Darkening prospects: Global economy to slow to 2.9 percent in 2019 as trade, investment weaken
Emerging, developing economies should rebuild policy buffers, boost productivity to sustain growth
Global economic growth is projected to soften from a downwardly revised 3 percent in 2018 to 2.9 percent in 2019 amid rising downside risks to the outlook, the World Bank said on Tuesday. International trade and manufacturing activity have softened, trade tensions remain elevated, and some large emerging markets have experienced substantial financial market pressures.
Growth among advanced economies is forecast to drop to 2 percent this year, the January 2019 Global Economic Prospects says. Slowing external demand, rising borrowing costs, and persistent policy uncertainties are expected to weigh on the outlook for emerging market and developing economies. Growth for this group is anticipated to hold steady at a weaker-than-expected 4.2 percent this year.
“At the beginning of 2018 the global economy was firing on all cylinders, but it lost speed during the year and the ride could get even bumpier in the year ahead,” said World Bank Chief Executive Officer Kristalina Georgieva. “As economic and financial headwinds intensify for emerging and developing countries, the world’s progress in reducing extreme poverty could be jeopardized. To keep the momentum, countries need to invest in people, foster inclusive growth, and build resilient societies.”
The upswing in commodity exporters has stagnated, while activity in commodity importers is decelerating. Per capita growth will be insufficient to narrow the income gap with advanced economies in about 35 percent of emerging market and developing economies in 2019, with the share increasing to 60 percent in countries affected by fragility, conflict, and violence.
A number of developments could act as a further brake on activity. A sharper tightening in borrowing costs could depress capital inflows and lead to slower growth in many emerging market and developing economies. Past increases in public and private debt could heighten vulnerability to swings in financing conditions and market sentiment. Intensifying trade tensions could result in weaker global growth and disrupt globally interconnected value chains.
“Robust economic growth is essential to reducing poverty and boosting shared prosperity,” said World Bank Group Vice President for Equitable Growth, Finance and Institutions, Ceyla Pazarbasioglu. “As the outlook for the global economy has darkened, strengthening contingency planning, facilitating trade, and improving access to finance will be crucial to navigate current uncertainties and invigorate growth.”
Analytical chapters address key current topics:
The informal sector accounts for about 70 percent of employment and 30 percent of GDP in emerging market and developing economies. Since it is associated with lower productivity and tax revenues and greater poverty and inequality, this is symptomatic of opportunities lost. Reducing tax and regulatory burdens, improving access to finance, offering better education and public services, and strengthening public revenue frameworks could level the playing field between formal and informal sectors.
Debt vulnerabilities in low-income countries are rising. While borrowing has enabled many countries to tackle important development needs, the median debt-to-GDP ratio of low-income countries has climbed, and the composition of debt has shifted toward more expensive market-based sources of financing. These economies should focus on mobilizing domestic resources, strengthening debt and investment management practices and building more resilient macro-fiscal frameworks.
Sustaining historically low and stable inflation is not guaranteed in emerging market and developing economies. Cyclical pressures that have depressed inflation over the past decade are gradually dissipating. The long-term factors that have helped reduce inflation over the past five decades – global trade and financial integration, widespread adoption of robust monetary policy frameworks – may lose momentum or reverse. Maintaining low global inflation may become as much of a challenge as achieving it.
Policies aimed at softening the blow of global food price swings can have unintended consequences if implemented by many governments in uncoordinated fashion. Government interventions can provide short-term relief, but widespread actions are likely to exacerbate food price spikes, with heaviest impact on the poor. For example, trade policies introduced during the 2010-11 food price spike may have accounted for more than one-quarter of the increase in the world price of wheat and maize. The 2010-11 food price spike tipped 8.3 million people (almost 1 percent of the world’s poor) into poverty.
“Designing tax and social policies to level the playing field for formal and informal sectors as well as strengthening domestic revenue mobilization and debt management will be important priorities for policymakers to overcome the challenges associated with informality in developing economies,” said World Bank Prospects Group Director Ayhan Kose. “As the economic outlook dims, such efforts become even more important.”
