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Global Growth: Modest Pickup to 2.5% in 2020 amid Mounting Debt and Slowing Productivity Growth

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Global economic growth is forecast to edge up to 2.5% in 2020 as investment and trade gradually recover from last year’s significant weakness but downward risks persist, the World Bank says in its January 2020 Global Economic Prospects.

Growth among advanced economies as a group is anticipated to slip to 1.4% in 2020 in part due to continued softness in manufacturing. Growth in emerging market and developing economies is expected to accelerate this year to 4.1%. This rebound is not broad-based; instead, it assumes improved performance of a small group of large economies, some of which are emerging from a period of substantial weakness. About a third of emerging market and developing economies are projected to decelerate this year due to weaker-than-expected exports and investment.

 “With growth in emerging and developing economies likely to remain slow, policymakers should seize the opportunity to undertake structural reforms that boost broad-based growth, which is essential to poverty reduction,” said World Bank Group Vice President for Equitable Growth, Finance and Institutions, Ceyla Pazarbasioglu. “Steps to improve the business climate, the rule of law, debt management, and productivity can help achieve sustained growth.”

U.S. growth is forecast to slow to 1.8% this year, reflecting the negative impact of earlier tariff increases and elevated uncertainty. Euro Area growth is projected to slip to a downwardly revised 1% in 2020 amid weak industrial activity.

Downside risks to the global outlook predominate, and their materialization could slow growth substantially. These risks include a re-escalation of trade tensions and trade policy uncertainty, a sharper-than expected downturn in major economies, and financial turmoil in emerging market and developing economies. Even if the recovery in emerging and developing economy growth takes place as expected, per capita growth would remain well below long-term averages and well below levels necessary to achieve poverty alleviation goals.

 “Low global interest rates provide only a precarious protection against financial crises,” said World Bank Prospects Group Director Ayhan Kose. “The history of past waves of debt accumulation shows that these waves tend to have unhappy endings. In a fragile global environment, policy improvements are critical to minimize the risks associated with the current debt wave.”

Analytical sections in this edition of Global Economic Prospects address key current topics:

The Fourth Wave: Recent Debt Buildup in Emerging and Developing Economies: There have been four waves of debt accumulation in the last 50 years. The latest wave, which started in 2010, has seen the largest, fastest, and most broad-based increase in debt among the four. While current low levels of interest rates mitigate some of the risks associated with high debt, previous waves of broad-based debt accumulation ended with widespread financial crises. Policy options to reduce the likelihood of crises and lessen their impact should they materialize include building resilient monetary and fiscal frameworks, instituting robust supervisory and regulatory regimes, and following transparent debt management practices.

Fading Promise: How to Rekindle Productivity Growth: Productivity growth, a primary source of income growth and driver of poverty reduction, has slowed more broadly and steeply since the global financial crisis than at any time in four decades. In emerging market and developing economies, the slowdown has reflected weakness in investment and moderating efficiency gains as well as dwindling resource reallocation between sectors. The pace of improvements in many key drivers of labor productivity—including education and institutions—has slowed or stagnated since the global financial crisis.

Price Controls: Good Intentions, Bad Outcomes: The use of price controls is widespread in emerging market and developing economies. While sometimes used as a tool for social policy, price controls can dampen investment and growth, worsen poverty outcomes, cause countries to incur heavy fiscal burdens, and complicate the effective conduct of monetary policy. Replacing price controls with expanded and better-targeted social safety nets, reforms to encourage competition and a sound regulatory environment can be pro-poor and pro-growth.  

Low for How Much Longer? Inflation in Low-Income CountriesInflation in low-income countries has tumbled to a median of 3% in mid-2019 from 25% in 1994. The decline has been supported by more flexible exchange rate regimes, greater central bank independence, lower government debt, and a more benign external environment. However, to maintain low and stable inflation amid mounting fiscal pressures and the risk of exchange rate shocks, policymakers need to strengthen monetary policy frameworks and central bank capacity and replace price controls with more efficient policies.

Regional Outlooks:

East Asia and Pacific: Growth in the region is projected to ease to 5.7% in 2020, reflecting a further moderate slowdown in China to 5.9% this year amid continued domestic and external headwinds, including the lingering impact of trade tensions. Regional growth excluding China is projected to slightly recover to 4.9%, as domestic demand benefits from generally supportive financial conditions amid low inflation and robust capital flows in some countries (Cambodia, the Philippines, Thailand, and Vietnam), and as large public infrastructure projects come onstream (the Philippines and Thailand). Regional growth will also benefit from the reduced global trade policy uncertainty and a moderate, even if still subdued, recovery of global trade. Regional data.

