 Europe and Central Asia 1.9 4.1 3.1 1.6 2.7 2.9 3.5 4.2 3.8 2.9 1.8 .. Albania 3.3 3.8 4.1 3.7 3.7 3.8 3.6 4.3 4.2 4.6 3.1 .. Armenia 0.2 7.5 5.2 4.2 4.9 5.2 .. .. .. .. .. .. Azerbaijan -3.1 0.1 1.4 3.3 3.5 3.7 .. .. .. .. .. .. Belarus -2.5 2.5 3.0 1.8 1.3 1.2 4.5 5.3 4.0 2.2 1.3 .. Bosnia and Herzegovina 3.1 3.2 3.1 3.4 3.9 4.0 2.4 3.2 3.4 2.7 3.0 .. Bulgaria 3.9 3.8 3.1 3.0 2.8 2.8 3.3 3.5 3.2 2.7 3.0 .. Croatia 3.5 2.9 2.6 2.5 2.5 2.4 2.2 2.5 2.9 2.8 2.3 .. Georgia 2.8 4.8 4.7 4.6 4.8 5.0 5.3 5.2 5.6 3.7 4.5 .. Hungary 2.3 4.1 4.9 3.8 2.8 2.6 4.5 4.6 4.9 5.1 5.1 5.3 Kazakhstan 1.1 4.1 4.1 3.5 3.2 3.2 3.1 4.1 4.3 3.9 5.2 .. Kosovo 4.1 4.2 4.2 4.4 4.5 4.5 .. .. .. .. .. .. Kyrgyz Republic 4.3 4.7 3.5 4.3 4.0 4.1 .. .. .. .. .. .. Moldova 4.4 4.7 4.0 3.4 3.6 3.8 .. .. .. .. .. .. Montenegro 5 2.9 4.7 4.9 2.9 2.4 2.3 .. .. .. .. .. .. North Macedonia 2.8 0.2 2.7 2.9 3.2 3.6 1.6 0.9 3.0 3.0 3.7 .. Poland 3.1 4.8 5.1 4.0 3.6 3.3 4.5 5.0 5.1 5.7 4.5 .. Romania 4.8 7.0 4.1 3.6 3.3 3.1 6.8 4.0 4.1 4.2 4.1 5.0 Russia 0.3 1.6 2.3 1.2 1.8 1.8 0.3 1.9 2.2 2.2 2.7 0.5 Serbia 3.3 2.0 4.3 3.5 4.0 4.0 2.5 4.9 4.9 4.1 3.4 2.3 Tajikistan 6.9 7.1 7.3 6.0 6.0 6.0 .. .. .. .. .. .. Turkey 3.2 7.4 2.6 -1.0 3.0 4.0 7.3 7.4 5.3 1.8 -3.0 .. Turkmenistan 6.2 6.5 6.2 5.6 5.1 4.9 .. .. .. .. .. .. Ukraine 2.4 2.5 3.3 2.7 3.4 3.8 2.2 3.4 3.8 2.8 3.5 2.2 Uzbekistan 6.1 4.5 5.1 5.3 5.5 6.0 .. .. .. .. .. .. 152 S T A TI S T I C A L A P P E N D IX G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 19 Real GDP growth (continued) Annual estimates and forecasts 1 Quarterly estimates 2 (Percent change) (Percent change, year-on-year) 2016 2017 2018e 2019f 2020f 2021f 17Q4 18Q1 18Q2 18Q3 18Q4 19Q1e Latin America and the Caribbean -0.3 1.7 1.6 1.7 2.5 2.7 2.3 1.9 1.7 1.5 1.1 .. Argentina -2.1 2.7 -2.5 -1.2 2.2 3.2 4.5 4.1 -3.8 -3.6 -6.2 .. Belize -0.6 1.4 3.0 2.3 2.1 1.9 .. .. .. .. .. .. Bolivia 4.3 4.2 4.2 4.0 3.6 3.4 5.2 4.9 4.9 4.0 3.3 .. Brazil -3.3 1.1 1.1 1.5 2.5 2.3 2.2 1.2 0.9 1.3 1.1 .. Chile 1.7 1.3 4.0 3.5 3.1 3.0 3.0 4.7 5.3 2.6 3.6 1.6 Colombia 2.1 1.4 2.6 3.5 3.7 3.7 1.3 2.0 2.9 2.6 2.7 2.8 Costa Rica 4.2 3.4 2.7 3.0 3.1 3.4 3.4 3.0 3.8 2.5 1.4 .. Dominican Republic 6.6 4.6 7.0 5.2 5.0 5.0 6.5 6.6 7.2 7.4 6.6 .. Ecuador -1.2 2.4 1.4 0.0 0.4 0.8 2.8 1.8 1.4 1.5 0.8 .. El Salvador 2.5 2.3 2.5 2.6 2.5 2.4 2.8 2.9 2.9 2.2 2.2 .. Grenada 3.7 5.1 5.2 3.9 3.7 3.7 .. .. .. .. .. .. Guatemala 3.1 2.8 3.1 3.3 2.7 3.0 2.9 1.8 3.6 3.6 3.5 .. Guyana 3.4 2.1 4.1 4.6 33.5 22.9 .. .. .. .. .. .. Haiti 3 1.5 1.2 1.5 0.4 1.6 1.3 .. .. .. .. .. .. Honduras 3.9 4.8 3.7 3.6 3.8 3.9 4.3 3.0 4.0 3.4 4.5 .. Jamaica 1.4 1.0 1.9 1.6 1.7 1.9 1.2 1.4 2.2 1.9 2.0 .. Mexico 2.9 2.1 2.0 1.7 2.0 2.4 1.5 1.2 2.6 2.5 1.7 1.3 Nicaragua 4.6 4.7 -3.8 -5.0 1.1 1.3 4.1 2.4 -5.2 -4.4 -7.7 .. Panama 5.0 5.3 3.7 5.0 5.4 5.2 4.4 4.0 3.1 3.6 4.0 .. Paraguay 4.3 5.0 3.6 3.3 4.0 4.0 5.0 5.4 6.6 1.4 1.2 .. Peru 4.0 2.5 4.0 3.8 3.9 4.0 2.4 3.2 5.5 2.4 4.8 2.3 St. Lucia 3.9 3.7 1.5 3.4 3.5 2.4 .. .. .. .. .. .. St. Vincent and the Grenadines 1.3 0.7 2.0 2.1 2.3 2.3 .. .. .. .. .. .. Suriname -5.6 1.4 2.0 2.0 2.1 2.1 .. .. .. .. .. .. Trinidad and Tobago -6.5 -1.9 0.7 0.9 1.5 2.1 .. .. .. .. .. .. Uruguay 1.7 2.6 1.6 1.5 2.3 2.5 1.6 2.0 2.2 1.8 0.6 .. Middle East and North Africa 5.1 1.2 