East Asia and Pacific: East Asia and Pacific remains one of the world’s fastest-growing developing regions. Regional growth is expected to moderate to 6 percent in 2019, assuming broadly stable commodity prices, a moderation in global demand and trade, and a gradual tightening of global financial conditions. Growth in China is expected to slow to 6.2 percent this year as domestic and external rebalancing continue. The rest of the region is expected to grow at 5.2 percent in 2019 as resilient demand offsets the negative impact of slowing exports. Indonesia’s growth is expected to hold steady at 5.2 percent. The expansion of the Thai economy is expected to slow in 2019 to 3.8 percent.
Europe and Central Asia: The lingering effects of financial stress in Turkey are anticipated to weigh on regional growth this year, slowing it to 2.3 percent in 2019. Turkey is forecast to experience weak activity and slow to a 1.6 percent pace due to high inflation, high interest rates, and low confidence, dampening consumption and investment. Growth in the western part of the region, excluding Turkey, is projected to slow. Poland is anticipated to slow to 4 percent as Euro Area growth slows. Growth in the eastern part of the region is also anticipated to slow as large economies including Russia, Kazakhstan, and Ukraine decelerate.
Latin America and the Caribbean: Regional growth is projected to advance to a 1.7 percent pace this year, supported mainly by a pickup in private consumption. Brazil is forecast to expand 2.2 percent, assuming fiscal reforms are quickly put in place, and that a recovery of consumption and investment will outweigh cutbacks to government spending. In Mexico, policy uncertainty and the prospect of still subdued investment is expected to keep growth at a moderate 2 percent, despite the fall in trade-related uncertainty following the announcement of the U.S.-Mexico-Canada Agreement. Argentina is forecast to contract by 1.7 percent as deep fiscal consolidation leads to a loss of employment and reduced consumption and investment.
Middle East and North Africa: Regional growth is projected to rise to 1.9 percent in 2019. Despite slower global trade growth and tighter external financing conditions, domestic factors, particularly policy reforms, are anticipated to bolster growth in the region. Growth among oil exporters is expected to pick up slightly this year, as GCC countries as a group accelerate to a 2.6 percent rate from 2 percent in 2018. Iran is forecast to contract by 3.6 percent in 2019 as sanctions bite. Algeria is forecast to ease to 2.3 percent after a rise in government spending last year tapers off. Egypt is forecast to accelerate to 5.6 percent growth this fiscal year as investment is supported by reforms that strengthen the business climate and as private consumption picks up.
South Asia: Regional growth is expected to accelerate to 7.1 percent in 2019, underpinned by strengthening investment and robust consumption. India is forecast to accelerate to 7.3 percent in FY 2018/19 as consumption remains robust and investment growth continues, Bangladesh is expected to slow to 7 percent in FY2018/19 as activity is supported by strong private consumption and infrastructure spending. Pakistan’s growth is projected to decelerate to 3.7 percent in FY2018/19, with financial conditions tightening to help counter rising inflation and external vulnerabilities. Sri Lanka is anticipated to speed up slightly to 4 percent in 2019, supported by robust domestic demand and investment boosted by infrastructure projects. Nepal’s post-earthquake momentum is forecast to moderate, and growth should slow to 5.9 percent in FY2018/19.
Sub-Saharan Africa: Regional growth is expected to accelerate to 3.4 percent in 2019, predicated on diminished policy uncertainty and improved investment in large economies together with continued robust growth in non-resource intensive countries. Growth in Nigeria is expected to rise to 2.2 percent in 2019, assuming that oil production will recover and a slow improvement in private demand will constrain growth in the non-oil industrial sector. Angola is forecast to grow 2.9 percent in 2019 as the oil sector recovers as new oil fields come on stream and as reforms bolster the business environment. South Africa is projected to accelerate modestly to a 1.3 percent pace, amid constraints on domestic demand and limited government spending.
