global economic prospects – january...

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Global Economic Prospects February 2021

M. Ayhan Kose and Naotaka Sugawara

• Global Outlook

• Regional Outlooks

• How has the Pandemic Made the Fourth Wave of Debt More Dangerous?

• Global Economy: Heading into a Decade of Disappointments?

• Asset Purchase Programs in Emerging Markets: Unconventional Policies, Unconventional Times

Global Economic Prospects – January 2021

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Four Questions

3 * EMDEs = Emerging Market and Developing Economies

1 What are near-term growth prospects? Global recovery is underway, but its strength is uncertain. Risks tilted to the downside.

3 How has COVID-19 worsened growth prospects for the 2020s? More pronounced potential growth slowdown over the 2020s; another decade of repeated growth disappointments likely.

4 What are policy priorities? Addressing the health crisis; providing relief for vulnerable populations; easing debt burdens; undertaking reforms to rekindle robust, sustainable and equitable growth; enhancing global cooperation to tackle global challenges, including climate change, trade and finance.

2 How has COVID-19 increased debt-related risks? Sharp increase in debt and low growth eroding debt service capacity; new risks to policy frameworks.

Four Questions


1 What are near-term growth prospects? Global recovery is underway but its strength is uncertain. Risks tilted to the downside.

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Global Spread of COVID-19Declining Case Numbers

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Sources: Our World in Data; World Bank.Note: EAP, ECA, LAC, MNA, SAR, and SSA refer to, respectively, East Asia and Pacific, Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa, South Asia,and Sub-Saharan Africa. Figure shows 7-day moving average of cases by date of case reporting. Sample includes 41 advanced economies and 150 EMDEs, consisting of 19 EAP, 23 ECA, 33LAC, 19 MNA, 8 SAR, and 48 SSA. Last observation is February 13, 2021.

Daily confirmed new COVID-19 cases(Thousands of cases)

Daily confirmed new COVID-19 cases in EMDEs, by region(Thousands of cases)

0

100

200

300

400

500

Jan-20 Apr-20 Jul-20 Oct-20 Feb-21

Advanced economies

EMDEs

0

30

60

90

120

150

Jan-20 Apr-20 Jul-20 Oct-20 Feb-21

EAPECALACMNASARSSA

Trade, Financial and Commodity MarketsRecovery Underway

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Source: Bloomberg, Haver Analytics, Institute of Shipping Economics and Logistics, World Bank.Left Panel. Figure shows 3-month moving averages. New export orders measured by manufacturing PMI. Last observation is December 2020 for container shipping and January 2021 for newexport orders. Center Panel. 10-year sovereign bond yields are computed summing the J.P. Morgan Emerging Market Bond Index spreads and the U.S. 10-year government bond yields. High-yield corporate bond yields are represented by the effective yields of the ICE BofAML High Yield Emerging Markets Corporate Plus Index. Last observation is February 11, 2021. Right Panel.Last observation is January 2021.

Global goods trade Nominal commodity prices(Index, January 2020 = 100)

EMDE bond yields(Percent)(Percent change, y/y) (Index)

30

40

50

60

70

-8

-4

0

4

8

Oct-19 Mar-20 Aug-20 Jan-21

Container shipping

New export orders(RHS)

3

6

9

12

15

Jan-20 Jul-20 Feb-21

10-yearsovereign

High-yieldcorporate

20

60

100

140

Jan-20 Jul-20 Jan-21

Energy

Metals

Agriculture

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Growth Prospects in 2021Rebounding Activity But Uncertain Strength

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Sources: Oxford Economics, World Bank.Note: The baseline scenario assumes that voluntary and mandatory pandemic control measures are diligently maintained over the next several quarters until after widespread vaccination becomesavailable. The daily number of infections is assumed to decline in the first half of 2021 in most countries. The downside scenario assumes a persistently higher level of new cases in many regionsthroughout the forecast horizon. In advanced economies and major EMDEs, the vaccination proceeds at a much slower pace than under the baseline. The upside scenario assumes more effectivemanagement of the pandemic, coupled with the rapid deployment of highly effective vaccines. Aggregate growth rates calculated using GDP weights at 2010 prices and market exchange rates.