Europe and Central Asia: Regional growth is expected to firm to 2.6% in 2020, assuming stabilization of key commodity prices and Euro Area growth and recovery in Turkey (to 3%) and Russia (to 1.6%). Economies in Central Europe are anticipated to slow to 3.4% as fiscal support wanes and as demographic pressures persist, while countries in Central Asia are projected to grow at a robust pace on the back of structural reform progress. Growth is projected to firm in the Western Balkans to 3.6% — although the aftermath of devastating earthquakes could weigh on the outlook — and decelerate in the South Caucasus to 3.1%. Regional data.

Latin America and the Caribbean: Regional growth is expected to rise to 1.8% in 2020, as growth in the largest economies strengthens and domestic demand picks up at the regional level. In Brazil, more robust investor confidence, together with a gradual easing of lending and labor market conditions, is expected to support an acceleration in growth to 2%. Growth in Mexico is seen rising to 1.2% as less policy uncertainty contributes to a pickup in investment, while Argentina is anticipated to contract by a slower 1.3%. In Colombia, progress on infrastructure projects is forecast to help support a rise in growth to 3.6%. Growth in Central America is projected to firm to 3% thanks to easing credit conditions in Costa Rica and relief from setbacks to construction projects in Panama. Growth in the Caribbean is expected to accelerate to 5.6%, predominantly due to offshore oil production developments in Guyana. Regional data.

Middle East and North Africa: Regional growth is projected to accelerate to a modest 2.4% in 2020, largely on higher investment and stronger business climates. Among oil exporters, growth is expected to pick up to 2%. Infrastructure investment and business climate reforms are seen advancing growth among the Gulf Cooperation Council economies to 2.2%. Iran’s economy is expected to stabilize after a contractionary year as the impact of US sanctions tapers and oil production and exports stabilize, while Algeria’s growth is anticipated to rise to 1.9% as policy uncertainty abates and investment picks up. Growth in oil importers is expected to rise to 4.4%. Higher investment and private consumption are expected to support a rise to 5.8% in FY2020 growth in Egypt. Regional data.

South Asia: Growth in the region is expected to rise to 5.5% in 2020, assuming a modest rebound in domestic demand and as economic activity benefits from policy accommodation in India and Sri Lanka and improved business confidence and support from infrastructure investments in Afghanistan, Bangladesh, and Pakistan. In India, where weakness in credit from non-bank financial companies is expected to linger, growth is projected to slow to 5% in FY 2019/20, which ends March 31 and recover to 5.8% the following fiscal year. In Pakistan’s growth is expected to rise to 3% in the next fiscal year after bottoming out at 2.4% in FY2019/20, which ends June 30. In Bangladesh, growth is expected to ease to 7.2% in FY2019/2020, which ends June 30, and edge up to 7.3% the following fiscal year. Growth in Sri Lanka is forecast to rise to 3.3%. Regional data

Sub-Saharan Africa: Regional growth is expected to pick up to 2.9% in 2020, assuming investor confidence improves in some large economies, energy bottlenecks ease, a pickup in oil production contributes to recovery in oil exporters and robust growth continues among agricultural commodity exporters. The forecast is weaker than previously expected reflecting softer demand from key trading partners, lower commodity prices, and adverse domestic developments in several countries. In South Africa, growth is expected to pick up to 0.9%, assuming the new administration’s reform agenda gathers pace, policy uncertainty wanes, and investment gradually recovers. Growth in Nigeria expected to edge up to 2.1% as the macroeconomic framework is not conducive to confidence. Growth in Angola is anticipated to accelerate to 1.5%, assuming that ongoing reforms provide greater macroeconomic stability, improve the business environment, and bolster private investment. In the West African Economic and Monetary Union, growth is expected to hold steady at 6.4%. In Kenya, growth is seen edging up to 6%.

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Higher Productivity is Key to Thailand’s Future Economic Growth and Prosperity

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Thailand’s growth slowed to an estimated 2.5 percent in 2019 from 4.1 percent in 2018, due to external and domestic factors. The economy is projected to pick up moderately to 2.7 percent in 2020 as private consumption recovers and investment picks up due to the implementation of large public infrastructure projects. As Thailand seeks to transition to high-income status by 2037, boosting productivity and reviving private investment will be critical, according to the World Bank’s Thailand Economic Monitor report, released today.

Global economic growth is forecast to edge up to 2.5 percent in 2020 as investment and trade gradually recover from last year’s significant weakness but downward risks persist. These risks include a re-escalation of trade tensions and trade policy uncertainty, a sharper-than expected downturn in major economies, and financial turmoil in emerging market and developing economies.

“A continued deceleration of economic activity in large economies, China, the Euro Area, and the United States, could have adverse repercussions across the East Asia region, through weaker demand for exports and the disruptions of global value chains,” said Birgit Hansl, World Bank Country Manager for Thailand. “Financial investment, commodity, and confidence channels could further weaken the global economy and adversely impact Thailand’s exports.”

