World Bank sees improving global economy but risks remain

WSHINGTON - 5 June 2017: The World Bank is keeping its forecast for global growth in 2017 unchanged, because for the first time in years, no new risks have arisen to threaten the outlook.

"Over the past four years this is the first time we didn't have a downgrade and I think that's very good sign. Growth is firming," World Bank economist Ayhan Kose told AFP.
The World Bank expects the global economy to grow by 2.7 percent this year, and 2.9 percent in 2018 and 2019, the same as the January forecast. And after 10 years of crisis and tepid recovery, keeping a stable growth forecast is news.

Kose, who heads the World Bank's Development Prospects Group, which twice a year prepares the global economic forecasts, attributes the good news to the fact the risks, while still present, have receded.

The issues that had the potential to derail the incipient recovery included stress in financial markets as they adapt to rising US interest rates, uncertainty over the stability of oil prices, and concerns about election outcomes in Europe.

But after the Federal Reserve's two rate increases in recent months, markets have reacted "very well," European political uncertainty "has receded quite a bit" -- French voters rejected the anti-EU candidate -- and oil prices while still low, have stabilized after OPEC and non-OPEC oil producers extended the agreement to limit output.

"All in all, we still think that risks are tilted to the downside but the risk profile is a little bit more improved today versus six months ago," Kose said.

However, uncertainty over policies, especially US trade protectionism and immigration restrictions under the Trump administration, is having immediate, real impacts on conditions that could dampen growth, Kose cautioned.

Companies may delay business decisions and postpone investments in the absence of "well-defined policies," for example in a case where companies have cross-border operations impacted by the North American Free Trade Agreement which President Donald Trump has opened to renegotiation.

Kose noted the "serious slowdown" in investment in emerging markets and developing economy already seen over the past six years.

"We are of course worried about how policy uncertainty impacts investment growth and then ultimately impacts growth in the real economy," he said.

But despite the slowing investment growth, which has fallen to three percent from 10 percent six years ago, emerging markets are returning as a key engine for the global economy.

Kose said the "important story that should not be missed" is that the seven largest emerging market economies -- China, Brazil, Mexico, India, Indonesia, Turkey and Russia -- which represent about half of total emerging market GDP, are "turning the corner" and returning to growth.

While China's GDP is slowing, to 6.5 percent this year, and 6.3 percent in the next two years, Russia and Brazil are seeing positive expansion after two years of recession.
The fact that "as a group after prolonged period of slowdown they're able to show growth accelerating is welcome news for emerging markets as well as for global economy," Kose said.

Their performance has positive spillover effects on other economies, especially in their own neighborhoods, but also for advanced economies like Germany which sees more manufactured goods exports.

As a whole, emerging market and developing economies are expected to grow 4.1 percent this year, up from just 3.5 percent in 2016, and are projected to continue accelerating to 4.5 percent next year and 4.7 percent in 2019.

A big challenge for those economies remains their rising debt and deficits, with half of those countries seeing government debt rise more than 10 points of GDP in 10 years.
That makes them vulnerable if the economies face a downturn or as interest rates rise, Kose said.

Policymakers will have to "pay close attention" to these issues and improve tax collection and debt management as well as spending more efficiently, Kose said.

The new forecasts come just days after Trump announced he was pulling the United States out of the 2015 Paris climate accord, saying it imposed an unfair burden on the US economy and would jeopardize American workers.

But that will have little impact on the World Bank's work, which has as a central mission helping developing nations deal with the impacts of climate change.

Kose said countries already are seeing changing environmental patterns already, natural disasters and droughts, that are "impacting significant numbers of people."

"These are important risks," he said, and the bank "has a commitment to tackle climate change related challenges, and work with countries to help them address the risks they are already facing."

That includes developing clean energy, climate-smart agriculture and sustainable urbanization, and disaster risk management.