GDP growth(Percent)

-6

-3

0

3

6

2020 2021 2020 2021 2020 2021

World Advanced economies EMDEs

Baseline Downside/upside range

Evolution of Global Growth ForecastsUpgraded Growth after the Downturn; Other Outcomes Possible

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Sources: Consensus Economics, World Bank.Left Panel. Year “t” denotes the initial year of global recoveries. Right Panel. Consensus global growth forecasts for 2021 in denoted months. Ranges show the minimum-maximum of growthforecasts.

Consensus forecasts of global GDP growth(Percent)

Dispersion of global GDP growth forecasts for 2021(Percent)

1

2

3

4

5

6

Jan

Feb

Mar

Ap

r

May

Jun

Jul

Au

g

Sep

Oct

Nov

Dec

Jan

Feb

Year t-1 Year t

2010 2021

0

2

4

6

8

10

Jan

Feb

Mar

Ap

r

May

Jun

Jul

Au

g

Sep

Oct

Nov

Dec

Jan

2020 21

Range Average

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Investment in EMDEsCollapse After Persistent Decline

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Sources: Haver Analytics; World Bank.Note: Annual investment growth rates for 2020 are estimates and for 2021-22 are forecasts (shaded areas). Investment refers to gross fixed capital formation. Aggregate growth is calculated withreal investment at 2010 prices and market exchange rates as weights. Sample includes 97 countries, consisting of 34 advanced economies and 63 EMDEs.

Investment levels(Index, 2019 = 100)

Differences in EMDE and advanced economy growth(Percentage points)

Investment growth(Percent)

-12

-6

0

6

12

18

2000 2005 2010 2015 2020

Advanced economiesEMDEs

85

90

95

100

105

110

Advancedeconomies

EMDEs EMDEsexcl.

China

2020 2021 2022

-4

0

4

8

12

16

2000 2005 2010 2015 2020

Per capita GDPPer capita investment

Risks to the OutlookTilted to the Downside

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Weaker near-termrecovery

• Intensifying pandemic•Delayed vaccine deployment •Financial crises amid high debt levels and wave of bankruptcies•Premature unwinding of fiscal and monetary support •Limited effectiveness of policy support• Intensifying food security challenges

More disappointing

long-term growth

•Larger-than-expected decline in potential growth•Lasting change in household behavior away from consumption, services, tourism•Weaker-than-expected trade and foreign investment flows•Social unrest

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Four Questions



Fiscal Support MeasuresSizeable Accommodation; Large Deficits

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Sources: International Monetary Fund; Kose et al. (2020); World Bank.Left Panel. Fiscal stimulus measures are derived from the October 2020 IMF Fiscal Monitor database and include measures planned or under consideration. Aggregates are the GDP-weightedaverage of the total fiscal package, including discretionary revenue and expenditure measures, contingent liabilities, equity injections, and the Next Generation EU funds. Sample includes 35advanced economies, 139 EMDEs, and 23 LICs. Right Panel. Aggregates computed with current GDP in U.S. dollars as weights.

Fiscal support measures(Percent of GDP)

Fiscal balance(Percent of GDP)

0

5

10

15

20

25

Advancedeconomies

EMDEs LICs-16

-12

-8

-4

0

Advancedeconomies

EMDEs LICs

2019 2020 2021

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The Fourth Wave of DebtRapid Increase in Government Debt

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Sources: Bank for International Settlements; International Monetary Fund; Kose et al. (2020); World Bank.Left Panel. Aggregates are calculated using current GDP in U.S. dollars as a weight, based on data for up to 182 countries, including up to 145 EMDEs. Shaded area refers to forecasts for 2021-22; data for 2020 are estimates. Right Panel. Average annual change calculated as changes in total debt-to-GDP ratios over the denoted periods, divided by the number of years in each of them.Total debt is defined as a sum of government and private debt. Aggregates are calculated using current GDP in U.S. dollars as a weight. Total debt in 2020 is obtained under the assumption that itchanges at the same pace as government debt in respective country groups.

Government debt(Percent of government revenue)

Average annual change in total debt(Percentage points of GDP)

50

100

150

200

250

300

2005 2008 2011 2014 2017 2020

World

Advanced economies

EMDEs

-2

0

2

4

6

8

World Advancedeconomies

EMDEs EMDEsexcl. China

1970-89

1990-2001

2002-09

2010-20

Debt Risks in LICsDebt Higher, Debt Service Capacity Lower

14Sources: International Monetary Fund; Kose et al. (2017, 2020); World Bank.Left and Center Panels. Unweighted averages. Sample includes 26 LICs. Right Panel. Pre-pandemic trend corresponds to January 2020 forecasts in the Global Economic Prospects report.