Sub-Saharan Africa: Analytical chapter
The recovery in Sub-Saharan Africa (SSA) continued in 2018, but activity lost momentum in several countries. Growth in the region is estimated to have risen marginally from 2.6 percent in 2017 to 2.7 percent in 2018, slower than expected and still below potential. This reflected a sluggish expansion in the region’s three largest economies – Angola, Nigeria, and South Africa. The region faced a more difficult external environment last year as global trade growth moderated, financing conditions tightened, and the U.S. dollar strengthened. Commodity prices diverged, with metals and agriculture prices dampened by weakening global demand, while oil prices were higher in most of 2018, mainly due to supply factors.
In Nigeria, oil production fell, partly owing to pipeline closures in mid-2018, while non-oil activity was dampened by lackluster consumer demand, as well as conflicts over land between farmers and herders that disrupted crop production. In Angola – the region’s second largest oil exporter – stagnant non-oil activity was aggravated by a contraction in oil production, which fell sharply due to underinvestment and to key oil fields reaching maturity. South Africa’s economy emerged from a technical recession in the second half of 2018, in part due to improved activity in the agricultural and manufacturing sectors. However, growth remains subdued, as challenges in the mining sector and weak construction activity are compounded by policy uncertainty and low business confidence. Against this backdrop, the South African government announced measures to support the economy through reprioritized spending and structural reforms to improve the business environment and infrastructure delivery.
Growth in the rest of the region was broadly steady, although performance varied between country groups. While growth among metals exporters was subdued in 2018, activity in several oil exporters rebounded. In the Central African Economic and Monetary Community (CEMAC), growth benefitted from an increase in oil production and higher oil prices. Economic activity in non-resource-intensive countries remained robust, supported by agricultural production and services on the production side, and household consumption and public investment on the demand side. Several countries in the West African Economic and Monetary Union (WAEMU) grew at 6 percent or more, including Benin, Burkina Faso, Côte d’Ivoire, and Senegal. A strong rebound in agriculture in Kenya, Rwanda, and Uganda, following prior droughts, underpinned the pickup in activity in East Africa.
The median current account deficit is estimated to have widened from 5.8 percent of GDP in 2017 to 6.1 percent in 2018, but sizable differences persist across countries. For large oil exporters (e.g., Angola, Nigeria), external balances improved, driven by higher oil prices and soft import demand. The current account deficit also narrowed significantly in CEMAC, underpinned by strong fiscal adjustments. By contrast, external balances in metals exporters deteriorated amid weaker exports in some countries and higher imports in others. In non-resource-intensive countries, current account deficits remained elevated due to high fuel imports and capital goods imports related to public infrastructure projects. Across the region, balance of payments financing became more difficult against the backdrop of rising external borrowing costs and weakening capital inflows. Eurobond issuance slowed markedly in the second half of the year, while FDI inflows remained subdued.
Currencies in the region depreciated in effective terms amid a broad-based strengthening of the U.S. dollar and weaker investor sentiment toward emerging markets. Investors’ renewed focus on country-specific vulnerabilities contributed to a rapid sell-off of the South African rand and the Zambian kwacha since mid-2018. Elsewhere in the region, the pace of currency depreciation has been more modest.
Growth in Sub-Saharan Africa is expected to pick up to 3.4 percent in 2019, rising to an average of 3.7 percent in 2020-21. This is predicated on diminished policy uncertainty and improved investment in large economies, together with continued robust growth in non-resource intensive countries. However, external headwinds have intensified, as growth among main trading partners moderates, global financial conditions tighten, and trade policy uncertainty persists. Per capita income growth is predicted to remain well below its long-term average in many countries, yielding little progress in poverty reduction, and highlighting the need for policy measures to raise potential output while raising the productive capacity of the poor.
