Public investment can bring private investment off the sidelines

Global economic growth is forecast to accelerate moderately to 2.7 percent in 2017 after a post-crisis low last year as obstacles to activity recede among emerging market and developing economy commodity exporters, while domestic demand remains solid among emerging and developing commodity importers, the World Bank said in a report released on Tuesday.

Growth in advanced economies is expected to edge up to 1.8 percent in 2017, the World Bank’s January 2017 Global Economic Prospects report said. Fiscal stimulus in major economies – particularly in the United States – could generate faster domestic and global growth than projected, although rising trade protection could have adverse effects. Growth in emerging market and developing economies as a whole should pick up to 4.2 percent this year from 3.4 percent in the year just ended amid modestly rising commodity prices.

Nevertheless, the outlook is clouded by uncertainty about policy direction in major economies. A protracted period of uncertainty could prolong the slow growth in investment that is holding back low, middle, and high income countries.

“After years of disappointing global growth, we are encouraged to see stronger economic prospects on the horizon,” World Bank Group President Jim Yong Kim said. “Now is the time to take advantage of this momentum and increase investments in infrastructure and people. This is vital to accelerating the sustainable and inclusive economic growth required to end extreme poverty.”

The report analyzes the worrisome recent weakening of investment growth in emerging market and developing economies, which account for one-third of global GDP and about three-quarters of the world’s population and the world’s poor. Investment growth fell to 3.4 percent in 2015 from 10 percent on average in 2010, and likely declined another half percentage point last year.

Slowing investment growth is partly a correction from high pre-crisis levels, but also reflects obstacles to growth that emerging and developing economies have faced, including low oil prices (for oil exporters), slowing foreign direct investment (for commodity importers), and more broadly, private debt burdens and political risk.

“We can help governments offer the private sector more opportunities to invest with confidence that the new capital it produces can plug into the infrastructure of global connectivity,” said World Bank Chief Economist Paul Romer. “Without new streets, the private sector has no incentive to invest in the physical capital of new buildings. Without new work space connected to new living space, the billions of people who want to join the modern economy will lose the chance to invest in the human capital that comes from learning on the job.”

Emerging market and developing economy commodity exporters are expected to expand by 2.3 percent in 2017 after an almost negligible 0.3 percent pace in 2016, as commodity prices gradually recover and as Russia and Brazil resume growing after recessions.

Commodity-importing emerging market and developing economies, in contrast, should grow at 5.6 percent this year, unchanged from 2016. China is projected to continue an orderly growth slowdown to a 6.5 percent rate. However, overall prospects for emerging market and developing economies are dampened by tepid international trade, subdued investment, and weak productivity growth.

Among advanced economies, growth in the United States is expected to pick up to 2.2 percent, as manufacturing and investment growth gain traction after a weak 2016. The report looks at how proposed fiscal stimulus and other policy initiatives in the United States could spill over to the global economy.

“Because of the outsize role the United States plays in the world economy, changes in policy direction may have global ripple effects. More expansionary U.S. fiscal policies could lead to stronger growth in the United States and abroad over the near-term, but changes to trade or other policies could offset those gains,” said World Bank Development Economics Prospects Director Ayhan Kose. “Elevated policy uncertainty in major economies could also have adverse impacts on global growth.”

» Download: Global Economic Prospects: Weak Investment in Uncertain Times, January 2017 (PDF, 5.03 MB)

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Regional Outlooks

Sub-Saharan Africa

Sub-Saharan African growth is expected to pick up modestly to 2.9 percent in 2017 as the region continues to adjust to lower commodity prices. Growth in South Africa and oil exporters is expected to be weaker, while growth in economies that are not natural-resource intensive should remain robust. Growth in South Africa is expected to edge up to a 1.1 percent pace this year. Nigeria is forecast to rebound from recession and grow at a 1 percent pace. Angola is projected to expand at a 1.2 percent pace.

East Asia and Pacific

Growth in the East Asia and Pacific region is projected to ease to 6.2 percent in 2017 as slowing growth in China is moderated by a pickup in the rest of the region. Output in China is anticipated to slow to 6.5 percent in the year. Macroeconomic policies are expected to support domestic drivers of growth despite soft external demand, weak private investment, and overcapacity in some sectors. Excluding China, growth in the region is seen advancing at a more rapid 5 percent rate in 2017. This largely reflects a recovery of growth in commodity exporters to its long-term average. Growth in commodity importers excluding China is projected to remain broadly stable, with the exception of Thailand where growth is expected to accelerate, helped by improved confidence and accommodative policies. Indonesia is anticipated to pick up to 5.3 percent in 2017 thanks to a rise in private investment. Malaysia is expected to accelerate to 4.3 percent in 2017 as adjustment to lower commodity prices eases and commodity prices stabilize.