Government debt(Percent of GDP)

Level of LIC output(Percent of pre-pandemic trend)

Government debt(Percent of government revenues)

40

50

60

70

80

2019 2020 2019 2020 2019 2020

LICs FragileLICs

OtherLICs

200

300

400

500

600

2019 2020 2019 2020 2019 2020

LICs FragileLICs

OtherLICs

-8

-6

-4

-2

0

2019 2020 2021 2022

LICs

Fragile LCs

Other LICs

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Asset Purchases in EMDEsVarying Size; Declines in Bond Yields; Concerns about Deficit Financing

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Sources: Bank for International Settlements; Haver Analytics; International Monetary Fund; Kose et al. (2020); World Bank. Note: EAP, ECA, LAC, SAR, and SSA are East Asia and Pacific, Europe andCentral Asia, Latin America and the Caribbean, Middle East and North Africa, South Asia, and Sub-Saharan Africa, respectively. Left Panel. Blue bars denote unweighted regional averages of announcedcentral bank asset purchase programs, expressed relative to nominal local-currency GDP in 2019. Yellow whiskers indicate range of programs. The ultimate size of asset purchase programs in somecountries will depend on market conditions; data for these countries reflect total assets purchased up to August 13, 2020. Center Panel. Panel regression results based on daily bond yields in 26 EMDEs. 25QE announcement in 14 EMDEs are studied. Horizontal axes indicate days after the announcements of quantitative easing (t = 0). Standard errors are clustered by country. Blue bars indicate pointestimates and yellow sticks indicate 90 percent confidence intervals. Right Panel. Historical episodes include Argentina (1989), Bolivia (1985), Brazil (1989), Peru (1990), and Turkey (1994), and arereported in the blue bars as the average of the five episodes in the 1-5 years ahead of the peak rate of inflation or debt monetization. Red bars indicate the average of EMDEs undertaking asset purchaseprograms since the emergence of the COVID-19 pandemic in the years indicated. Bars denote averages, whiskers denote ranges. Red bars for 2020 and 2021-25 show the average of the fiscal deficitprojected in the IMF’s OctoberWorld Economic Outlook for EMDEs undertaking asset purchase programs.

Asset purchases in EMDEs(Percent of GDP)

Government deficits(Percent of GDP)

Impact of asset purchases on bond yields(Basis points)

0

4

8

12

16

EAP ECA LAC SAR SSA

Advanced-economy

-60

-40

-20

0

t t+3 t+5

-20

-15

-10

-5

0

2020 2021-2025

HistoricalEpisodes

EMDEs with assetpurchase

announcements

Four Questions



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Output LossesLarge and Long-Lasting Losses

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Sources: Consensus Economics, World Bank.Note: Note: Data are in U.S. dollars at 2010 prices and market exchange rates. In the left panel, shaded area indicates forecasts. Trend is assumed to grow at the regression-estimated trend growthrate of 2010-19. Output over 2020-25 is based on the estimates and forecasts in January 2021 Global Economic Prospects over 2020-22 and, for 2023-25, is assumed to grow at the ratescomputed with long-term consensus forecasts surveyed in October 2020 for the world and EMDEs. For regions, output for 2023-25 is assumed to grow at the same rates as in the trend. In theright panel, bars show cumulative output losses over 2020-25, based on baseline growth forecasts, and, for regions, an average of six EMDE regions is presented. Red circles are based on growthforecasts under the downside scenario. A vertical yellow line for regions shows the minimum-maximum range among the six regions. Cumulative losses are computed as deviations from trend inU.S. dollars, expressed as a share of GDP in 2019.

Global output levels(Trillions of U.S. dollars)

Cumulative global and EMDE output losses, 2020-25(Percent of 2019 GDP)

70

80

90

100

2016 2019 2022 2025

BaselineDownside

Trend based on 2010-19

-150

-120

-90

-60

-30

0

World EMDEs Regions

Baseline Downside

Potential GrowthSteeper-than-Anticipated Decline over Next Decade

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Sources: Kilic Celik, Kose, and Ohnsorge (2020); World Bank.Left Panel. GDP-weighted averages (at 2010 prices and exchange rates). Sample includes 30 advanced economies and 52 EMDEs. Potential growth estimates based on a production functionapproach as described in Kilic Celik, Kose and Ohnsorge (2020). Pre-COVID prospects for the 2020s assume that investment grows at its historical average rate, working age population and lifeexpectancy evolve as envisaged by the UN Population Projections; and secondary and tertiary school enrolment and completion rates improve at their historical average rate. Post-COVID estimatesfor 2020s assume that investment grows as expected by consensus forecasts; working age population and life expectancy evolve as envisaged by the UN Population Projects; and secondaryattainment rates decline by 2.5 percentage points.

