Global economy to drop to 2.9 percent | Sunday Observer

Global economy to drop to 2.9 percent

Global economic growth is projected to soften from a downwardly revised three percent in 2018 to 2.9 percent in 2019 amid rising downside risks to the outlook, a spokesman for the World Bank said on Tuesday.

International trade and manufacturing activity have softened, trade tensions remain elevated, and some large emerging markets have experienced substantial financial market pressures.

Growth among advanced economies is forecast to drop to two percent this year, the January 2019 Global Economic Prospects said. Slowing external demand, rising borrowing costs and persistent policy uncertainties are expected to weigh on the outlook for emerging market and developing economies. Growth for this group is anticipated to hold steady at a weaker-than-expected 4.2 percent this year.

“At the beginning of 2018, the global economy was firing on all cylinders, but it lost speed during the year and the ride could get even bumpier in the year ahead,” World Bank Chief Executive Officer Kristalina Georgieva said.

“As economic and financial headwinds intensify for emerging and developing countries, the world’s progress in reducing extreme poverty could be jeopardised. To keep the momentum, countries need to invest in people, foster inclusive growth and build resilient societies.”

The upswing in commodity exporters has stagnated, while activity in commodity importers is decelerating. Per capita growth will be insufficient to narrow the income gap with advanced economies in about 35 percent of emerging market and developing economies in 2019, with the share increasing to 60 percent in countries affected by fragility, conflict and violence.

A number of developments could act as a further brake on activity. A sharper tightening in borrowing costs could depress capital inflows and lead to slower growth in emerging markets and developing economies. Past increases in public and private debt could heighten vulnerability to swings in financing conditions and market sentiment. Intensifying trade tensions could result in weaker global growth and disrupt globally interconnected value chains.

“Robust economic growth is essential to reducing poverty and boosting shared prosperity,” World Bank Group Vice President for Equitable Growth, Finance and Institutions, Ceyla Pazarbasioglu said.

“As the outlook for the global economy has darkened, strengthening contingency planning, facilitating trade, and improving access to finance will be crucial to navigate uncertainties and invigorate growth.”

Analytical chapters address key current topics:

* The informal sector accounts for about 70 percent of employment and 30 percent of GDP in emerging market and developing economies. Since it is associated with lower productivity and tax revenues and greater poverty and inequality, this is symptomatic of opportunities lost. Reducing tax and regulatory burdens, improving access to finance, offering better education and public services, and strengthening public revenue frameworks could level the playing field between formal and informal sectors.

* Debt vulnerabilities in low-income countries are rising. While borrowing has enabled many countries to tackle important development needs, the median debt-to-GDP ratio of low-income countries has climbed, and the composition of debt has shifted toward more expensive market-based sources of financing.

These economies should focus on mobilising domestic resources, strengthening debt and investment management practices and building more resilient macro-fiscal frameworks.

* Sustaining historically low and stable inflation is not guaranteed in emerging market and developing economies. Cyclical pressures that have depressed inflation over the past decade are gradually dissipating.

The long-term factors that have helped reduce inflation over the past five decades – global trade and financial integration, widespread adoption of robust monetary policy frameworks – may lose momentum or reverse. Maintaining low global inflation may become as much of a challenge as achieving it.

* Policies aimed at softening the blow of global food price swings can have unintended consequences if implemented by governments in uncoordinated fashion. Government interventions can provide short-term relief, but widespread action is likely to exacerbate food price spikes, with heaviest impact on the poor. For example, trade policies during the 2010-11 food price spike may have accounted for more than one-quarter of the increase in the world price of wheat and maize. The 2010-11 food price spike tipped 8.3 million people or almost one percent of the world’s poor into poverty.

“Designing tax and social policies to level the playing field for formal and informal sectors and strengthening domestic revenue mobilisation and debt management will be priorities for policymakers to overcome the challenges associated with informality in developing economies,” World Bank Prospects Group Director Ayhan Kose said.

East Asia and Pacific

East Asia and Pacific is one of the world’s fastest-growing developing regions. Regional growth is expected to moderate to six percent in 2019, assuming broadly stable commodity prices, a moderation in global demand and trade and a gradual tightening of global financial conditions.

Growth in China is expected to drop to 6.2 percent this year as domestic and external rebalancing continue. The rest of the region is expected to grow at 5.2 percent as resilient demand offsets the negative impact of slowing exports. Indonesia’s growth is expected to hold steady at 5.2 percent. The expansion of the Thai economy is expected to slow in 2019 to 3.8 percent.

Europe and Central Asia

The lingering effects of financial stress in Turkey are anticipated to weigh on regional growth this year, slowing it to 2.3 percent in 2019. Turkey is forecast to experience weak activity and slow to a 1.6 percent pace due to high inflation, high interest rates and low confidence, dampening consumption and investment. Growth in the western part of the region, excluding Turkey, is projected to slow. Poland is anticipated to drop to four percent as Euro Area growth slows. Growth in the eastern part of the region is also anticipated to drop as large economies, including Russia, Kazakhstan and Ukraine decelerate.

South Asia

Regional growth is expected to accelerate to 7.1 percent in 2019, underpinned by strengthening investment and robust consumption. India is forecast to accelerate to 7.3 percent as consumption remains robust and investment growth continues. Bangladesh is expected to drop to seven percent as activity is supported by strong private consumption and infrastructure spending. Pakistan’s growth is projected to decelerate to 3.7 percent, with financial conditions tightening to help counter rising inflation and external vulnerabilities.

Sri Lanka is anticipated to speed up slightly to four percent in 2019, supported by robust domestic demand and investment boosted by infrastructure projects. Nepal’s post-earthquake momentum is forecast to moderate, and growth should drop to 5.9 percent. 

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