Worst is over, but road remains bumpy
Four years after the onset of the global financial crisis, the worst appears to be over for the developing world. Yet, developing countries need to focus on raising the growth potential of their economies, while strengthening buffers to deal with risks from the Euro Area and fiscal policy in the United States, says the World Bank in the newly-released Global Economic Prospects (GEP) report.
"The economic recovery remains fragile and uncertain, clouding the prospect for rapid improvement and a return to more robust economic growth," said World Bank Group President Jim Yong Kim. "Developing countries have remained remarkably resilient thus far. But we can’t wait for a return to growth in the high-income countries, so we have to continue to support developing countries in making investments in infrastructure, in health, in education. This will set the stage for the stronger growth that we know that they can achieve in the future."
The report was released in Washington DC on Jan 15.
Last year developing countries recorded among their slowest economic growth rates of the past decade, partly because of the heightened Euro Area uncertainty in May and June of 2012. Since then, financial market conditions have improved dramatically. International capital flows to developing countries, which fell 30 per cent in the second quarter of 2012, have recovered and bond spreads have declined to below their long-term average levels of around 282 basis points. Developing-country stock markets are up 12.6 per cent since June, while equity markets in high-income countries are up by 10.7 per cent. However, the real-side of the economy has responded modestly. Output in developing countries has accelerated, but is being held back by weak investment and industrial activity in advanced economies.
"From hopes for a U-shaped recovery, through a W-shaped one, the prognosis for global growth is getting alphabetically challenged. With governments in high-income countries struggling to make fiscal policies more sustainable, developing countries should resist trying to anticipate every fluctuation in developed countries and, instead, ensure that their fiscal and monetary policies are robust and responsive to domestic conditions," said Kaushik Basu, Senior Vice President and Chief Economist at The World Bank.
Despite slow growth in high-income countries, prospects for the developing world remain solid (albeit between 1 and 2 per centage points slower than in the pre-crisis period). In order to regain those earlier faster growth rates, developing countries will need to focus on productivity-enhancing domestic policies, to assure robust growth in the long term.
The World Bank estimates global GDP grew 2.3 per cent in 2012. Growth is expected to remain broadly unchanged at 2.4 per cent growth in 2013, before gradually strengthening to 3.1 per cent in 2014 and 3.3 per cent in 2015.
Developing countries recorded among their slowest economic growth rates of the past decade in 2012, with GDP estimated to have grown 5.1 per cent. Growth for developing countries is projected to expand by 5.5 per cent in 2013, strengthening to 5.7 per cent and 5.8 per cent in 2014 and 2015, respectively.
Growth in high-income countries remains weak, with their GDP expanding only 1.3 per cent in 2012 and expected to remain slow at an identical 1.3 per cent in 2013. Growth should gradually firm to 2 per cent in 2014 and 2.3 per cent by 2015. In the Euro Area, growth is now projected to only return to positive territory in 2014, with GDP expected to contract by 0.1 per cent in 2013, before edging up to 0.9 per cent in 2014 and 1.4 per cent in 2015.
Global trade of goods and services, which grew only 3.5 per cent in 2012, is expected to accelerate, expanding by 6 per cent in 2013 and 7 per cent by 2015.
While diminished, downside risks to the global economy persist and include a stalling of progress on the Euro Area crisis, debt and fiscal issues in the United States, the possibility of a sharp slowing of investment in China, and a disruption in global oil supplies.
Growth in the East Asia and Pacific region slowed to an estimated 7.5 per cent in 2012, from 8.3 per cent in 2011, largely due to weak external demand and policy actions in China to contain inflation. Growth in the region, excluding China, slowed less quickly due to robust domestic demand. Regional GDP growth is projected to pick up to 7.9 per cent in 2013 before stabilizing at around 7.5 per cent by 2015, with China's economy expanding at 8.4 per cent in 2013, before easing to 7.9 per cent by 2015. Ex-China, regional growth is forecast to average 5.9 per cent over 2013-2015 on strong domestic demand and intensified global trade flows.
GDP growth in Europe and Central Asia is estimated to have slowed sharply to 3 per cent in 2012 from 5.5 per cent in 2011 as the region faced significant headwinds, including weak external demand, deleveraging by European banks, summer drought and commodity-price induced inflationary pressures. Growth in the region is projected to rebound to 3.6 per cent in 2013 and 4.3 per cent by 2015. Medium-term prospects for the region will critically depend on progress in addressing external (large current account deficits) and domestic (large fiscal deficit, unemployment, and inflation) imbalances, lack of competitiveness, and structural constraints.
In the Latin America and the Caribbean region GDP growth declined to an estimated 3 per cent in 2012 (from 4.3 per cent in 2011) because of a marked slowdown in domestic demand in some of the largest economies in the region and a weak external environment. Growth in Brazil, the region's largest economy, expanded only an estimated 0.9 per cent in 2012. A more accommodative policy environment, stronger capital flows (notably FDI) and more robust external demand are expected to lift regional growth over 2013-2015 to an average of 3.8 per cent.
Growth in the Middle East and North Africa region continues to be affected by political uncertainty and unrest in several countries. Regional GDP is estimated to have grown by 3.8 per cent in 2012 (following a 2.4 per cent decline in 2011). Regional output is projected to slow to 3.4 per cent in 2013, rising to 4.3 per cent by 2015, assuming an easing of the current uncertainty and domestic unrest, a strengthening of tourism, and a recovery of the region's exports as global demand continues to firm.
In South Asia, growth weakened to an estimated 5.4 per cent in 2012 (7.4 per cent in 2011), mainly due to a sharp slowdown in India, where GDP growth (measured at factor cost) is forecast at 5.4 per cent in the fiscal year ending March 2013. Regional GDP is projected to grow by 5.7 per cent in the 2013 calendar year, and by 6.4 per cent and 6.7 per cent in 2014 and 2015, respectively, driven by policy reforms in India, stronger investment activity, normal agricultural production, and improvement in export demand. Growth in India (at factor cost) is projected at 6.4 per cent in the 2013 fiscal year, rising to 7.3 per cent by 2015.
Growth in Sub-Saharan Africa remained robust at 4.6 per cent in 2012. Excluding South Africa, the region's largest economy, GDP output expanded 5.8 per cent in 2012, with a third of countries in the region growing by at least 6 per cent. Robust domestic demand, still high commodity prices, increased export volumes (due to new capacity in the natural resource sector) and steady remittance flows supported growth in 2012. However, the expansion was curtailed by domestic factors, including earlier monetary policy tightening, protracted labor disputes, and political unrest. The region is projected to grow at its pre-crisis average of 5 per cent during 2013-15.