In 2019, declining exports and growing weaknesses in domestic demand were the key drivers of the slowdown in growth in Thailand. Agricultural commodity exports declined by 7 percent in the first three quarters of 2019, led by sharp decreases in export volumes for major products such as rice and rubber. Manufacturing exports declined by 6 percent in the same period, with electronics exports hardest hit. Thailand’s strong currency, which has appreciated by 8.9 percent since last year, making the baht the strongest it has been in six years, has also impacted international tourism and merchandise exports.

The government has responded swiftly to the growth slowdown, through accommodative monetary policies and a fiscal stimulus package to boost economic growth. Going forward, the report recommends the governments consider policies to enhance the effectiveness of the stimulus by focusing on implementing major public investment projects, improving the efficiency of public investment management, and providing social protection coverage for vulnerable families.

The recent growth slowdown has highlighted Thailand’s long-run structural constraints, with slowing investments and low productivity growth. In the last decade, Thailand’s productivity growth has fallen to 1.3 percent over 2010-2016 from 3.6 percent over 1999-2007. Private investment has halved from 30 percent of GDP in 1997 to 15 percent in 2018, as foreign direct investments slowed, and progress stalled on projects under the Eastern Economic Corridor.

The report projects that if current trends continue, with no significant pickup in investment and productivity growth, Thailand’s average annual growth rate will remain below 3 percent. To achieve its vision of being a high-income country by 2037, Thailand will need to sustain long-run growth rates of above 5 percent, which would require a productivity growth rate of 3 percent and increase investment to 40 percent of GDP.

“Boosting productivity will be a critical part of Thailand’s long-term structural reform,” said Kiatipong Ariyapruchya, World Bank Senior Economist for Thailand. “Increasing productivity, particularly of manufacturing firms, will depend on increasing competition and openness to foreign direct investments, and improving skills.”

Sustaining higher productivity growth will require removing constraints that prevents new firms, especially foreign firms, and skilled professionals from entering the domestic market. These constraints include lifting restrictive laws, particularly for the services sector, implementing the new Competition Act with clear guidelines related to state-owned enterprises and price controls, and developing policies to build the skills and human capital needed for an innovative knowledge-based economy.

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ADB History Book Explains Asia’s Five Decades of Economic Success

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Sound economic policies and strong institutions have transformed Asia and the Pacific over the past five decades into a center of global dynamism, according to a new book from the Asian Development Bank (ADB). The book—Asia’s Journey to Prosperity: Policy, Market, and Technology Over 50 Years—explains the reasons for Asia’s economic success, while cautioning against complacency.

Developing Asia’s share of global gross domestic product (GDP) rose from 4% in 1960 to 24% in 2018. Including Australia, Japan, and New Zealand, the share increased from 13% to 34%. During the same period, developing Asia’s per capita GDP grew 15-fold (in constant 2010 United States dollars), from $330 to $4,903, boosting incomes and lifting hundreds of millions out of poverty.

“In 1966, when ADB was established, developing economies in the Asia and Pacific region were very poor. There was pessimism about prospects for industrialization and broad development. But the region’s performance over the past 50 years has surpassed expectations by any measure—be it economic growth, structural transformation, poverty reduction, or improvement in health and education,” said ADB President Mr. Takehiko Nakao.

The book emphasizes that there is no such thing as a unique “Asian Consensus” in the region’s journey to prosperity. Rather, the policies pursued in Asia can be explained by standard economic theories, not so different from those prescribed by the “Washington Consensus” set of policies. Economic transformation in the region came about in much the same ways as in many developed economies. What was important was that many Asian countries took a pragmatic approach. They implemented import liberalization, opening up of foreign direct investment, financial sector deregulation, and capital account liberalization in a sequential way and based on meeting certain conditions.

In the past half century, many Asian countries enjoyed a “demographic dividend” and benefited from rapid technological progress, globalization, and the generally open trade and investment regimes of developed countries. However, even with favorable demographic and external conditions, the process of economic growth is not automatic.

Asia’s postwar economic success owed much to creating effective policies and strong institutions. It was supported by governments’ pragmatism in making policy choices, decisiveness in introducing reforms, and an ability to learn from their own and other’s achievements and mistakes. In many countries, a clear vision for the future, which is often championed by forward-looking leaders and shared across a wide spectrum of social groups, contributed to broad-based growth and made a difference, especially when backed by a competent bureaucracy.

Over time, Asian economies adopted open trade and investment policies; facilitated agricultural modernization and industrial transformation; supported technological progress; invested in education and health; mobilized the high level of domestic savings for productive investments; promoted infrastructure development; pursued sound macroeconomic policies; and implemented policies for poverty reduction and inclusiveness.

