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Tehmina KhanWorld BankMay 6, 2014
Global OutlookUpdate
Tightening conditions; narrowing options
http://www.worldbank.org/globaloutlook
2
Key messages
1. Global economy accelerating led by high-income economies 2. Global trade volumes will rebound buoyed by high-income demand,
but USD value of trade will be relatively muted3. Developing country growth to pick up slowly due to headwinds and
capacity constraints4. Developing-countries have not done enough to restore
macroeconomic buffers following the crisis5. Better outcomes requires further structural reform
• Risks include:– Fallout from situation in the Ukraine– Financial tightening risks– Possible contagion from middle-income countries
Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 Jul '13 Oct '13 Jan '14-15
-10
-5
0
5
10
15
Industrial production, % 3m/3m saar
United States
Euro area
Japan
Source: World Bank, Datastream.
Q4
Latest data suggests continued strengthening in high income countries
Q1
4
Main messages
• High-income economies are reviving• Developing regions may be slowing, partly in response to
Ukraine• Trade volumes will rebound buoyed by high-income demand,
but USD value of trade will be relatively muted• Developing-countries have not done enough to restore
macroeconomic buffers following the crisis• Better outcomes requires further structural reform• Risks include:
– Fallout from situation in the Ukraine– Financial tightening risks– Possible contagion from middle-income countriesJan '11 Jul '11 Jan '12 Jul '12 Jan '13 Jul '13 Jan '14
40
42
44
46
48
50
52
54
56
58
60
Manufacturing PMI (+50=expansion)
EMU
United States
Japan
Business confidence in high-income countries has improved markedly
Source: World Bank, Markit, Haver Analytics.
5
Developing countries
• Short-term cycle is strengthening• Financial turmoil has eased, borrowing
costs are up, but remain low• Forecast is for modest pickup in growth• Growth has been disappointing in some
regions
6
Feb '12 Aug '12 Feb '13 Aug '13 Feb '14-15
-10
-5
0
5
10
15Industrial production, % 3m/3m saar
China
India
Dev ex India and China
Source: World Bank, Datastream.
Growth firming or solid in most developing countries
7
Jan '12 Jul '12 Jan '13 Jul '13 Jan '1445
47
49
51
53
55
57
59
China
Europe & Central Asia
Latin America & Car-ibbean
South Asia
Sub-Saharan Africa
Business confidence suggests growth will slow in second quarter
Balance of respondents (>50 implies expansion, <50 decline)
Source: World Bank, Markit, National authorities.
8
Financial turmoil has abated, impacts have been limited
• Most developing countries not affected by turmoil
• Capital flows have recovered
• Developing country yields have returned to fall levels, and are actually 55 basis points lower than before the crisis
• Markets remain volatile, in part because rising rates will change portfolio decisions
• Vulnerabilities have declined but remain Jan '12 Jul '12 Jan '13 Jul '13 Jan '14
0
10
20
30
40
50
60
70
80 Syndicated Bank loansBond IssuanceEquity Issuance
Gross capital flows, billions USD
9
Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Jul '13-12
-10
-8
-6
-4
-2
0
2
4
6
In-dia
Brazil
South Africa
Turkey
Indonesia
Thailand
Current accounts deficits have narrowed in many of the countries hardest hit during the summer turmoil
Current account balance (% of GDP)
Source: World Bank, Haver.
10
Outlook
• Projected pick up in growth to be led by high-income countries
• Developing-country growth in line with underlying potential
• Regional growth shows strengthening or stability going forward
• Slower growth in middle-income countries may reflect weaker than thought potential
11
A gradual pick up in growth, led by high-income countries
2000 2002 2004 2006 2008 2010 2012 2014 2016-4
-2
0
2
4
6
8
10
2.42.9 3.3 3.4
1.32.0 2.4 2.4
4.8 5.0 5.45.5
World
High In-come
Developing
Percent annual GDP growth
Source: World Bank.
12
Contribution of high-income countries to global trade growth will more than double
Source: World Bank.
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
-25
-20
-15
-10
-5
0
5
10
15
Contribtion from Developing (% points)
Global Trade, % annual change
13
Baseline: tighter conditions will reduce flows to developing countries by around of 0.6 % of GDP
Source: World Bank.