Europe and Central Asia

Growth in the region is projected to pick up to 2.4 percent in 2017, driven by a recovery in commodity-exporting economies and recovery in Turkey. The forecast depends on a recovery in commodity prices and an easing of political uncertainty. Russia is expected to grow at a 1.5 percent pace in the year, as the adjustment to low oil prices is completed. Azerbaijan is expected to expand 1.2 percent and Kazakhstan is anticipated to grow by 2.2 percent as commodity prices stabilize and as economic imbalances narrow. Growth in Ukraine is projected to accelerate to a 2 percent rate.

Latin America and Caribbean

The region is projected to return to positive growth in 2017 and expand by 1.2 percent. Brazil is projected to expand at a 0.5 percent pace on easing domestic constraints. Weakening investment in Mexico, on policy uncertainty in the United States, is anticipated to result in a modest deceleration of growth this year, to 1.8 percent. A rolling back of fiscal consolidation and strengthening investment is expected to support growth in Argentina, which is forecast to grow at a 2.7 percent pace in 2017, while República Bolivariana de Venezuela continues to suffer from severe economic imbalances and is forecast to shrink by 4.3 percent this year. Growth in Caribbean countries is expected to be broadly stable, at 3.1 percent.

Middle East and North Africa

Growth in the region is forecast to recover modestly to a 3.1 percent pace this year, with oil importers registering the strongest gains. Among oil exporters, Saudi Arabia is forecast to accelerate modestly to a 1.6 percent growth rate in 2017, while continued gains in oil production and expanding foreign investment are expected to push up growth in the Islamic Republic of Iran to 5.2 percent. The forecast is based on an expected rise in oil prices to an average of $55 per barrel for the year.

South Asia

Regional growth is expected to pick up modestly to 7.1 percent in 2017 with continued support from strong growth in India. Excluding India, growth is expected to edge up to 5.5 percent in 2017, lifted by robust private and public consumption, infrastructure investment, and a rebound in private investment. India is expected to post a 7.6 percent growth rate in FY2018 as reforms loosen domestic supply bottlenecks and increase productivity. Pakistan’s growth is projected to accelerate to 5.5 percent, at factor cost, in FY2018, reflecting improvements in agriculture and infrastructure spending.

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Sub-Saharan Africa

Recent developments

Growth in the Sub-Saharan Africa region is estimated to have slowed to a 1.5 percent rate in 2016, the weakest pace in over two decades, as commodity exporting economies adjusted to low prices. On a per capita basis, regional GDP contracted by an estimated 1.1 percent. South Africa and oil exporters, which contribute two-thirds of regional output, accounted for most of the slowdown, while activity in non-resource intensive economies generally remained robust.

In South Africa, growth slowed to 0.4 percent in 2016, reflecting the effects of low commodity prices and heightened governance concerns. The region’s two largest oil exporters – Angola, where growth slowed to a 0.4 percent rate, and Nigeria, which contracted by 1.7 percent – faced severe economic and financial strains. Other oil exporters were also hit hard by low oil prices, with Chad contracting by 3.5 percent and Equatorial Guinea shrinking by 5.7 percent.

Metals exporters struggled with low prices as well. Growth slowed to 2.7 percent in the Democratic Republic of Congo and to 3.6 percent in Mozambique, where a surge in government debt weighed on investor sentiment. The post-Ebola recovery in Guinea, which accelerated to 5.2 percent, Liberia, which picked up to 2.5 percent, and Sierra Leone, which expanded by 3.9 percent, was hampered by low prices for iron ore.

Many agricultural exporters, such as Côte d’Ivoire, which expanded by 7.8 percent, and Ethiopia, which grew by 8.4 percent, registered strong output on the back of infrastructure investment. Among commodity importers, growth increased to 3.0 percent in Cabo Verde, and softened to 3.2 percent in Mauritius thanks to tourism.

Outlook

Sub-Saharan African growth is expected to pick up modestly to 2.9 percent in 2017 as the region continues to adjust to lower commodity prices. Growth in South Africa and oil exporters is anticipated to be weaker, while growth in economies that are not natural-resource intensive should remain robust.

Growth in South Africa is expected to edge up to a 1.1 percent pace this year. South African output will be held back by tight fiscal policy and high unemployment that is weighing on consumer spending. Nigeria is forecast to rebound from recession and grow at a 1.0 percent pace, as an anticipated modest improvement in oil prices, coupled with an increase in oil production, boost domestic revenues. Angola is projected to expand at a moderate 1.2 percent pace as high inflation and tight policy continue to weigh on consumption and investment.

