Prepare for ‘considerable’ risks to economy in 2015, developing nations told

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Hakata_Station_constructionAfter growing by an estimated 2.6 percent in 2014, the global economy is headed for fragile recovery, projected to expand by 3 percent this year, 3.3 percent in 2016, and 3.2 percent in 2017, with downside risks “considerable,” predicts the World Bank (WB) in a new report.

The twice-yearly WB flagship Global Economic Prospects said that developing countries grew by 4.4 percent in 2014 and are expected to edge up to 4.8 percent in 2015, strengthening to 5.3 and 5.4 percent in 2016 and 2017, respectively.

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

It advised developing countries to support social programs for the poor, undertake structural reforms, as well as “remove any unnecessary roadblocks for private sector investment.”

It also noted that underneath the fragile global recovery “lie increasingly divergent trends with significant implications for global growth.” While activity in the United States and the United Kingdom is gathering momentum, recovery has been sputtering in the Euro area and Japan as legacies of the financial crisis linger, and China is implementing a carefully managed slowdown.

Risks to the outlook remain tilted to the downside, owing to factors such as persistently weak global trade, possible volatility in financial markets, low oil prices that strain balance sheets in oil-producing countries, and the risk of a prolonged period of stagnation or deflation in the Euro area or Japan.

“Worryingly, the stalled recovery in some high-income economies and even some middle-income countries may be a symptom of deeper structural malaise,” said Kaushik Basu, World Bank chief economist and senior vice president. “As population growth has slowed in many countries, the pool of younger workers is smaller, putting strains on productivity. But there are some silver linings behind the clouds. The lower oil price, which is expected to persist through 2015, is lowering inflation worldwide and is likely to delay interest rate hikes in rich countries.”

Growth in high-income countries as a group is expected to rise modestly to 2.2 percent this year (from 1.8 percent in 2014) and by about 2.3 percent in 2016-17. Growth in the United States is expected to accelerate to 3.2 percent this year (from 2.4 percent last year), before moderating to 3 and 2.4 percent in 2016 and 2017, respectively. The forecast for Euro Area growth is a sluggish 1.1 percent in 2015 (0.8 percent in 2014), rising to 1.6 percent in 2016-17. In Japan, growth will rise to 1.2 percent in 2015 (0.2 percent in 2014) and 1.6 percent 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 4 percent in 2013 and 2014, well below the pre-crisis average growth of 7 percent per annum.

The slowdown is partly due to weak demand and to what appears to be lower sensitivity of world trade to changes in global activity, finds analysis in the report. “Changes in global value chains and a shifting composition of import demand may have contributed to the decline in responsiveness of trade to growth.”

Risks to the global economy are considerable. “Countries with relatively more credible policy frameworks and reform-oriented governments will be in a better position to navigate the challenges of 2015,” said Franziska Ohnsorge, lead author of the report.

Regional forecasts

The East Asia and Pacific region continued its gradual adjustment to slower but more balanced growth. Regional growth slipped to 6.9 percent in 2014 as a result of policy tightening and political tensions that offset a rise in exports in line with the ongoing recovery in some high-income economies. The medium-term outlook is for a further easing of growth to 6.7 percent in 2015 and a stable outlook thereafter, reflecting a gradual slowdown in China, which will be offset by a pick-up in the rest of the region in 2016-17.

For developing Europe and Central Asia, the region is estimated to have slowed to a lower-than-expected 2.4 percent in 2014 as a sputtering recovery in the Euro Area and stagnation in Russia posed headwinds. Regional growth is expected to rebound to 3 percent in 2015, 3.6 percent in 2016 and 4 percent in 2017 but with considerable divergence.

Growth in Latin America and the Caribbean slowed markedly to 0.8 percent in 2014, but with diverging developments across the region. Strengthening exports on the back of the continued recovery among high-income countries and robust capital flows should lift regional GDP growth to an average of around 2.6 percent in 2015-17.

Following years of turmoil, some economies in the Middle East and North Africa appear to be stabilizing, although growth remains fragile and uneven. Regional growth is expected to pick up gradually to 3.5 percent in 2017 (from 1.2 percent in 2014).

In South Asia, growth rose to an estimated 5.5 percent in 2014 from a 10-year low of 4.9 percent in 2013. Regional growth is projected to rise to 6.8 percent by 2017, as reforms ease supply constraints in India, political tensions subside in Pakistan, remittances remain robust in Bangladesh and Nepal, and demand for the region’s exports firms.

In Sub-Saharan Africa, growth picked up only moderately in 2014 to 4.5 percent, reflecting a slowdown in several of the region’s large economies, notably South Africa. Growth is expected to remain flat in 2015 at 4.6 percent (lower than previously expected), largely due to softer commodity prices, and rise gradually to 5.1 percent by 2017, supported by infrastructure investment, increased agriculture production, and buoyant services.

Photo: Sushiya