1.4 1.3 3.2 2.7 1.1 2.3 2.4 2.8 3.2 .. Algeria 3.2 1.4 1.5 1.9 1.7 1.4 .. .. .. .. .. .. Bahrain 3.5 3.8 1.8 2.0 2.2 2.8 2.9 -1.0 2.1 1.4 4.6 .. Djibouti 9.1 4.1 6.0 7.0 7.5 8.0 .. .. .. .. .. .. Egypt 3 4.3 4.2 5.3 5.5 5.8 6.0 5.3 5.4 5.4 5.3 5.5 5.6 Iran 13.4 3.8 -1.9 -4.5 0.9 1.0 2.4 2.9 2.5 .. .. .. Iraq 13.6 -1.7 0.6 2.8 8.1 2.3 .. .. .. .. .. .. Jordan 2.0 2.1 2.0 2.2 2.4 2.6 .. .. .. .. .. .. Kuwait 2.9 -3.5 1.2 1.6 3.0 2.9 -2.7 -0.5 0.6 2.9 2.0 .. Lebanon 1.6 0.6 0.2 0.9 1.3 1.5 .. .. .. .. .. .. Morocco 1.1 4.1 3.0 2.9 3.5 3.6 .. .. .. .. .. .. Oman 5.0 -0.9 2.1 1.2 6.0 2.8 .. .. .. .. .. .. Qatar 2.1 1.6 1.4 3.0 3.2 3.4 3.3 2.0 1.7 1.7 0.3 .. Saudi Arabia 1.7 -0.7 2.2 1.7 3.1 2.3 -1.3 1.3 1.6 2.3 3.6 .. Tunisia 1.1 2.0 2.5 2.7 3.2 3.5 .. .. .. .. .. .. United Arab Emirates 3.0 0.8 1.7 2.6 3.0 3.2 .. .. .. .. .. .. West Bank and Gaza 4.7 3.1 0.9 0.5 1.0 1.6 .. .. .. .. .. .. G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 19 S T A TI S T I C A L A P P E N D IX 153 Real GDP growth (continued) Annual estimates and forecasts 1 Quarterly estimates 2 (Percent change) (Percent change, year-on-year) 2016 2017 2018e 2019f 2020f 2021f 17Q4 18Q1 18Q2 18Q3 18Q4 19Q1e South Asia 8.1 6.7 7.0 6.9 7.0 7.1 7.5 8.0 7.9 6.8 6.4 .. Afghanistan 2.3 2.7 1.0 2.4 3.2 3.6 .. .. .. .. .. .. Bangladesh 3,4 7.1 7.3 7.9 7.3 7.4 7.3 .. .. .. .. .. .. Bhutan 3,4 7.4 6.3 5.8 5.4 5.4 5.2 .. .. .. .. .. .. India 3,4 8.2 7.2 7.2 7.5 7.5 7.5 7.7 8.1 8.0 7.0 6.6 .. Maldives 7.3 6.9 7.9 5.7 5.2 5.3 .. .. .. .. .. .. Nepal 3,4 0.6 8.2 6.7 7.1 6.4 6.5 .. .. .. .. .. .. Pakistan 3,4 4.6 5.4 5.8 3.4 2.7 4.0 .. .. .. .. .. .. Sri Lanka 4.5 3.3 3.2 3.5 3.6 3.7 3.7 4.0 3.9 3.5 1.8 .. Sub-Saharan Africa 1.3 2.6 2.5 2.9 3.3 3.5 2.6 2.5 2.0 2.7 2.8 .. Angola -2.6 -0.1 -1.7 1.0 2.9 2.8 .. .. .. .. .. .. Benin 4.0 5.8 6.5 6.5 6.5 6.5 .. .. .. .. .. .. Botswana 4.3 2.9 4.5 4.2 3.9 4.0 6.4 4.5 5.2 4.0 4.1 .. Burkina Faso 5.9 6.3 6.8 6.0 6.0 6.0 .. .. .. .. .. .. Burundi -0.6 0.5 1.6 1.8 2.1 2.0 .. .. .. .. .. .. Cabo Verde 4.7 4.0 4.5 4.4 4.6 4.7 .. .. .. .. .. .. Cameroon 4.6 3.5 4.0 4.2 4.4 4.6 .. .. .. .. .. .. Chad -6.3 -3.0 2.6 3.4 5.6 4.8 .. .. .. .. .. .. Comoros 2.2 2.7 2.8 3.1 3.2 3.2 .. .. .. .. .. .. Congo, Dem. Rep. 2.4 3.7 5.8 5.9 6.5 6.8 .. .. .. .. .. .. Congo, Rep. -2.8 -3.1 0.8 5.4 1.5 1.9 .. .. .. .. .. .. Côte d’Ivoire 8.0 7.7 7.4 7.4 7.3 7.3 .. .. .. .. .. .. Equatorial Guinea -8.8 -4.7 -2.9 -2.2 -1.9 -1.8 .. .. .. .. .. .. Eswatini 3.2 1.9 0.5 1.1 1.6 1.7 .. .. .. .. .. .. Ethiopia 3 7.6 10.2 7.9 7.9 8.2 8.2 .. .. .. .. .. .. Gabon 2.1 0.5 0.8 2.8 3.7 3.9 .. .. .. .. .. .. Gambia, The 0.4 4.6 6.6 5.4 5.2 5.0 .. .. .. .. .. .. Ghana 3.4 8.1 6.3 7.6 7.0 5.8 5.5 5.4 5.4 7.4 6.8 .. Guinea 10.5 10.6 5.8 5.9 6.0 6.0 .. .. .. .. .. .. Guinea-Bissau 6.3 5.9 3.8 4.3 4.8 5.5 .. .. .. .. .. .. Kenya 5.9 4.9 6.3 5.7 5.9 6.0 5.3 6.6 6.3 6.4 5.9 .. Lesotho 3.1 -0.4 1.7 1.5 0.4 4.1 3.2 2.7 1.9 -1.5 .. .. Liberia -1.6 2.5 1.2 0.4 1.6 1.3 .. .. .. .. .. .. Madagascar 4.2 4.3 5.2 5.2 5.3 5.1 .. .. .. .. .. .. Malawi 2.5 4.0 3.5 4.5 4.7 5.1 .. .. .. .. .. .. Mali 5.8 5.3 4.9 5.0 4.9 4.8 .. .. .. .. .. .. Mauritania 2.0 3.0 3.6 6.7 5.8 6.0 .. .. .. .. .. .. Mauritius 3.8 3.8 3.8 3.9 3.9 3.5 .. .. .. .. .. .. Mozambique 3.8 3.7 3.3 2.0 3.5 4.2 .. .. .. .. .. .. Namibia 1.1 -0.9 -0.1 0.9 1.5 1.9 .. .. .. .. .. .. Niger 4.9 4.9 5.2 6.5 6.0 5.6 .. .. .. .. .. .. Nigeria -1.6 0.8 1.9 2.1 2.2 2.4 2.1 2.0 1.5 1.8 2.4 2.0 Rwanda 6.0 6.1 8.6 7.8 8.0 7.5 .. .. .. .. .. .. Senegal 6.2 7.2 6.8 6.8 7.0 7.0 .. .. .. .. .. .. Seychelles 4.5 5.3 3.6 3.4 3.0 3.2 .. .. .. .. .. .. Sierra Leone 6.4 3.8 3.7 5.4 5.4 5.2 .. .. .. .. .. .. 