Developing countries are headed for a year of disappointing growth, as first quarter weakness in 2014 has delayed an expected pick-up in economic activity, according to the World Bank’s Global Economic Prospects report, released on June 10.
Bad weather in the US, the crisis in Ukraine, rebalancing in China, political strife in several middle-income economies, slow progress on structural reform, and capacity constraints are all contributing to a third straight year of sub five per cent growth for the developing countries as a whole.
“Growth rates in the developing world remain far too modest to create the kind of jobs we need to improve the lives of the poorest 40 per cent,” World Bank Group President Jim Yong Kim said.
“Clearly, countries need to move faster and invest more in domestic structural reforms to get broad-based economic growth to levels needed to end extreme poverty in our generation.”
The Bank has lowered its forecasts for developing countries, now eyeing growth at 4.8 per cent this year, down from its January estimate of 5.3 per cent.
Signs point to strengthening in 2015 and 2016 to 5.4 and 5.5 per cent, respectively. China is expected to grow by 7.6 per cent this year, but this will depend on the success of rebalancing efforts. If a hard landing occurs, the reverberations across Asia would be widely felt, the World Bank said.
Despite first quarter weakness in the United States, the recovery in high-income countries is gaining momentum. These economies are expected to grow by 1.9 per cent in 2014, accelerating to 2.4 per cent in 2015 and 2.5 per cent in 2016.
The euro zone is on target to grow by 1.1 per cent this year, while the US economy, which contracted in the first quarter because of severe weather, is expected to grow by 2.1 per cent this year (down from the previous forecast of 2.8 per cent), according to the World Bank.
The global economy is expected to pick up speed as the year progresses and is projected to expand by 2.8 per cent this year, strengthening to 3.4 and 3.5 per cent in 2015 and 2016, respectively.
High-income economies will contribute about half of global growth in 2015 and 2016, compared with less than 40 per cent in 2013.
The acceleration in high-income economies will be an important impetus for developing countries, the World Bank said. High-income economies are projected to inject an additional $6.3 trillion to global demand over the next three years, which is significantly more than the $3.9 trillion increase they contributed during the past three years, and more than the expected contribution from developing countries.
Short-term financial risks have become less pressing, in part because earlier downside risks have been realised without generating large upheavals and because economic adjustments over the past year have reduced vulnerabilities.
Current account deficits in some of the hardest hit economies during 2013 and early 2014 have declined, and capital flows to developing countries have bounced back. Developing country bond yields have declined, and stock markets have recovered, in some cases surpassing levels at the start of the year, although they remain down from a year ago by significant margins in many instances.
Markets remain skittish and speculation over the timing and magnitude of future shifts in high-income macro policy may result in further episodes of volatility. Also, vulnerabilities persist in several countries that combine high inflation and current account deficits (Brazil, South Africa and Turkey). The risk here is that the recent easing of international financial conditions will once again serve to boost credit growth, current account deficits and associated vulnerabilities.
National budgets of developing countries have deteriorated significantly since 2007. In almost half of developing countries, government deficits exceed 3 per cent of GDP, while debt-to-GDP ratios have risen by more than 10 per centage points since 2007. Fiscal policy needs to tighten in countries where deficits remain large, including Ghana, India, Kenya, Malaysia, and South Africa, the World Bank said.
In addition, the structural reform agenda in many developing countries, which has stalled in recent years, needs to be reinvigorated in order to sustain rapid income growth, the Bank said.
A modest recovery in the developing countries of Europe and Central Asia region remained on track in the first quarter of 2014, despite headwinds from global financial turbulence and the situation in Ukraine, the World Bank said.
In this region, industrial output accelerated, boosted by rising exports to the euro area.
In Central Asia, much weaker Russian growth (a major trade partner and source of remittances) and declining metal and mineral prices and domestic capacity constraints have slowed growth in 2014, the World Bank said.
Overall, the Ukraine situation is estimated to have knocked one percentage point off growth among low and middle-income countries in the region.
As this effect eases, output is projected to accelerate from a weak 2.4 per cent in 2014 (3.6 per cent in 2013), to 3.7 and four per cent in 2015 and 2016, respectively.
Growth in Russia, now a high-income country, will be barely positive at 0.5 per cent in 2014, rising to 1.5 per cent and 2.2 per cent in 2015 and 2016, respectively, the World Bank said.
(Photo: Darren Deans/sxc.hu)