Growth in Nigeria is projected to rebound to 2.2 percent in 2019 and 2.4 percent in 2020-21. These forecasts are unchanged from June and assume that oil production will recover, but peak below government targets, while a slow improvement in private demand will constrain growth in the non-oil industrial sector. In Angola, the growth forecast has been upgraded to 2.9 percent in 2019, moderating to an average of 2.7 percent in 2020-21. A recovery in the oil sector, as new oil fields come on stream, is expected to boost growth, along with a pickup in activity in the non-oil sector as reforms bolster the business environment.
Growth in South Africa is projected to recover more slowly than previously expected, to 1.3 percent in 2019, before rising to 1.7 percent in 2020-21. High unemployment and slow growth in household credit extension are expected to constrain domestic demand in 2019, while fiscal consolidation limits government spending. Higher growth in 2020 reflects the expectation that the government’s structural reform agenda will gradually gather speed, helping to boost investment growth, as policy uncertainty recedes and investor sentiment improves.
Excluding Angola, Nigeria, and South Africa, growth in the rest of Sub-Saharan Africa is expected to remain relatively solid, but with significant variation between country groups. Economic activity in CEMAC should benefit from higher oil production and an increase in domestic demand as fiscal tightening eases.
Growth is expected to rise moderately among metals exporters, supported in part by stronger mining activity. However, non-mining activity remains subdued owing to weak business confidence, accelerating inflation in some countries, and sluggish credit growth.
Among non-resource-intensive countries, economic activity is expected to remain robust in fast-growing countries, such as Cote d’Ivoire, Kenya, and Tanzania, boosted by public investment and strong agricultural production, and in smaller economies, such as Madagascar, on the back of solid export performance. While growth in Ethiopia is expected to remain strong, it will be weighed down by fiscal consolidation efforts to stabilize public debt.
Inflation is expected to pick up across the region in 2019, reflecting the pass-through of currency depreciations during 2018 and domestic price pressures among metals exporters and non-resource-intensive countries. Notably, inflation is envisioned to continue to recede in Angola and Nigeria. However, it may rise temporarily in Angola if the anticipated increases in utility tariffs and fuel prices are implemented. In addition, price pressures are likely to intensify in Kenya, Tanzania, and Uganda.
Fiscal balances are expected to improve further, reflecting fiscal consolidation efforts among the large oil exporters and continued adjustment in CEMAC. Policy tightening is likely to yield smaller fiscal deficits in metals exporters, while fiscal deficits in non-resource-intensive countries should also continue to narrow as public investment spending slows to stabilize public debt.
Risks to the regional outlook are tilted to the downside. On the external front, slower-than-projected growth in China and the Euro Area, which have strong trade and investment links with Sub-Saharan Africa, would adversely affect the region through lower export demand and investment. Moreover, Sub-Saharan African metals producers would likely be among the hardest hit by escalating trade tensions between China and the United States, as metals prices would fall faster than other commodity prices as a result of weakening demand from China. Furthermore, a faster-than-expected normalization of advanced-economy monetary policy could result in sharp reductions in capital inflows, higher financing costs, and disorderly exchange rate depreciations, especially in countries with weaker fundamentals or higher political risks. Sharp currency declines would make the servicing of foreign-currency-denominated debt, already a rising concern in the region, more challenging.
The increased reliance on foreign currency borrowing has heightened refinancing and interest rate risk in debtor countries. Furthermore, the rise in non-resident participation in domestic debt markets has exposed some countries to the risk of sudden capital outflows. In some countries, sizable loans to state-owned enterprises, backed by commodity exports, have increased the risk that a negative commodity price shock could trigger financial crises.
Domestic risks, in particular, remain elevated. Political uncertainty and a concurrent weakening of economic reforms could continue to weigh on the economic outlook in many countries. In countries holding elections in 2019 (e.g., Malawi, Mozambique, Nigeria, South Africa), domestic political considerations could undermine the commitment needed to rein in fiscal deficits or implement structural reforms, especially where public debt levels are high and rising. Insurgencies and armed conflicts, with their adverse effects on economic activity, remain an important risk in several countries. Adverse weather shocks and rising financial sector stress are additional risks.