154 S T A TI S T I C A L A P P E N D IX G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 19 Real GDP growth (continued) Annual estimates and forecasts 1 Quarterly estimates 2 (Percent change) (Percent change, year-on-year) 2016 2017 2018e 2019f 2020f 2021f 17Q4 18Q1 18Q2 18Q3 18Q4 19Q1e Sub-Saharan Africa (continued) South Africa 0.6 1.4 0.8 1.1 1.5 1.7 1.4 0.7 0.1 1.3 1.1 .. Sudan 4.7 4.3 -2.3 -1.9 -1.3 -0.8 .. .. .. .. .. .. Tanzania 6.9 6.8 6.0 5.4 5.7 6.1 8.4 .. .. .. .. .. Togo 5.2 4.3 4.9 5.0 5.2 5.1 .. .. .. .. .. .. Uganda 3 4.6 3.9 5.9 6.1 6.5 5.8 5.9 6.8 4.9 6.2 6.6 .. Zambia 3.6 3.4 3.5 2.5 2.8 2.8 3.3 2.7 3.9 5.6 2.5 .. Zimbabwe 0.8 4.7 3.5 -3.1 3.5 4.9 .. .. .. .. .. .. Source: World Bank and Haver Analytics. Note: e = estimate; f = forecast. 1. Aggregate growth rates calculated using constant 2010 U.S. dollars GDP weights. 2. Quarterly estimates are based on non-seasonally-adjusted real GDP, except for advanced economies, as well as Ecuador. Data for Bosnia and Herzegovina are from the production approach. Quarterly data for Jamaica are gross value added. Regional averages are calculated based on data from following countries. East Asia and Pacific: China, Indonesia, Malaysia, Mongolia, Philippines, Thailand, and Vietnam. Europe and Central Asia: Albania, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Georgia, Hungary, Kazakhstan, North Macedonia, Poland, Romania, Russia, Serbia, Turkey, and Ukraine. Latin America and the Caribbean: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, and Uruguay. Middle East and North Africa: Bahrain, Egypt, Iran, Kuwait, Qatar, and Saudi Arabia. South Asia: India and Sri Lanka. Sub-Saharan Africa: Botswana, Ghana, Kenya, Nigeria, South Africa, Tanzania, Uganda, and Zambia. 3. Annual GDP is on fiscal year basis, as per reporting practice in the country. 4. GDP data for Pakistan are based on factor cost. For Bangladesh, Bhutan, Nepal, and Pakistan, the column labeled 2019 refers to FY2018/19. For India, the column labeled 2018 refers to FY2018/19. 5. Quarterly data are preliminary. Click here to download data. G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 19 S T A TI S T I C A L A P P E N D IX 155 Data and Forecast Conventions The macroeconomic forecasts presented in this ments Statistics, and IMF International Financial report are prepared by staff of the Prospects Statistics. Group of the Development Economics Vice- Presidency, in coordination with staff from the Aggregations. Aggregate growth for the world and Macroeconomics, Trade, and Investment Global all sub-groups of countries (such as regions and Practice and from regional and country offices, income groups) is calculated as GDP-weighted and with input from regional Chief Economist average (at 2010 prices) of country-specific offices. They are the result of an iterative process growth rates. Income groups are defined as in the that incorporates