Lift in global economy prompts opportunities to tackle deep-rooted development issues – UN

Lift in global economy prompts opportunities to tackle deep-rooted development issues – UN
Photo credit: A’Melody Lee | World Bank

12 Dec 2017

A 3% upturn in the global economy has paved the way to readjust policy towards longer-term issues, such as addressing climate change, tackling existing inequalities and removing institutional obstacles to development, according to a new United Nations report on global economic prospects.

Launched in New York on Monday, among other things, the World Economic Situation and Prospects (WESP) 2018 offers policy imperatives that include tackling inequality and delinking economic growth from environmental degradation.

“The World Economic Situation and Prospects 2018 demonstrates that current macroeconomic conditions offer policy-makers greater scope to address some of the deep-rooted issues that continue to hamper progress towards the Sustainable Development Goals,” stated UN Secretary-General António Guterres in the Foreword.

According to the report, 2017 global economic growth had reached three per cent – its highest since 2011 – as crisis-related fragilities and the adverse effects of other recent shocks have subsided.

The improvement is widespread. Roughly two-thirds of the world’s countries have experienced stronger growth in 2017 than in the previous year, and movement is expected to remain steady at three per cent in 2018 and 2019.

Noting that the recent pickup in global growth stems predominantly from firmer growth in several developed economies, the report states that East and South Asia remain the world most dynamic regions.

Despite the improved short-term outlook, the global economy continues to face longer-term challenges, including trade policy changes and rising geopolitical tensions.

The report highlighted that the improved macroeconomic situation has opened a door for reorienting policies, including to increase economic diversification; reduce inequality; support long-term investment; and tackle institutional deficiencies. It noted that addressing these challenges can generate stronger investment and productivity, higher job creation and more sustainable medium-term economic growth.

Uneven Growth

However, the recent economic improvements have been unevenly distributed across countries and regions.

Through 2019, negligible per capita income growth is expected in several parts of Africa, Western Asia and Latin America and the Caribbean – underscoring the urgent need to foster an environment that will both accelerate medium-term growth prospects and tackle poverty through policies that address income and opportunity inequalities.

The report also found that – hindered by institutional deficiencies, inadequate basic infrastructure and greater exposure levels to natural disasters, along with challenges to security and political instability – very few least developed countries (LDCs) are expected to reach the Sustainable Development Goal target for GDP growth of “at least 7 per cent” (SDG 8.1) in the near term.

In addition to mobilizing financial resources to meet LDC investment needs, policies must also focus on conflict prevention and removing barriers that continue to hinder more rapid progress.

After remaining flat for three consecutive years, preliminary estimates suggest that 2017 global energy-related CO2 emissions increased, according to WESP.

“While the upturn in global growth is a welcome sign of a healthier economy, it is important to remember that this may come at an environmental cost,” said Under-Secretary-General for Economic and Social Affairs Liu Zhenmin.

As the frequency of weather-related shocks continues to rise, the urgent need to build resilience against climate change and prioritize environmental protection is becoming more prevalent.

International shipping and aviation emission polices, which do not fall under the purview of the Paris Agreement, must be strengthened as their emissions continue to grow faster than those from road transport.

“This calls for stronger efforts to delink economic growth and environmental degradation – as also emphasized by the UN Climate Change Conference in Bonn last month,” stressed Mr. Liu.

Africa expected to see stronger growth in 2018 and 2019 as global environment improves

Growth underpinned by an improvement in domestic and external demand amid firmer global commodity prices

An upturn in the global economy – now growing by about 3 per cent – paves the way to reorient policy towards longer-term issues such as addressing climate change, tackling existing inequalities and removing institutional obstacles to development, according to the WESP 2018 Report.

Africa is expected to see a recovery in aggregate GDP growth, with a projected expansion of 3.5 per cent in 2018 and 3.7 per cent in 2019, up from 3.0 per cent in 2017. Strengthening external demand and a continued firming of global commodity prices will ease fiscal and external pressures. However, significant fiscal adjustments lie ahead for many commodity exporters, constraining the pace of rebound in countries of this region.

Furthermore, GDP growth on a per capita basis is expected to be negligible in several subregions, namely Central, Southern and West Africa in 2018-2019. These regions combined are home to nearly one-third of the global population living in extreme poverty.

The report notes substantial differences in growth prospects among the five African subregions. East Africa will remain the fastest-growing subregion, with aggregate GDP projected to grow by about 6 per cent in 2018 and 2019, facilitated by large infrastructure investments and the expansion of domestic markets.

Growth in North Africa is projected to stabilize at 4.1 per cent in 2018 and 2019, after reaching 4.8 per cent in 2017, as a result of firmer commodity prices, further improvement in the security situation and continuing economic recovery in Europe.

West Africa will continue its growth recovery, from 2.4 per cent in 2017 to 3.3 per cent in 2018, as oil prices rise and oil production gradually increases in Nigeria, easing fiscal and foreign exchange pressures. Several other West African countries continue a path of strong growth including Côte d’Ivoire, Ghana and Senegal, supported by robust spending on infrastructure, higher investor confidence and improvements in the business climate.

Growth in the Southern Africa is projected to improve but remain modest. Following growth of 1.2 per cent in 2017, GDP is projected to expand by 2.3 per cent in 2018 and 2.5 per cent in 2019. In South Africa, net exports will rebound with the moderate recovery in the agriculture and mining sectors. Growth will, however, remain relatively subdued amid heightened political uncertainty.

Buoyed by higher oil prices, growth in Central Africa is estimated to rebound from 0.7 per cent in 2017 to 2.1 per cent in 2018. Insecurity and relatively low commodity prices weigh on prospects for the area.

The report also notes that several central banks in Africa decreased policy rates in 2017 amid moderately easing inflationary pressures. As the impacts of large currency depreciations subside, inflation is projected to decrease in 2018-2019. However, inflation in many African countries remain high relative to the rest of the world.

Risks and policy challenges

Despite the improved short-term outlook, the global economy continues to face risks – including changes in trade policy, a sudden deterioration in global financial conditions and rising geopolitical tensions.

The world economy also faces longer-term challenges. The report highlights four areas where the improved macroeconomic situation opens the way for policy to address these challenges: increasing economic diversification, reducing inequality, supporting long-term investment and tackling institutional deficiencies. The report notes that reorienting policy to address these challenges can generate stronger investment and productivity, higher job creation and more sustainable medium-term economic growth.

For Africa, a sharper-than-expected increase in global interest rates could lead to an increase in the premium for sovereign bonds, a decrease in access to financing and could raise debt sustainability risks. Lower external demand or a reversal in commodity price growth could decrease foreign direct investment. Internally, an absence of fiscal adjustment policies could jeopardize macroeconomic stability in many countries. An escalation of security concerns and political instability ahead of key elections also pose risks to growth. Several agriculture dependent economies remain exposed to weather-related shocks.

The report calls for renewed efforts to decrease the over-reliance on commodity revenues through economic diversification and structural transformation. In this aspect, investments in human capital as well as efforts to strengthen governance and institutions are needed. Importantly, acute malnutrition in conflict-affected areas must be urgently addressed.