The book notes that Asia should not be complacent and that it is too early to describe the 21st century as the “Asian Century”. Developing Asia still faces pockets of persistent poverty, increasing income inequality, large gender gaps, environmental degradation, and climate change. Millions still lack adequate access to health, education, electricity, and safe drinking water. Mr. Nakao also pointed out that it will take more time for Asia to become as influential as the West has been over the last five centuries. Asia must continue to make efforts to strengthen its institutions, contribute to the development of science and technology, assume more responsibilities in tackling global issues, and articulate its own ideas.

The book was produced by a diverse ADB team, led by the management group of the Economic Research and Regional Cooperation Department and the President himself, over 3 years. It provides a broad historical overview of rapid transformation in all ADB’s 46 developing economies, beyond the newly industrialized economies and several Southeast Asian countries discussed by the well-known 1993 World Bank publication, The East Asian Miracle. It considers a longer time horizon from the immediate postwar period to the present, capturing the transition from centrally planned systems to market-oriented economies. In writing, the team tried to make the book as interesting as possible by including anecdotes, data, and country examples.

The book consists of 15 chapters: (i) an overview of 50 years of development; (ii) the roles of markets and the state; (iii) industrial transformation; (iv) land reform and green revolution; (v) technological progress; (vi) education, health and demographics; (vii) investment and saving; (viii)  infrastructure (energy, transport, water, and telecommunication); (ix) trade and foreign direct investment; (x) macroeconomic policies; (xi) poverty reduction and income equality; (xii) gender and development; (xiii) environmental sustainability and climate change; (xiv) multilateral and bilateral development finance; and (xv) regional cooperation. Several chapters benefit from contributions by staff engaged in ADB operations.

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Myanmar’s Growth Resilient Despite Global Slowdown

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Myanmar’s economy continues to show resilience despite the ongoing global slowdown and domestic uncertainties, according to a new World Bank report released today.

The Myanmar Economic Monitor for December 2019 estimates that Myanmar’s economy grew at 6.3 percent in 2018-19, marginally higher than 6.2 percent in 2017-18. Economic growth is expected to reach 6.4 percent in 2019-20, helped by growing investment in the transport and telecommunications sector and planned infrastructure spending by the government before the 2020 elections.

The service sector is the main driver of growth in Myanmar and is expected to grow by 8.4 percent in 2018-19. A slow recovery in tourism related services is offset by robust growth in wholesale and retail trade. The industrial sector is expected to grow by 6.4 percent, on the back of strong manufacturing growth offsetting slower growth in construction. Despite seasonal floods and volatile demand, agriculture output growth is projected to be stable at 1.6 percent, with greater diversification in production and export destinations, but remains below potential.

At the same time, it remains important to monitor domestic macroeconomic volatility. Since the June 2019 Myanmar Economic Monitor, headline inflation reached 10.4 percent in August 2019 as the important and carefully planned increase in electricity came on top of rising food prices. The report also points to continued insecurity and violence in border areas and the aftermath of the Rakhine crisis as factors that affect investors’ sentiment.

The report sees external downside risks to Myanmar’s economic outlook from slowing global and regional growth, along with trade tensions. Global growth is expected to slow to 2.4 percent in 2019 from 3.0 percent in 2018. Growth in the East Asia and Pacific region is projected to slow from 6.3 percent in 2018 to 5.8 percent on average over the two years 2019-20, and to ease further to 5.6 percent by 2021.

 “Myanmar continues to experience robust growth but as the global economic environment deteriorates, the importance of domestic factors such as prevalent conflict, low private sector productivity, and institutional constraints challenge investor sentiment and hamper the country’s long-term prospects,” said Gevorg Sargsyan, Acting World Bank Country Director for Myanmar.  “Urgent actions are needed to address sources of conflict, improve social inclusion, and foster a diversified and responsible private sector to sustain economic performance and set the foundation for Myanmar’s future prosperity.”

The report special topic looks at Myanmar’s rapidly growing private sector. According to the report, reforms have lifted Myanmar quickly in the recent World Bank Group Doing Business Index. But firms in Myanmar need greater access to inputs such as finance, land, and skills, better connectivity, and an enabling business environment to support a responsible private sector. The presence of armed actors and conflicts add challenges for business in much of Myanmar. The report recommends that polices should be geared towards private-sector led growth by fostering market expansion, improving the allocation of resources and developing the capacity of market participants.

The Myanmar Economic Monitor is a biannual analysis of economic developments, economic prospects and policy priorities in Myanmar. The publication draws on available data reported by the Government of Myanmar and additional information collected as part of the World Bank Group’s regular economic monitoring and policy dialogue.

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