data, macroeconometric models, World Bank’s classification of country groups. and judgment. Forecast Process. The process starts with initial Data. Data used to prepare country forecasts assumptions about advanced-economy growth come from a variety of sources. National Income and commodity price forecasts. These are used as Accounts (NIA), Balance of Payments (BOP), and conditioning assumptions for the first set of fiscal data are from Haver Analytics; the World growth forecasts for EMDEs, which are produced Development Indicators by the World Bank; the using macroeconometric models, accounting World Economic Outlook, Balance of Payments frameworks to ensure national account identities Statistics, and International Financial Statistics by and global consistency, estimates of spillovers the International Monetary Fund. Population from major economies, and high-frequency data and forecasts are from the United Nations indicators. These forecasts are then evaluated to World Population Prospects. Country- and ensure consistency of treatment across similar lending-group classifications are from the World EMDEs. This is followed by extensive discussions Bank. DECPG databases include commodity with World Bank country teams, who conduct prices, data on previous forecast vintages, and in- continuous macroeconomic monitoring and house country classifications. Other internal dialogue with country authorities and finalize databases include high-frequency indicators such growth forecasts for EMDEs. The Prospects as industrial production, consumer price indexes, Group prepares advanced-economy and house prices, exchange rates, exports, imports, and commodity price forecasts. Throughout the stock market indexes, based on data from forecasting process, staff use macroeconometric Bloomberg, Haver Analytics, OECD Analytical models that allow the combination of judgement House Prices Indicators, IMF Balance of Pay- and consistency with model-based insights. G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 19 S E L E CTE D TO P I C S 157 Global Economic Prospects: Selected Topics, 2015-19 Growth and Business Cycles Informality Growing in the shadow: Challenges of informality January 2019, Chapter 3 Linkages between formal and informal sectors January 2019, Box 3.1 Regional dimensions of informality: An overview January 2019, Box 3.2 Casting a shadow: Productivity in formal and informal firms January 2019, Box 3.3 Under the magnifying glass: How do policies affect informality? January 2019, Box 3.4 East Asia and Pacific January 2019, Box 2.1.1 Europe and Central Asia January 2019, Box 2.2.1 Latin America and the Caribbean January 2019, Box 2.3.1 Middle East and North Africa January 2019, Box 2.4.1 South Asia January 2019, Box 2.5.1 Sub-Saharan Africa January 2019, Box 2.6.1 Inflation Currency depreciation, inflation, and central bank independence June 2019, Special Focus 1.2 The great disinflation January 2019, Box 1.1 Growth prospects Growth in low-income countries: Evolution, prospects, and policies June 2019, Special Focus 2.1 Long-term growth prospects: Downgraded no more? June 2018, Box 1.1 Global output gap Is the global economy turning the corner? January 2018, Box 1.1 Potential growth Building solid foundations: How to promote