China's Current Account Surplus in Q4 2018 by Strong Exports
Photo: World Bank

Current Slack in Global Economy Expected to Fade

WASHINGTON The World Bank forecasts global economic growth to edge up to 3.1 percent in 2018 after a much stronger-than-expected 2017, as the recovery in investment, manufacturing, and trade continues, and as commodity-exporting developing economies benefit from firming commodity prices.

However, this is largely seen as a short-term upswing. Over the longer term, slowing potential growth—a measure of how fast an economy can expand when labor and capital are fully employed—puts at risk gains in improving living standards and reducing poverty around the world, the World Bank warns in its January 2018 Global Economic Prospects.

Growth in advanced economies is expected to moderate slightly to 2.2 percent in 2018, as central banks gradually remove their post-crisis accommodation and as an upturn in investment levels off. Growth in emerging market and developing economies as a whole is projected to strengthen to 4.5 percent in 2018, as activity in commodity exporters continues to recover.

“The broad-based recovery in global growth is encouraging, but this is no time for complacency,” World Bank Group President Jim Yong Kim said.

“This is a great opportunity to invest in human and physical capital. If policy makers around the world focus on these key investments, they can increase their countries’ productivity, boost workforce participation, and move closer to the goals of ending extreme poverty and boosting shared prosperity.”

2018 is on track to be the first year since the financial crisis that the global economy will be operating at or near full capacity. With slack in the economy expected to dissipate, policymakers will need to look beyond monetary and fiscal policy tools to stimulate short-term growth and consider initiatives more likely to boost long-term potential.

The slowdown in potential growth is the result of years of softening productivity growth, weak investment, and the aging of the global labor force. The deceleration is widespread, affecting economies that account for more than 65 percent of global GDP.

Without efforts to revitalize potential growth, the decline may extend into the next decade, and could slow average global growth by a quarter percentage point and average growth in emerging market and developing economies by half a percentage point over that period.

“An analysis of the drivers of the slowdown in potential growth underscores the point that we are not helpless in the face of it,” said World Bank Senior Director for Development Economics, Shantayanan Devarajan.

“Reforms that promote quality education and health, as well as improve infrastructure services could substantially bolster potential growth, especially among emerging market and developing economies.  Yet, some of these reforms will be resisted by politically powerful groups, which is why making this information about their development benefits transparent and publicly available is so important.”

Risks to the outlook remain tilted to the downside. An abrupt tightening of global financing conditions could derail the expansion. Escalating trade restrictions and rising geopolitical tensions could dampen confidence and activity. On the other hand, stronger-than-anticipated growth could also materialize in several large economies, further extending the global upturn.

“With unemployment rates returning to pre-crisis levels and the economic picture brighter in advanced economies and the developing world alike, policymakers will need to consider new approaches to sustain the growth momentum,” said World Bank Development Economics Prospects Director Ayhan Kose.

“Specifically, productivity-enhancing reforms have become urgent as the pressures on potential growth from aging populations intensify.”

Data by World Bank

East Asia Pacific: Broad-Based Upturn – But for How Long?

Recent developments: Growth in developing East Asia and Pacific strengthened slightly in 2017 to 6.4 percent from 6.3 percent in 2016. The pickup reflected better-than-expected external conditions—an expansion of global activity and trade, a recovery of commodity prices, and benign financing conditions.

The region accounted for more than a third of global growth in 2017, mostly due to China. Investment in the region, excluding China, showed signs of a cyclical upturn following several years of weakness. Trade flows recovered markedly across the region, and regional financial markets remained stable. Growth in China advanced modestly to 6.8 percent in 2017, mainly due to an acceleration of exports as global demand solidified.

China’s economic rebalancing continued, with consumption growing faster than investment and services faster than industry. Excluding China, the rest of the region as a group picked up to 5.2 percent from 4.9 percent in 2016. The recovery in commodity prices and improved confidence supported activity in commodity exporting countries.

Among these, GDP accelerated sharply in Malaysia due to increased private sector spending and rising exports. Also, growth inched up in Indonesia thanks to stronger investment and a pickup in exports. Among commodity importers, Thailand grew more rapidly after several years of weakness.

Vietnam expanded more strongly on the back of solid exports. Outlook: Growth in developing East Asia and Pacific is projected to ease to 6.2 percent in 2018 and to 6.1 percent in 2019 as a cyclical pickup in the region, excluding China, is offset by that the gradual structural slowdown in China.

The region is expected to continue to be a major driver of global growth. Growth in China is projected to slow to 6.4 percent in 2018 as its economic rebalancing from investment to consumption proceeds and as credit growth decelerates. Growth in the rest of the region is expected to accelerate to 5.3 percent this year as commodity exporters continue to experience a cyclical rebound.

Among commodity exporters, Indonesia is projected to accelerate to 5.3 percent this year as private consumption strengthens in line with wage gains. Growth is seen moderating in Malaysia to still-strong 5.2 percent as investment growth moderates slightly. Commodity importing economies are expected to see positive growth as well. Thailand is projected to see growth advance to 3.6 percent in 2018 from 3.5 percent as merchandise exports and tourism strengthen.

Vietnam is seen growing 6.5 percent in this year after 6.7 percent in the year just ended, supported by robust agricultural production and strong export-oriented manufacturing. Risks: Risks to the outlook have become more balanced but are still tilted to the downside. Geopolitical tensions in the Korean peninsula could negatively affect confidence and trigger financial instability.

A fasterthan-expected tightening of financing conditions or a steeper-than-expected slowdown of major economies, including China, could exacerbate existing financial vulnerabilities. These vulnerabilities include elevated domestic debt, large external financing needs, and limited policy buffers.

Increased projectionist sentiment in advanced economies, particularly the United States, and policy changes resulting from Great Britain’s departure from the European Union, would deepen uncertainty about established trading and investment relationships. Stronger-than-expected growth among advanced economies, and further strengthening of investment could lead to faster-than-anticipated growth in the region.