Gradual recovery in euro zone should lift growth in CEE – World Bank

Written by on January 14, 2015 in Business - Comments Off on Gradual recovery in euro zone should lift growth in CEE – World Bank

Growth in developing Europe and Central Asia is estimated to have slowed to a lower-than-expected 2.4 per cent in 2014 as a sputtering recovery in the euro zone and stagnation in Russia posed headwinds, the World Bank said in its Global Economic Prospects report released on January 13 2015.

In contrast, growth in Turkey exceeded expectations despite slowing to 3.1 per cent.

Regional growth is expected to rebound to three per cent in 2015, 3.6 per cent in 2016 and four per cent in 2017 but with considerable divergence, the World Bank report said.

“Recession in Russia holds back growth in Commonwealth of Independent States whereas a gradual recovery in the euro zone should lift growth in Central and Eastern Europe and Turkey,” the World Bank said.

The tensions between Russia and Ukraine and the associated economic sanctions, the possibility of prolonged stagnation in the euro area, and sustained commodity price declines remain key downside risks for the region.

Following another disappointing year in 2014, developing countries should see an increase in growth this year, boosted in part by soft oil prices, a stronger US economy, continued low global interest rates, and receding domestic headwinds in several large emerging markets, the report said.

After growing by an estimated 2.6 per cent in 2014, the global economy is projected to expand by three per cent this year, 3.3 per cent in 2016 and 3.2 per cent in 2017.

Developing countries grew by 4.4 per cent in 2014 and are expected to edge up to 4.8 per cent in 2015, strengthening to 5.3 and 5.4 per cent in 2016 and 2017, respectively.

Underneath the fragile global recovery lie increasingly divergent trends with significant implications for global growth, according to the report.

Activity in the United States and the United Kingdom is gathering momentum as labour markets heal and monetary policy remains extremely accommodative. But the recovery has been sputtering in the euro area and Japan as legacies of the financial crisis linger, the World Bank said.

China, meanwhile, is undergoing a carefully managed slowdown with growth slowing to a still-robust 7.1 per cent this year (7.4 per cent in 2014), seven per cent in 2016 and 6.9 per cent in 2017. And the oil price collapse will result in winners and losers.

Risks to the outlook remain tilted to the downside, due to four factors. First is persistently weak global trade. Second is the possibility of financial market volatility as interest rates in major economies rise on varying timelines. Third is the extent to which low oil prices strain balance sheets in oil-producing countries. Fourth is the risk of a prolonged period of stagnation or deflation in the euro zone or Japan.

On the back of gradually recovering labour markets, less budget tightening, soft commodity prices, and still-low financing costs, growth in high-income countries as a group is expected to rise modestly to 2.2 per cent this year (from 1.8 per cent in 2014) in 2015 and by about 2.3 per cent in 2016-17.

Growth in the United States is expected to accelerate to 3.2 per cent this year (from 2.4 per cent last year), before moderating to three and 2.4 per cent in 2016 and 2017, respectively.

In the euro zone, uncomfortably low inflation could prove to be protracted. The forecast for euro zone growth is a sluggish 1.1 per cent in 2015 (0.8 per cent in 2014), rising to 1.6 per cent in 2016-17.

In Japan, growth will rise to 1.2 per cent in 2015 (0.2 per cent in 2014) and 1.6 per cent in 2016.

Trade flows are likely to remain weak in 2015. Since the global financial crisis, global trade has slowed significantly, growing by less than four per cent in 2013 and 2014, well below the pre-crisis average growth of seven per cent a year.

The slowdown is partly due to weak demand and to what appears to be lower sensitivity of world trade to changes in global activity, the report said.

Changes in global value chains and a shifting composition of import demand may have contributed to the decline in responsiveness of trade to growth.

Commodity prices are projected to stay soft in 2015. As discussed in a chapter in the report, the unusually steep decline in oil prices in the second half of 2014 could significantly reduce inflationary pressures and improve current account and fiscal balances in oil-importing developing countries.

Among large middle-income countries that will benefit from lower oil prices is India, where growth is expected to accelerate to 6.4 per cent this year (from 5.6 per cent in 2014), rising to seven per cent in 2016-17.

In Brazil, Indonesia, South Africa and Turkey, the fall in oil prices will help lower inflation and reduce current account deficits, a major source of vulnerability for many of these countries.

However, sustained low oil prices will weaken activity in exporting countries. For example, the Russian economy is projected to contract by 2.9 per cent in 2015, getting barely back into positive territory in 2016 with growth expected at 0.1 per cent.

In contrast to middle-income countries, economic activity in low-income countries strengthened in 2014 on the back of rising public investment, significant expansion of service sectors, solid harvests, and substantial capital inflows

Growth in low-income countries is expected to remain strong at six per cent in 2015-17, although the moderation in oil and other commodity prices will hold growth back in commodity exporting low-income countries.

(Photo: Piotr Lewandowski)

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