potential growth January 2018, Chapter 3 What is potential growth? January 2018, Box 3.1 Understanding the recent productivity slowdown: Facts and explanations January 2018, Box 3.2 Moving together? Investment and potential output January 2018, Box 3.3 The long shadow of contractions over potential output January 2018, Box 3.4 Productivity and investment growth during reforms January 2018, Box 3.5 East Asia and Pacific January 2018, Box 2.1.1 Europe and Central Asia January 2018, Box 2.2.1 Latin America and the Caribbean January 2018, Box 2.3.1 Middle East and North Africa January 2018, Box 2.4.1 South Asia January 2018, Box 2.5.1 Sub-Saharan Africa January 2018, Box 2.6.1 Investment slowdown Investment: Subdued prospects, strong needs June 2019, Special Focus 1.1 Weak investment in uncertain times: Causes, implications and policy responses January 2017, Chapter 3 Investment-less credit booms January 2017, Box 3.1 Implications of rising uncertainty for investment in EMDEs January 2017, Box 3.2 Investment slowdown in China January 2017, Box 3.3 Interactions between public and private investment January 2017, Box 3.4 158 S E L E CTE D TO P I C S G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 19 Global Economic Prospects: Selected Topics, 2015-19 Growth and Business Cycles Investment slowdown (continued) East Asia and Pacific January 2017, Box 2.1.1 Europe and Central Asia January 2017, Box 2.2.1 Latin America and the Caribbean January 2017, Box 2.3.1 Middle East and North Africa January 2017, Box 2.4.1 South Asia January 2017, Box 2.5.1 Sub-Saharan Africa January 2017, Box 2.6.1 Forecast uncertainty Quantifying uncertainties in global growth forecasts June 2016, Special Focus 1.2 Cross-border spillovers Who catches a cold when emerging markets sneeze? January 2016, Chapter 3 Sources of the growth slowdown in BRICS January 2016, Box 3.1 Understanding cross-border growth spillovers January 2016, Box 3.2 Within-region spillovers January 2016, Box 3.3 East Asia and Pacific January 2016, Box 2.1.1 Europe and Central Asia January 2016, Box 2.2.1 Latin America and the Caribbean January 2016, Box 2.3.1 Middle East and North Africa January 2016, Box 2.4.1 South Asia January 2016, Box 2.5.1 Sub-Saharan Africa January 2016, Box 2.6.1 Fiscal space Having space and using it: Fiscal policy challenges and developing economies January 2015, Chapter 3 Fiscal policy in low-income countries January 2015, Box 3.1 What affects the size of fiscal multipliers? January 2015, Box 3.2 Chile’s fiscal rule—an example of success January 2015, Box 3.3 Narrow fiscal space and the risk of a debt crisis January 2015, Box 3.4 Revenue mobilization in South Asia: Policy challenges and recommendations January 2015, Box 2.3 Other topics Education demographics and global inequality January 2018, Special Focus 2 Recent developments in emerging and developing country labor markets June 2015, Box 1.3 Linkages between China and Sub-Saharan Africa June 2015, Box 2.1 What does weak growth mean for poverty in the future? January 2015, Box 1.1 What does a slowdown in China mean for Latin America and the Caribbean? January 2015, Box 2.2 G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 19 S E L E CTE D TO P I C S 159 Global Economic Prospects: Selected Topics, 2015-19 