1

Tehmina KhanWorld BankMay 6, 2014

Global OutlookUpdate

Tightening conditions; narrowing options

http://www.worldbank.org/globaloutlook

2

Key messages

1. Global economy accelerating led by high-income economies 2. Global trade volumes will rebound buoyed by high-income demand,

but USD value of trade will be relatively muted3. Developing country growth to pick up slowly due to headwinds and

capacity constraints4. Developing-countries have not done enough to restore

macroeconomic buffers following the crisis5. Better outcomes requires further structural reform

• Risks include:– Fallout from situation in the Ukraine– Financial tightening risks– Possible contagion from middle-income countries

Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 Jul '13 Oct '13 Jan '14-15

-10

-5

0

5

10

15

Industrial production, % 3m/3m saar

United States

Euro area

Japan

Source: World Bank, Datastream.

Q4

Latest data suggests continued strengthening in high income countries

Q1

4

Main messages

• High-income economies are reviving• Developing regions may be slowing, partly in response to

Ukraine• Trade volumes will rebound buoyed by high-income demand,

but USD value of trade will be relatively muted• Developing-countries have not done enough to restore

macroeconomic buffers following the crisis• Better outcomes requires further structural reform• Risks include:

– Fallout from situation in the Ukraine– Financial tightening risks– Possible contagion from middle-income countriesJan '11 Jul '11 Jan '12 Jul '12 Jan '13 Jul '13 Jan '14

40

42

44

46

48

50

52

54

56

58

60

Manufacturing PMI (+50=expansion)

EMU

United States

Japan

Business confidence in high-income countries has improved markedly

Source: World Bank, Markit, Haver Analytics.

5

Developing countries

• Short-term cycle is strengthening• Financial turmoil has eased, borrowing

costs are up, but remain low• Forecast is for modest pickup in growth• Growth has been disappointing in some

regions

6

Feb '12 Aug '12 Feb '13 Aug '13 Feb '14-15

-10

-5

0

5

10

15Industrial production, % 3m/3m saar

China

India

Dev ex India and China

Source: World Bank, Datastream.

Growth firming or solid in most developing countries

7

Jan '12 Jul '12 Jan '13 Jul '13 Jan '1445

47

49

51

53

55

57

59

China

Europe & Central Asia

Latin America & Car-ibbean

South Asia

Sub-Saharan Africa

Business confidence suggests growth will slow in second quarter

Balance of respondents (>50 implies expansion, <50 decline)

Source: World Bank, Markit, National authorities.

8

Financial turmoil has abated, impacts have been limited

• Most developing countries not affected by turmoil

• Capital flows have recovered

• Developing country yields have returned to fall levels, and are actually 55 basis points lower than before the crisis

• Markets remain volatile, in part because rising rates will change portfolio decisions

• Vulnerabilities have declined but remain Jan '12 Jul '12 Jan '13 Jul '13 Jan '14

0

10

20

30

40

50

60

70

80 Syndicated Bank loansBond IssuanceEquity Issuance

Gross capital flows, billions USD

9

Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Jul '13-12

-10

-8

-6

-4

-2

0

2

4

6

In-dia

Brazil

South Africa

Turkey

Indonesia

Thailand

Current accounts deficits have narrowed in many of the countries hardest hit during the summer turmoil

Current account balance (% of GDP)

Source: World Bank, Haver.

10

Outlook

• Projected pick up in growth to be led by high-income countries

• Developing-country growth in line with underlying potential

• Regional growth shows strengthening or stability going forward

• Slower growth in middle-income countries may reflect weaker than thought potential

11

A gradual pick up in growth, led by high-income countries

2000 2002 2004 2006 2008 2010 2012 2014 2016-4

-2

0

2

4

6

8

10

2.42.9 3.3 3.4

1.32.0 2.4 2.4

4.8 5.0 5.45.5

World

High In-come

Developing

Percent annual GDP growth

Source: World Bank.

12

Contribution of high-income countries to global trade growth will more than double

Source: World Bank.

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

-25

-20

-15

-10

-5

0

5

10

15

Contribtion from Developing (% points)

Global Trade, % annual change

13

Baseline: tighter conditions will reduce flows to developing countries by around of 0.6 % of GDP

Source: World Bank.