In other mineral and energy exporters, the outlook is generally favorable. Ghana is forecast to surge to 7.5 percent growth pace as improving fiscal and external positions help boost investor confidence. Progress in developing Mozambique’s energy sector will help spur investment in that country’s natural gas production and contribute to an accelerated 5.2 percent growth rate. The post-Ebola recovery is anticipated to help Guinea grow by 4.6 percent, Liberia by 5.8 percent, and Sierra Leone by 6.9 percent.

Large infrastructure investment programs will continue to support robust growth among agricultural exporters, with Côte d’Ivoire and Ethiopia growing at or above 8 percent. However, political fragility will exert a drag on growth in countries such as Burundi and The Gambia.

Among commodity importers, Cabo Verde is expected to grow at a 3.3 percent rate, Mauritius to rise moderately to 3.5 percent, and Seychelles to slow to a 3.5 percent clip as uncertainty in Europe weighs on tourism, investment, and trade flows. Lesotho, which is forecast to pick up to a 3.7 percent pace, and Swaziland, which should exit recession and resume growing at a 1.9 percent rate, are anticipated to benefit from regional trade and infrastructure investment.

Risks

Risks to the outlook are heavily tilted to the downside. Externally, heightened policy uncertainty in the United States and Europe could lead to financial market volatility and higher borrowing costs or cut off capital flows to emerging and frontier markets. A reversal of flows to the region would hit heavily traded currencies, like the South African rand, hard. A sharper-than-expected slowdown in China could weigh on demand for export commodities and undermine prices. Continued weakness in commodity prices would strain fiscal and current account balances, forcing spending cuts that could weaken recovery and investment.

Domestic risks include the failure to adjust to low commodity prices and weak global demand. Populist pressures may deter authorities from taking the necessary measures to contain fiscal deficits and rebuild policy buffers. A further deterioration of security conditions in some countries could put strains on public finances.

Policy challenges

The sustained decline in commodity prices has dealt a major setback to the region, threatening recent progress on poverty and revealing sizable macroeconomic imbalances in some countries. Regional per capita output contracted in 2016, with growth and employment slowing sharply in the large commodity exporters. A significant number of Sub-Saharan Africa’s poor live in countries where per capita income growth was negative in 2016. Unless growth is restored, poverty rates will rise. This implies a dual challenge: developing new sources of growth while ensuring macroeconomic stability.

Improvements in agricultural sectors. About two-thirds of the poor in the region live in rural households, for which agriculture is the dominant source of income and food security. Expansion of smallholder agricultural output growth is therefore essential for balanced income growth. For many countries in the region, raising productivity growth in smallholder agriculture, and making smallholder farmers competitive, are central to improving the lives of the people.

Although agricultural output growth in Sub-Saharan Africa has improved over the last two decades, it has largely been the result of expanding the area under cultivation rather than productivity gains, which have remained limited. Unleashing productivity improvements will require significant public investments in rural public goods to strengthen markets, and to develop and disseminate improved technologies. While progress has been made in these areas, investment in agriculture R&D remains insufficient. Governments will need international support to finance these investments. To make smallholder farmers more competitive, governments need to take steps to improve the business environment. Attention is particularly needed on upgrading power and trade logistics infrastructure, strengthening the skills base, and expanding markets through deeper regional integration.

Countries in the region will also need to attract FDI to help develop agro-businesses with capital and skills that can be integrated into global value chains. Countries that have made the largest strides into global value chains – Ethiopia, Kenya, and South Africa – have benefitted from this integration.

Macroeconomic stability. Governments need to rebuild their policy buffers. Adjustment to low commodity revenues has started in some countries; however, it has relied on measures such as reserve drawdowns or deep cuts in capital expenditures. More sustainable sources of revenue are needed, including better tax collection. Tax collection has been held back by limited data on potential taxpayers, ineffective tracking tools, gaps in capabilities and resources, and complex tax processes. Appropriate measures to improve tax collection vary across countries. Oil exporters, such as Angola and Nigeria, need to diversify their tax sources, upgrade IT infrastructure, and ensure compliance. For smaller economies, standardizing and simplifying internal processes, and improving collection procedures, will help boost revenues.

Fiscal adjustment through reduced and more efficient government expenditure is also critical. This implies rationalizing current expenditures, and improving the quality of public investment through more effective financial management. Within a credible medium-term framework, expenditure should be maintained on health and education, to promote learning and build human capital, and on investment in strategic infrastructure. Such a public expenditure program should form part of a broader strategy to make the most of the promising economic potential of the young and growing population in the region.