Commodity Markets The role of the EM7 in commodity production June 2018, SF1, Box SF1.1 Commodity consumption: Implications of government policies June 2018, SF1, Box SF1.2 With the benefit of hindsight: The impact of the 2014–16 oil price collapse January 2018, Special Focus 1 From commodity discovery to production: Vulnerabilities and policies in LICs January 2016, Chapter 1 After the commodities boom: What next for low-income countries? June 2015, Special Focus Low oil prices in perspective June 2015, Box 1.2 Understanding the plunge in oil prices: Sources and implications January 2015, Chapter 4 What do we know about the impact of oil prices on output and inflation? A brief survey January 2015, Box 4.1 Globalization of Trade and Financial Flows Poverty impact of food price shocks and policies January 2019, Chapter 4 Arm’s-Length trade: A source of post-crisis trade weakness June 2017, Special Focus 2 The U.S. economy and the world January 2017, Special Focus Regulatory convergence in mega-regional trade agreements January 2016, Box 4.1.1 Can remittances help promote consumption stability? January 2016, Chapter 4 Potential macroeconomic implications of the Trans-Pacific Partnership Agreement January 2016, Chapter 4 Regulatory convergence in mega-regional trade agreements January 2016, Box 4.1.1 China’s integration in global supply chains: Review and implications January 2015, Box 2.1 What lies behind the global trade slowdown? January 2015, Chapter 4 Monetary and Exchange Rate Policies Currency depreciation, inflation, and central bank independence June 2019, Special Focus 1.2 The great disinflation January 2019, Box 1.1 Corporate debt: Financial stability and investment implications June 2018, SF2 Recent credit surge in historical context June 2016, SF1 Peg and control? The links between exchange rate regimes and capital account policies January 2016, Chapter 4 Negative interest rates in Europe: A glance at their causes and implications June 2015, Box 1.1 Hoping for the best, preparing for the worst: Risks around U.S. rate liftoff and policy options June 2015, SF1.1 Countercyclical monetary policy in emerging markets: Review and evidence January 2015, Box 1.2 Fiscal Policies Debt: No free lunch June 2019, Box 1.1 Debt in low-income countries: Evolution, implications, and remedies January 2019, Chapter 4 Debt dynamics in emerging market and developing economies: Time to act? June 2017, Special Focus 1 Having fiscal space and using it: Fiscal challenges in developing economies January 2015, Chapter 3 Revenue mobilization in South Asia: Policy challenges and recommendations January 2015, Box 2.3 Fiscal policy in low-income countries January 2015, Box 3.1 What affects the size of fiscal multipliers? January 2015, Box 3.2 Chile’s fiscal rule—an example of success January 2015, Box 3.3 Narrow fiscal space and the risk of a debt crisis January 2015, Box 3.4 160 S E L E CTE D TO P I C S G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 19 Prospects Group: Selected Other Publications on the Global Economy, 2015-19 Commodity Markets Outlook Column1 Food price shocks: Channels and implications April 2019, Special Focus The implications of tariffs for commodity markets October 2018, Box The changing of the guard: Shifts in