FDI

Bank

lend

ing

Portf

olio

Inve

stm

ent

Mut

ual F

und

Flow

s

-50-45-40-35-30-25-20-15-10

-50

-1.0-0.9-0.8-0.7-0.6-0.5-0.4-0.3-0.2-0.10.0

Percent change

Percent of GDP change [Right]

Percent Percent

Estimated decline in capital inflows in the baseline, relative to no policy change:

14

Jan '05 Jan '06 Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 Jan '1440

60

80

100

120

140

160

180

Metals and Min-erals

Food

Energy

USD price of internationally traded commodities, index 2010=100

Price declines 2011 y/y

Metals -34.0 -12.2

Food -13.9 -6.3

Energy -9.9 +1.3

Falling commodity or stable commodity prices imply value of trade is growing less quickly

Source: World Bank.

15

USD value of trade growing much less quickly than in 2000s

20002001200220032004200520062007200820092010201120122013201420152016-25

-20

-15

-10

-5

0

5

10

15

20

25

Value of tradeVolume of trade

2013-16: 5.7%

Growth of USD and volume of international trade

Source: World Bank.

Average growth rate nominal USD trade 2002-08: 15.9%

16

Risks

• Financial conditions will be tighter over the next five years, implying weaker financial flows, higher capital costs and potential banking-sector stress in economies with rapid expansions in credit over past 5 years

• Developing countries remain vulnerable: little progress has been made to strengthen developing-country buffers depleted in post-crisis period or push forward with structural reform

• Financial turmoil in a large middle-income country could induce contagion– China risks remain– high-short-term and foreign denominated debt in Turkey

• Situation in Ukraine would likely have minor consequences unless global confidence is shaken

17

Ukraine situation

• WBG Russia 2014 forecast downgraded 0.9 pp. to 1.3 could be -1.8% in low case scenario

• Ukraine forecast downgraded to -5.0 percent• Rest of world impact likely small unless

sanctions intensify or conflict escalates• Impacts on global food markets likely marginal• Potentially serious impacts on Europe and

Russia if there is a disruption in oil and or natural gas supply / demand

18

Downside risks threaten capital flows, risk aversion and GDP

GDP, percentage point deviation from baseline, overshooting scenario

Source: World Bank

-60

-40

-20

0

20

40

60

-2.0-1.5-1.0-0.50.00.51.01.52.0

Taper-related extended increase in US yieldsModerate increase in risk aversion (market based)Sharp increase in risk aversion (possibly Ukraine related)Taper-related extended increase in US yields

19

Tensions between financial stability and growth restructuring in China

Restructuring is occurring• Growth has slowed sharply (est. 6-6.5% in Q1)• Unit labor costs are rising• Financial-sector regulations are tightening• All 3 imply reduced profitability / liquidityAuthorities can respond• Have responded with fiscal stimulus of c. 2.5% of GDP

but mainly through credit vehicles• More than 80% of credit issued by state controlled or

owned entities

20

Developing country resilienceneeds to be built up

• Countries should be engaged in modest fiscal consolidation

• Monetary policy has tightened but remains loose

• Relatively elevated current account deficits imply significant financing needs

• Metal price declines have put additional pressures on exporters

21

20052006

20072008

20092010

20112012

2013-5.0-4.5-4.0-3.5-3.0-2.5-2.0-1.5-1.0-0.50.0

Structrural deficitActual

Both structural and actual fiscal deficits much higher than in 2007

Percent of GDP

-35 -25 -15 -5 5 15 25M

ore02468

10121416

# of countries

Change in debt -GDP ratio (2013-2007), ppts of GDP

Partly as a result, developing country debt to GDP ratios have been rising

1999 2001 2003 2005 2007 2009 2011 2013-6

-4

-2

0

2

4

6

ChinaEast Asia excl. China P.R.Europe & Central AsiaLatin America & CaribbeanMiddle East & N. AfricaSouth AsiaSub-Saharan Africa

Output Gaps (% of Potential GDP)

With limited slack in most regions, inflation has been trending up

2000 2002 2004 2006 2008 2010 2012 2014-2

0

2

4

6

8

10

High-income countries

Developing countriesInflation, y/y, %

23

Despite recent rate hikes, real interest rates are low in many developing countries

Brazil

Ukraine

Zambia

Nigeria

China

Ghana

Armenia

Hungary

Romania

VietnamAngo

la

Turkey

Georgia

Indonesia

Russia

India

Thailan

d

South

Africa

Mexic

o

Mongo

lia-8

-6

-4

-2

0

2

4

6

8

Change in real policy rate (s-ince April 2013)

Real policy rate

Percent, percentage points

Source: World Bank, Datastream, IMF.