FDI
Bank
lend
ing
Portf
olio
Inve
stm
ent
Mut
ual F
und
Flow
s
-50-45-40-35-30-25-20-15-10
-50
-1.0-0.9-0.8-0.7-0.6-0.5-0.4-0.3-0.2-0.10.0
Percent change
Percent of GDP change [Right]
Percent Percent
Estimated decline in capital inflows in the baseline, relative to no policy change:
14
Jan '05 Jan '06 Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 Jan '1440
60
80
100
120
140
160
180
Metals and Min-erals
Food
Energy
USD price of internationally traded commodities, index 2010=100
Price declines 2011 y/y
Metals -34.0 -12.2
Food -13.9 -6.3
Energy -9.9 +1.3
Falling commodity or stable commodity prices imply value of trade is growing less quickly
Source: World Bank.
15
USD value of trade growing much less quickly than in 2000s
20002001200220032004200520062007200820092010201120122013201420152016-25
-20
-15
-10
-5
0
5
10
15
20
25
Value of tradeVolume of trade
2013-16: 5.7%
Growth of USD and volume of international trade
Source: World Bank.
Average growth rate nominal USD trade 2002-08: 15.9%
16
Risks
• Financial conditions will be tighter over the next five years, implying weaker financial flows, higher capital costs and potential banking-sector stress in economies with rapid expansions in credit over past 5 years
• Developing countries remain vulnerable: little progress has been made to strengthen developing-country buffers depleted in post-crisis period or push forward with structural reform
• Financial turmoil in a large middle-income country could induce contagion– China risks remain– high-short-term and foreign denominated debt in Turkey
• Situation in Ukraine would likely have minor consequences unless global confidence is shaken
17
Ukraine situation
• WBG Russia 2014 forecast downgraded 0.9 pp. to 1.3 could be -1.8% in low case scenario
• Ukraine forecast downgraded to -5.0 percent• Rest of world impact likely small unless
sanctions intensify or conflict escalates• Impacts on global food markets likely marginal• Potentially serious impacts on Europe and
Russia if there is a disruption in oil and or natural gas supply / demand
18
Downside risks threaten capital flows, risk aversion and GDP
GDP, percentage point deviation from baseline, overshooting scenario
Source: World Bank
-60
-40
-20
0
20
40
60
-2.0-1.5-1.0-0.50.00.51.01.52.0
Taper-related extended increase in US yieldsModerate increase in risk aversion (market based)Sharp increase in risk aversion (possibly Ukraine related)Taper-related extended increase in US yields
19
Tensions between financial stability and growth restructuring in China
Restructuring is occurring• Growth has slowed sharply (est. 6-6.5% in Q1)• Unit labor costs are rising• Financial-sector regulations are tightening• All 3 imply reduced profitability / liquidityAuthorities can respond• Have responded with fiscal stimulus of c. 2.5% of GDP
but mainly through credit vehicles• More than 80% of credit issued by state controlled or
owned entities
20
Developing country resilienceneeds to be built up
• Countries should be engaged in modest fiscal consolidation
• Monetary policy has tightened but remains loose
• Relatively elevated current account deficits imply significant financing needs
• Metal price declines have put additional pressures on exporters
21
20052006
20072008
20092010
20112012
2013-5.0-4.5-4.0-3.5-3.0-2.5-2.0-1.5-1.0-0.50.0
Structrural deficitActual
Both structural and actual fiscal deficits much higher than in 2007
Percent of GDP
-35 -25 -15 -5 5 15 25M
ore02468
10121416
# of countries
Change in debt -GDP ratio (2013-2007), ppts of GDP
Partly as a result, developing country debt to GDP ratios have been rising
1999 2001 2003 2005 2007 2009 2011 2013-6
-4
-2
0
2
4
6
ChinaEast Asia excl. China P.R.Europe & Central AsiaLatin America & CaribbeanMiddle East & N. AfricaSouth AsiaSub-Saharan Africa
Output Gaps (% of Potential GDP)
With limited slack in most regions, inflation has been trending up
2000 2002 2004 2006 2008 2010 2012 2014-2
0
2
4
6
8
10
High-income countries
Developing countriesInflation, y/y, %
23
Despite recent rate hikes, real interest rates are low in many developing countries
Brazil
Ukraine
Zambia
Nigeria
China
Ghana
Armenia
Hungary
Romania
VietnamAngo
la
Turkey
Georgia
Indonesia
Russia
India
Thailan
d
South
Africa
Mexic
o
Mongo
lia-8
-6
-4
-2
0
2
4
6
8
Change in real policy rate (s-ince April 2013)
Real policy rate
Percent, percentage points
Source: World Bank, Datastream, IMF.
