Pacific Money

World Bank: Global Economy Back on Track

Recent Features

Pacific Money

World Bank: Global Economy Back on Track

Led by high-income economies, the outlook is good for 2014, but some risks remain.

World Bank: Global Economy Back on Track
Credit: Shanghai via

Five years after the global financial crisis triggered the worst downturn since the Depression, the world economy may have finally turned the corner, at least according to the World Bank. With the International Monetary Fund also expected to revise its growth projections upwards, the Asia-Pacific region appears set to benefit.

Releasing its latest “Global Economic Prospects” report Tuesday, the Washington-based lender said global growth would increase to 3.2 percent in 2014, from 2.4 percent last year, rising to 3.4 percent in 2015 on stronger growth in high-income economies. Developing countries would benefit from the global upturn and continued strong growth in China, the bank said.

“Growth appears to be strengthening in both high-income and developing countries, but downside risks continue to threaten the global economic recovery,” World Bank group president Jim Yong Kim said in a statement.

“The performance of advanced economies is gaining momentum, and this should support stronger growth in developing countries in the months ahead. Still, to accelerate poverty reduction, developing nations will need to adopt structural reforms that promote job creation, strengthen financial systems, and shore up social safety nets.”

The bank said improved growth in high-income economies “marks a significant shift from recent years when developing countries alone pulled the global economy forward.” From just 1.3 percent growth in 2013, the wealthier economies are expected to post growth of 2.2 percent this year and 2.4 percent in 2015, aided by a reduced drag from fiscal tightening and an improving private sector.

Developing economies are forecast to see a modest improvement from 4.8 percent growth in 2013 to 5.3 percent this year and 5.5 percent in 2015, with increased demand from high-income countries for imports helping to compensate for “the inevitable tightening of global financial conditions.”

2015 Pickup For East Asia

The East Asia and Pacific region is expected to post relatively flat growth of around 7.1 to 7.2 percent, “partly reflecting a trend slowing of growth in China as it rebalances its economy,” and around 2 percentage points slower than before the GFC.

The recent slowdown has reflected softer growth in Indonesia, Malaysia and Thailand, hit by lower commodity prices and policy tightening, along with “rising political uncertainty” in the latter. Despite the damage caused by natural disasters including Typhoon Haiyan, the Philippines is expected to continue its expansion, aided by a construction boom.

However, the region is expected to see stronger growth of 5.7 percent in 2015, aided by improved global trade and regional exports, including stronger outlooks for Indonesia, the Philippines, Papua New Guinea and Thailand.

South Asia is predicted posting a pickup to 5.7 percent GDP growth in 2014, rising to 6.7 percent in 2016 on the back of high-income economies’ demand for imports and improved regional investment. India is expected to recover to over 6 percent growth in fiscal 2015 and 6.6 percent in 2016, after several years of subpar growth attributable to high inflation and large current account and government deficits.

Chinese growth is expected to hover around 7.7 percent over the next two years, while Asia’s second-biggest economy, Japan is forecast to see growth slowing to 1.4 percent in 2014 and 1.2 percent next year.

According to the bank, Japanese output “is nearly at par with its pre-crisis peak” with the economy responding favorably to Abenomics stimulus measures and a weaker currency. Activity was picking up with consumers frontloading spending ahead of April’s consumption tax hike, it said.

Headwinds Ahead?

Despite the rosier forecasts, the bank warned of potential risks from the unwinding of quantitative easing, particularly for developing economies.

“While the smooth adjustment process is the most likely scenario, the novelty of the unwinding process has only begun and the rapid spike in long-term interest rates during the summer of 2013 suggests that a much more abrupt rise in long-term interest rates is also a possibility, if less likely,” the bank’s chief economist and senior vice president Kaushik Basu said.

“In such a disorderly adjustment scenario, capital flows to developing countries could decline temporarily by 50 percent or more for a period of several months – potentially pushing one or more countries into crisis. Evidence suggests that countries with large current account deficits or those that have had a rapid accumulation of credit in recent years could be most vulnerable to a precipitous tightening of international financial conditions.”

Basu also pointed to other risks including uncertainty over the US debt ceiling, a renewed crisis in the eurozone and the prospects of a debt blowout in China.

“In China, high levels of investment and associated lending have generated significant vulnerabilities…an involuntary abrupt decline in investment rates could have significant impacts on Chinese GDP, and important knock-on effects in the region,” the bank warned.

Tokyo was also warned against relaxing, with the Bank stating that the structural reforms unveiled by the Japanese government had disappointed, “raising doubts about whether the improvement in economic performance can be sustained over the medium to longer term.”

For the Asia-Pacific region, the message appears to be clear: Don’t start partying like it’s 2006 just yet.