24

2007 2008 2009 2010 2011 2012 2013-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

Developing oil importers

Developing oil exporters

Current account balances of both developing oil importers and exporters have deteriorated

Source: World Bank.

Current account balance, % of GDP

25

Concluding remarks

• Strengthening recovery in high-income world is supporting developing country growth

• Positive effects partly offset by tighter financial conditions and supply side constraints

• Trade volume growth will recover, but the USD value of trade will grow much less quickly than during pre-crisis period

• Economic risks have declined and are more balances, but geopolitical risks are elevated

• Developing countries need to do more to build up buffers, and need to reinvigorate structural reforms

26

Andrew BurnsWorld BankApril, 23 2014

Global OutlookUpdate

Tightening conditions; narrowing options

http://www.worldbank.org/globaloutlook

27

Extra Slides

28

01-Jan-14 01-Feb-14 01-Mar-14 01-Apr-1480

85

90

95

100

105

110

115

120

125China Indonesia India Russian Federation Thailand TurkeySouth Africa 100

Global sell off

Except China and Russia stock markets have recovered

Index, January 1 2014=100

Source: World Bank, Datastream.

29

Earlier rapid increase in credit increases the risk of banking-sector crises

Thail

and

Bhutan

Botswan

a

Armen

iaSe

rbiaChina

St. Lu

cia

Vanuatu

Vietnam

Malaysi

a

Morocco

Gambia

Turke

y

Venezu

ela

Leso

tho

Cambodia

Paragu

ay

Lao PDR

Malawi

Romania

Kosovo

Brazil

-

5

10

15

20

25

30

35

40

-

20

40

60

80

100

120

140

160

180

Change in Credit levelCredit levels in 2012

Change in net bank credits, 2012-2007 (% of GDP) Level of banking-sector net credits in 2012, % of GDP

Source: World Bank, IMF.

30

Belarus

India*

Mongo

liaKenya

Zambia

Turkey

South

Africa

Georgia

Sri La

nkaSe

rbia

Dom. Republic

RussiaBraz

ilChile

Albaia

Romania

Hungary

Euro ar

eaJap

an02468

1012141618

Latest Inflation rateUpper bound of inflation target

Inflation is above target in several economies

Source: World Bank, Datastream, National sources.

Inflation, policy rate, %

31

Combined Russia and Ukraine are large grain exporters

Wheat• Russia and Ukraine account for 11 and 5% of

global exports • But only 0.7 and 0.2% of global production• Markets are well suppliedMaize• Ukraine accounts for 14% of global exports, but

only 1 percent of global production• Markets are well supplied

32

Russia is #1 world producer of crude oil and a key source of natural gas for the European Union

Crude oil• World’s largest oil producer (> 10mb/d – 13% of world production)• Exports 7.1 mb/d (4.3 crude, 2.8 refined product)

– c. 5 mb/d to OECD countries (c. 4 mb/d to Europe)

Natural Gas• 30% of European natural gas sourced from Russia

– Half of this transits Ukraine, although about 2/3 of this could be re-routed if disrupted by Ukraine.

• Germany, Italy, Poland, Hungary and Southern Europe are highly dependent on Russian natural gas

Dependencies• A 2.7mb/d disruption to Russian exports could push non-Russian prices up 30%• 2.7 mb/d represents about 2.5% of Russian GDP and 7% of government revenue• A 30% price hike would cost Euro Union about 0.9% of GDP• GDP disruptions would likely be higher because of binding supply constraints in natural

gas dependent sectors

33

Output to accelerate, but outturns have disappointed

Source: World Bank.

GDP, % annual growth

Europe and Central

Asia

East Asia and Pacific

Latin Amer-ica and

Caribbean

Middle East and

North Africa

South Asia Sub-Sa-haran Africa

-1012345678 2012 2013e 2014f 2015f 2016f

34

Even a muted acceleration increases significantly the role of US

High-income Developing0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000 2013-2010 2016-2014

Change in GDP, trillions of current USD