24
2007 2008 2009 2010 2011 2012 2013-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
Developing oil importers
Developing oil exporters
Current account balances of both developing oil importers and exporters have deteriorated
Source: World Bank.
Current account balance, % of GDP
25
Concluding remarks
• Strengthening recovery in high-income world is supporting developing country growth
• Positive effects partly offset by tighter financial conditions and supply side constraints
• Trade volume growth will recover, but the USD value of trade will grow much less quickly than during pre-crisis period
• Economic risks have declined and are more balances, but geopolitical risks are elevated
• Developing countries need to do more to build up buffers, and need to reinvigorate structural reforms
26
Andrew BurnsWorld BankApril, 23 2014
Global OutlookUpdate
Tightening conditions; narrowing options
http://www.worldbank.org/globaloutlook
27
Extra Slides
28
01-Jan-14 01-Feb-14 01-Mar-14 01-Apr-1480
85
90
95
100
105
110
115
120
125China Indonesia India Russian Federation Thailand TurkeySouth Africa 100
Global sell off
Except China and Russia stock markets have recovered
Index, January 1 2014=100
Source: World Bank, Datastream.
29
Earlier rapid increase in credit increases the risk of banking-sector crises
Thail
and
Bhutan
Botswan
a
Armen
iaSe
rbiaChina
St. Lu
cia
Vanuatu
Vietnam
Malaysi
a
Morocco
Gambia
Turke
y
Venezu
ela
Leso
tho
Cambodia
Paragu
ay
Lao PDR
Malawi
Romania
Kosovo
Brazil
-
5
10
15
20
25
30
35
40
-
20
40
60
80
100
120
140
160
180
Change in Credit levelCredit levels in 2012
Change in net bank credits, 2012-2007 (% of GDP) Level of banking-sector net credits in 2012, % of GDP
Source: World Bank, IMF.
30
Belarus
India*
Mongo
liaKenya
Zambia
Turkey
South
Africa
Georgia
Sri La
nkaSe
rbia
Dom. Republic
RussiaBraz
ilChile
Albaia
Romania
Hungary
Euro ar
eaJap
an02468
1012141618
Latest Inflation rateUpper bound of inflation target
Inflation is above target in several economies
Source: World Bank, Datastream, National sources.
Inflation, policy rate, %
31
Combined Russia and Ukraine are large grain exporters
Wheat• Russia and Ukraine account for 11 and 5% of
global exports • But only 0.7 and 0.2% of global production• Markets are well suppliedMaize• Ukraine accounts for 14% of global exports, but
only 1 percent of global production• Markets are well supplied
32
Russia is #1 world producer of crude oil and a key source of natural gas for the European Union
Crude oil• World’s largest oil producer (> 10mb/d – 13% of world production)• Exports 7.1 mb/d (4.3 crude, 2.8 refined product)
– c. 5 mb/d to OECD countries (c. 4 mb/d to Europe)
Natural Gas• 30% of European natural gas sourced from Russia
– Half of this transits Ukraine, although about 2/3 of this could be re-routed if disrupted by Ukraine.
• Germany, Italy, Poland, Hungary and Southern Europe are highly dependent on Russian natural gas
Dependencies• A 2.7mb/d disruption to Russian exports could push non-Russian prices up 30%• 2.7 mb/d represents about 2.5% of Russian GDP and 7% of government revenue• A 30% price hike would cost Euro Union about 0.9% of GDP• GDP disruptions would likely be higher because of binding supply constraints in natural
gas dependent sectors
33
Output to accelerate, but outturns have disappointed
Source: World Bank.
GDP, % annual growth
Europe and Central
Asia
East Asia and Pacific
Latin Amer-ica and
Caribbean
Middle East and
North Africa
South Asia Sub-Sa-haran Africa
-1012345678 2012 2013e 2014f 2015f 2016f
34
Even a muted acceleration increases significantly the role of US
High-income Developing0
1000000
2000000
3000000
4000000
5000000
6000000
7000000
8000000 2013-2010 2016-2014
Change in GDP, trillions of current USD
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