Though indicating that economic risks in the United States and other advanced economies have eased and growth is firming, the World Bank expects global GDP to expand only 2.2% in 2013, down from its January 2013 prediction of 2.4% growth. Global GDP grew 2.3% in 2012.
In its Global Economic Prospects report released today, the bank said pick-up in developing countries will be modest because of capacity constraints in several middle income countries.
The World Bank said global growth would strengthen to 3.0% in 2014 and 3.3% in 2014.
Developing-country GDP is now projected to be around 5.1% in 2013, strengthening to 5.6% and 5.7% in 2014 and 2015, respectively. Growth in Brazil, India, Russia, South Africa and Turkey has been held back by supply bottlenecks. While external risks have eased, growth in these countries is unlikely to reach pre-crisis rates unless supply-side reforms are completed, the bank stated.
In China, growth has slowed as authorities seek to rebalance the economy toward more domestic consumption. Looking at broader region-wide trends, the East Asia & Pacific region is expected to grow by 7.3% this year; Europe & Central Asia by 2.8%; Latin America & the Caribbean by 3.3%; Middle East & North Africa by 2.5%; South Asia by 5.2%; and Sub-Saharan Africa by 4.9%.
For high-income countries, fiscal consolidation, high unemployment and still weak consumer and business confidence will keep growth this year to a modest 1.2%, firming to 2.0% in 2014 and 2.3% by 2015. The bank expects the European economy to contract by 0.6% for 2013, compared with its previous projection of 0.1%. Euro Area growth is expected to be a modest 0.9% in 2014 and 1.5% in 2015.
“While there are markers of hope in the financial sector, the slowdown in the real economy is turning out to be unusually protracted,” said Kaushik Basu, senior vice president and chief economist at the World Bank. “This is reflected in the stubbornly high unemployment in industrialized nations, with unemployment in the eurozone actually rising, and in the slowing growth in emerging economies, with India’s annual growth having dropped below 6% for the first time in 10 years. Also, there is heightened speculation that the U.S. may withdraw QE and widespread concern about its consequences.”
The World Bank said forward-looking indicators such as purchasing manager indexes suggested that global manufacturing output growth was moderating in the current quarter of 2013. Since the Great Recession, the bank said, growth in the industrial sectors has been “unimpressive globally, with the exception of East Asia and Pacific, and China in particular.”
More than four years after the financial crisis began, the bank noted, global industrial output is only 5.3% higher than its pre-crisis peak. Output in high-income countries is still 6.5% below pre-crisis levels, with output in the Euro area and Japan sharply lower and output in the United States having almost regained pre-crisis levels. Output in developing countries outside China is 2.6% higher than its pre-crisis peak.
Growth in developing countries has been most dynamic in East Asia and Pacific mainly reflecting double-digit industrial production growth in China, where output is 67.9% higher than the pre-crisis high, versus 12% in the remaining countries in the region. Industrial output in South Asia and Europe and Central Asia are 19.6% and 2% higher respectively than their pre-crisis peaks.
Increased Capacity Puts Pressure on Commodity Prices
Global trade, after contracting for several months, is expanding once again, the World Bank said, but trade is expected to expand only 4.0% in 2013, well off the pre-crisis pace of 7.3%. Not only will the volume of trade grow less quickly than in the past, the value of trade will grow even less quickly as commodity prices begin to ease in response to rapidly increasing supply. The prices of metals and minerals are already down by 30% and that of energy by 14% since their peaks in early 2011.
“The coming on stream of new mines and energy sources is putting downward pressure on most industrial commodity prices. If commodity prices were to decline even faster than expected, commodity exporting developing countries could experience serious fiscal setbacks and weaker growth,” said Hans Timmer, director of the bank’s Development Prospects Group.
Part of the resilience of global trade, despite the weakness in high-income economies, has been due to rapid expansion in South-South trade. More than 50% of developing country exports now go to other developing countries. Even when China is excluded, South-South trade has been growing at an average rate of 17.5% a year over the past decade, with manufacturing trade expanding as rapidly as commodities trade.
Gross capital flows to developing countries, which were relatively weak for most of the post-crisis period, have reached record levels. International bond issuance by developing countries is also at record levels, while bank lending and equity issuance for developing countries is up by almost 70% as compared with first 5 months of 2012. The rebound in bank-lending suggests that for developing countries the most acute effects of high-income banking-sector deleveraging have passed. Despite the uptick, as a percent of developing-country GDP, capital flows remain well below pre-crisis levels.
Prospects for developing countries are varied, the World Bank said. In several developing countries, notably in East Asia & the Pacific, demand appears to be expanding faster than supply, resulting in growing imbalances, such as inflation, asset-price bubbles, rising debt levels and deteriorating current account balances. Most countries in Sub-Saharan Africa are also running at or close to full capacity, risking a build-up of inflationary pressures. In developing Europe, although activity has picked up, growth has not been fast enough to quickly reduce post-crisis output gaps and unemployment. Finally, in the Middle East & North Africa, GDP growth has been disrupted by political and social tensions. Unemployment and slow productivity remain central policy challenges.
“Given capacity constraints, to achieve higher growth on a sustained basis, most developing countries need to once again prioritize structural reforms like easing the cost of doing business, opening up to international trade flows and foreign investment, and investing in infrastructure and human capital. These measures underpinned strong developing country growth over the past 20 years and are worth sticking with,” said Andrew Burns, manager of Global Macroeconomics and lead author of the report.