Global
Outlook
Update
Tightening conditions;
narrowing options
Tehmina Khan
World Bank
May 6, 2014
http://www.worldbank.org/globaloutlook
1
Key messages
1.
2.
3.
4.
5.
Global economy accelerating led by high-income economies
Global trade volumes will rebound buoyed by high-income
demand, but USD value of trade will be relatively muted
Developing country growth to pick up slowly due to headwinds
and capacity constraints
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 countries
2
Latest data suggests continued strengthening in
high income countries
Industrial production, % 3m/3m saar
Q4
Q1
15
Japan
10
United
States
5
Euro area
0
-5
-10
-15
Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 Jul '13 Oct '13 Jan '14
Source: World Bank, Datastream.
Business confidence
in
high-income
Main messages
countries has improved markedly
• High-income economies are reviving
60
• Developing regions may be slowing, partly in response
to
United
58
Ukraine
States
56 • Trade volumes will rebound buoyed by high-income
demand, but USD value of trade will be relatively muted
54
52 • Developing-countries have not done enough to restore Japan
macroeconomic buffers following the crisis
50
• Better outcomes requires further structural reform
EMU
48
• Risks include:
46
Manufacturing PMI (+50=expansion)
44
42
– Fallout from situation in the Ukraine
– Financial tightening risks
– Possible contagion from middle-income countries
40
Jan '11
Jul '11
Jan '12
Jul '12
Source: World Bank, Markit, Haver Analytics.
Jan '13
Jul '13
Jan '14
4
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
5
Growth firming or solid in most
developing countries
Industrial production, % 3m/3m saar
15
10
China
5
Dev ex
India and
China
0
India
-5
-10
-15
Feb '12
Aug '12
Source: World Bank, Datastream.
Feb '13
Aug '13
Feb '14
6
Business confidence suggests growth
will slow in second quarter
Balance of respondents (>50 implies expansion, <50 decline)
59
57
Sub-Saharan Africa
55
Europe & Central
Asia
South Asia
53
51
49
China
47
Latin America &
Caribbean
45
Jan '12
Jul '12
Jan '13
Source: World Bank, Markit, National authorities.
Jul '13
Jan '14
7
Financial turmoil has abated, impacts have
been limited
Gross capital flows, billions USD
• Most developing countries not
affected by turmoil
• Capital flows have recovered
80
Equity Issuance
Bond Issuance
Syndicated Bank loans
70
60
• Developing country yields have
returned to fall levels, and are actually 50
55 basis points lower than before the 40
crisis
• Markets remain volatile, in part
because rising rates will change
portfolio decisions
• Vulnerabilities have declined but
remain
30
20
10
0
Jan '12
Jul '12
Jan '13
Jul '13
Jan '14
8
Current accounts deficits have narrowed in many of
the countries hardest hit during the summer turmoil
Current account balance (% of GDP)
6
4
Thailand
2
India
0
Indonesia
-2
Brazil
-4
South
Africa
-6
Turkey
-8
-10
-12
Jan '10
Jul '10
Jan '11
Source: World Bank, Haver.
Jul '11
Jan '12
Jul '12
Jan '13
Jul '13
9
Outlook
• Projected pick up in growth to be led by highincome 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
10
A gradual pick up in growth, led by
high-income countries
Percent annual GDP growth
10
Developing
8
6
4.8 5.0 5.4
World
4
2.4
High
Income
2
1.3
5.5
3.4
2.9 3.3
2.0
2.4
2.4
0
-2
-4
2000
2002
Source: World Bank.
2004
2006
2008
2010
2012
2014
2016
11
Contribution of high-income countries to
global trade growth will more than double
Global Trade, % annual change
15
10
5
0
-5
-10
-15
Contribtion from Developing (% points)
Contribtion from High-income (% points)
Global Trade Volumes
-20
-25
2000
2002
Source: World Bank.
2004
2006
2008
2010
2012
2014
2016
12
0
-5
-10
-15
-20
-25
-30
-35
-40
-45
-50
Mutual Fund Flows
Bank lending
FDI
Estimated decline in capital inflows in the baseline,
relative to no policy change:
Portfolio Investment
Baseline: tighter conditions will reduce flows to
developing countries by around of 0.6 % of GDP
0.0
-0.1
-0.2
-0.3
-0.4
-0.5
-0.6
-0.7
-0.8
-0.9
-1.0
Percent change
Percent of GDP change [Right]
Percent
Source: World Bank.
Percent
13
Falling commodity or stable commodity prices
imply value of trade is growing less quickly
USD price of internationally traded commodities, index 2010=100
180
160
140
Price declines
2011
y/y
Metals
-34.0
-12.2
Food
-13.9
-6.3
Energy
-9.9
+1.3
Energy
120
Food
100
Metals and Minerals
80
60
40
Jan '05
Jan '06
Source: World Bank.
Jan '07
Jan '08
Jan '09
Jan '10
Jan '11
Jan '12
Jan '13
Jan '14
14
USD value of trade growing much less
quickly than in 2000s
Growth of USD and volume of international trade
Average growth rate nominal USD trade
25
2002-08: 15.9%
2013-16: 5.7%
20
15
10
5
0
-5
Value of trade
-10
Volume of trade
-15
-20
-25
2000
2002
Source: World Bank.