industrial commodity demand October 2018, Special Focus Oil exporters: Policies and challenges April, 2018, Special Focus Investment weakness in commodity exporters January 2017, Special Focus OPEC in historical context: Commodity agreements and market fundamentals October 2016, Special Focus Energy and food prices: Moving in tandem? July 2016, Special Focus Resource development in an era of cheap commodities April 2016, Special Focus Weak growth in emerging market economies: What does it imply for commodity markets? January 2016, Special Focus Understanding El Niño: What does it mean for commodity markets? October 2015, Special Focus How important are China and India in global commodity consumption July 2015, Special Focus Anatomy of the last four oil price crashes April 2015, Special Focus Putting the recent plunge in oil prices in perspective January 2015, Special Focus Inflation in Emerging and Developing Economies Inflation: Concepts, evolution, and correlates Chapter 1 Understanding global inflation synchronization Chapter 2 Sources of inflation: Global and domestic drivers Chapter 3 Inflation expectations: Review and evidence Chapter 4 Inflation and exchange rate pass-through Chapter 5 Inflation in low-income countries Chapter 6 Poverty impact of food price shocks and policies Chapter 7 High-Frequency Monitoring Column1 Global Monthly newsletter ECO-AUDIT Environmental Benefits Statement e World Bank Group is committed to reducing its environmental footprint. In support of this commitment, we leverage electronic publishing options and print-on-demand technology, which is located in regional hubs worldwide. Together, these initiatives enable print runs to be lowered and shipping distances decreased, resulting in reduced paper consumption, chemical use, greenhouse gas emissions, and waste. We follow the recommended standards for paper use set by the Green Press Initiative. e majority of our books are printed on Forest Stewardship Council (FSC)-certi ed paper, with nearly all containing 50-100 percent recycled content. e recycled ber in our book paper is either unbleached or bleached using totally chlorine-free (TCF), processed chlorine-free (PCF), or enhanced elemental chlorine-free (EECF) processes. More information about the Bank’s environmental philosophy can be found at http://www.worldbank.org/corporateresponsibility. G lobal growth has continued to soften this year. A modest recovery in emerging market and developing economies continues to be constrained by subdued investment, which is dampening prospects and impeding progress toward achieving critical development goals. Downside risks to the outlook remain elevated, and policymakers continue to face major challenges to boost resilience and foster long-term growth. In addition to discussing global and regional economic developments and prospects, this edition of Global Economic Prospects includes analytical essays on the benefits and risks of government borrowing, recent investment weakness in emerging market and developing economies, the pass-through of currency depreciations to inflation, and the evolution of growth in low-income countries. 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 economies, 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. SKU 21398