Potential growth prospects, 2020-29(Percent)

0

2

4

6

Pre-COVID Post-COVID Pre-COVID Post-COVID Pre-COVID Post-COVID

World Advanced economies EMDEs

2010-19

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Long-Term Growth ExpectationsWeakening Before the Pandemic; Likely Downgrades Ahead

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Sources: Consensus Economics; Laeven and Valencia (2020); World Bank.Left Panel. Aggregate growth calculated using GDP at 2010 prices and market exchange rates as weights. Results from the latest Consensus Economics surveys in each year are presented. Sampleincludes 84 countries, consisting of 33 advanced economies and 51 EMDEs. The horizontal axis shows the years when Consensus Economics forecasts are surveyed. Right Panel. In a localprojection estimation of ten-year-ahead consensus growth forecasts during 1990-2020, coefficient estimates of a dummy on country-specific recessions (business cycle peaks), identified in aHarding-Pagan algorithm, of financial crises as in Laeven and Valencia (2020). Vertical yellow lines show the 90 percent confidence interval. Sample includes 55 countries.

Long-term growth forecasts, by country group(Percent)

Impact on long-term growth forecasts after five years(Percentage points, cumulative)

3

4

5

6

7

1.0

1.5

2.0

2.5

3.0

1995 2000 2005 2010 2015 2020

Advanced economies

EMDEs (RHS)-3

-2

-1

0

Recessions Financial crises

Four Questions



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Policy PrioritiesPolicies for Relief, Restructuring and Resilience

Saving lives threatened by the pandemic- Support health care systems- Accelerate vaccine deployment through global coordination

Protecting the poor and vulnerable- Strengthen social safety nets

- Provide coordinated debt relief to poorest EMDEs

Maintaining foundations of the economy - Assist viable firms- Improve insolvency frameworks for speedy bankruptcy resolution- Support aggregate demand- Preserve financial stability

Strengthening policies and institutions- Enhance digital infrastructure

- Invest in climate resilience- Improve education to reverse losses during the pandemic- Coordinate policies globally to address global challenges,

including climate change, trade and finance

Policies

Reforms to Build Back Better Higher Investment, Better Long-Term Growth Prospects

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Sources: Consensus Economics; ICRG; Kilic Celik, Kose, and Ohnsorge (2020); World Bank.Left Panel. GDP-weighted average (at 2010 prices and exchange rates) for 52 EMDEs. Potential growth estimates based on a production function approach as described in Kilic Celik, Kose, andOhnsorge (2020). Estimates for 2020s assume that investment grows as expected by consensus forecasts; working-age population and life expectancy evolve as envisaged by the UN PopulationProjects; and secondary attainment rates decline by 2.5 percentage points. Policy improvements scenario assumes that each country matches its own highest ten-year average investment growthand ten-year improvements in school enrolment and completion rate. Right Panel. Cumulative response of long-term growth forecasts after five years. Coefficient estimates of a local projectionestimation on reform advances and setbacks are defined as years in which the average of four indicators by ICRG increases and decreases, and such changes are not unwound for at least threeyears. Sample includes 57 countries during 1990-2020.

EMDE potential growth(Percent)

Long-term growth forecasts after reforms(Percentage points)

0

2

4

6

2010-19 2020-29

Baseline Reforms

-2

-1

0

1

2

Advances Setbacks

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Four Questions


1 What are near-term growth prospects? Global recovery is underway but its strength is uncertain. Risks tilted to the downside.




Select Publications by Prospects Group

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• Global Economic Prospects – January 2021(January and June)

• Commodity Markets Outlook – April 2021(April and October)

• Global Monthly

• Global Productivity – July 2020

• Global Waves of Debt – December 2019

• A Decade After the Global Recession – November 2019

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Questions & CommentsThanks!

www.worldbank.org/prospects

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global economic prospects – january...

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