2004
2006
2008
2010
2012
2014
2016
15
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
16
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
17
Downside risks threaten capital flows,
risk aversion and GDP
GDP, percentage point deviation from baseline, overshooting scenario
60
Taper-related extended increase in US yields
Moderate increase in risk aversion (market based)
Sharp increase in risk aversion (possibly Ukraine related)
40
20
0
-20
-40
-60
Impact on flows (%)
Source: World Bank
Impact on VIX
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
Impact on GDP
(%deviation from
baseline)
18
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 / liquidity
Authorities 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
19
Developing country resilience
needs 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
20
Both structural and actual fiscal deficits much
higher than in 2007
# of countries
Percent of GDP
2013
2012
2011
2010
2009
2008
2007
2006
2005
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
-3.5
-4.0
-4.5
-5.0
16
14
12
10
8
6
4
2
0
Structrural deficit
Actual
Change in debt -GDP ratio (2013-2007), ppts of GDP
Partly as a result, developing country debt to GDP ratios have
been rising
21
With limited slack in most regions,
inflation has been trending up
Output Gaps (% of Potential GDP)
Inflation, y/y, %
10
6
Developing countries
8
4
6
2
4
0
2
-2
0
-4
High-income countries
-6
1999 2001 2003 2005 2007 2009 2011 2013
China
East Asia excl. China P.R.
Europe & Central Asia
Latin America & Caribbean
Middle East & N. Africa
South Asia
Sub-Saharan Africa
-2
2000 2002 2004 2006 2008 2010 2012 2014
Despite recent rate hikes, real interest rates
are low in many developing countries
Percent, percentage points
6
4
2
0
-2
-4
Change in real policy rate
(since April 2013)
Real policy rate
-6
Source: World Bank, Datastream, IMF.
Mongolia
Mexico
South Africa
Thailand
India
Russia
Indonesia
Georgia
Turkey
Angola
Vietnam
Romania
Hungary
Armenia
Ghana
China
Nigeria
Zambia
Ukraine
Brazil
-8
23
Current account balances of both developing oil
importers and exporters have deteriorated
Current account balance, % of GDP
2.5
2
1.5
1
0.5
0
Developing oil importers
-0.5
Developing oil exporters
-1
-1.5
2007
Source: World Bank.
2008
2009
2010
2011
2012
2013
24
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
25
Global
Outlook
Update
Tightening conditions;
narrowing options
Andrew Burns
World Bank
April, 23 2014
http://www.worldbank.org/globaloutlook
26
Extra Slides
27
Except China and Russia stock markets
have recovered
Index, January 1 2014=100
China
Russian Federation
125
South Africa
120
Global sell off
Indonesia
Thailand
100
India
Turkey
115
110
105
100
95
90
85
80
01-Jan-14
01-Feb-14
Source: World Bank, Datastream.
01-Mar-14
01-Apr-14
28
Earlier rapid increase in credit increases
the risk of banking-sector crises
Level of banking-sector net credits in 2012, % of GDP
Change in net bank credits, 2012-2007 (% of GDP)
40
180
35
Change in Credit level
160
30
Credit levels in 2012
140
120
25
100
20
80
15
60
Source: World Bank, IMF.
Brazil
Kosovo
Romania
Malawi
Lao PDR
Paraguay
Cambodia
Lesotho
Venezuela
Turkey
Gambia
Morocco
Malaysia
Vietnam
Vanuatu
St. Lucia
China
-
Serbia
-
Armenia
20
Botswana
5
Bhutan
40
Thailand
10
29
18
16
14
12
10
8
6
4
2
0
Source: World Bank, Datastream, National sources.
UK
Euro area
USA
Japan
Belarus
Ghana
India*
Nigeria
Mongolia
Pakistan
Kenya
Vietnam
Zambia
Moldova
Turkey
Azerbaijan
South Africa
Botswana
Georgia
Mozambique
Sri Lanka
Indonesia
Serbia
Armenia
Dom. Republic
Uganda
Russia
Philippines
Brazil
Mexico
Chile
Colombia
Albaia
China
Romania
Thailand
Hungary
Peru
Inflation is above target
in several economies
Inflation, policy rate, %
Latest Inflation rate
Upper bound of inflation target
30
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 supplied
Maize
• Ukraine accounts for 14% of global exports, but
only 1 percent of global production
• Markets are well supplied
31
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
32
Output to accelerate, but outturns
have disappointed
GDP, % annual growth
8
7
6
5
4
3
2
1
0
-1
2012
Europe and
Central Asia
2013e
2014f
East Asia and Latin America Middle East
Pacific
and Caribbean and North
Africa
Source: World Bank.
2015f
South Asia
2016f
Sub-Saharan
Africa
33
Even a muted acceleration increases
significantly the role of US
Change in GDP, trillions of current USD
8
2013-2010
2016-2014
7
6
5
4
3
2
1
0
High-income
Developing
34