the global economic outlook: an uneven recovery?
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The Global Economic Outlook: An Uneven Recovery?. Carlos A. Primo Braga Special Representative and Director for Europe, External Affairs Vice-Presidency, The World Bank Presentation at the Università di Pavia/Istituto Universitario di Studi Superiori/Collegio Santa Caterina da Siena - PowerPoint PPT PresentationTRANSCRIPT
The Global Economic Outlook:An Uneven Recovery?
Carlos A. Primo BragaSpecial Representative and Director for Europe, External Affairs Vice-
Presidency, The World Bank
Presentation at the Università di Pavia/Istituto Universitario di Studi Superiori/Collegio Santa Caterina da Siena
November 25, 2011
The views expressed here are those of the author and do not necessarily reflect the views of the World Bank, or those of its Executive Directors or
the governments they represent.
“Theory is when you understand everything, but nothing works.Practice is when everything works, but nobody understands why.
At this station, theory and practice are united, so nothing works and nobody understands why.” (Source: Fisher, 2011)
What is the global economic outlook? A mix of good and bad news…
• Commodity prices increase has moderated and inflationary pressures are down• Japanese recovery is proceeding well• Emerging markets growth remains strong (and developing countries are expected
to grow between 5.6 and 4.7% in 2012)BUT• Eurozone strains have increased• Political uncertainty about US budget discussions• Weaker underlying growth momentum in High Income Countries (2012 forecasts
between 1.8 and 1.1% versus 2.2% forecast of mid-year)• Major global stock market correction (more than $5 trillion since July)• Even though developing countries fundamentals remain strong, contagion is
generating significant headwinds and major capital outflows• Moreover, developing countries have now a more restricted fiscal space compared
to 2008
In short: downside risks have increased
Commodity prices have stabilized or are falling
Sources: Datastream and World Bank DEC Prospects Group
Impact of Japan disaster is fading Car production
12-month percent change, number of units produced
Note: 2011 Source: OECD/Toyota Motor Corporation and Honda Motor Co. Ltd monthly reports.
2011 GDP compares well with 2007, in most cases
• For example, GDP is below its 2007 level in only 8 out of 30 ECA countries
-20
-10
0
10
20
30
40
% c
ha
ng
e fro
m 2
007
CH
NTK
MU
ZBIN
DA
ZE TJK
BLR
KSV
ALB
KA
ZBRA
KG
ZPO
LKO
RM
DA
TUR
GEO
MKD
SRB
MN
ERU
SBIH
MEX
CA
NBG
RSV
KD
EUC
ZERO
MU
SAFR
ASV
NH
UN
GBR
ARM
JPN
HRV
ITA
UKR
LTU
EST
LVA
Deviations of 2011 real GDP from the 2007 level
BUT…
The Outlook According to the IMF
World U.S. Euro area Japan Brazil Russia India China2011
(Sept 2011) 4 1.5 1.6 -0.5 3.8 4.3 7.8 9.5
2011 (Jun 2011) 4.3 2.5 2.0 -0.7 4.1 4.8 8.2 9.6
2011(Apr 2011) 4.4 2.8 1.6 1.4 4.5 4.8 8.2 9.6
2012(Sept 2011) 4 1.8 1.1 2.3 3.6 4.1 7.5 9
2012(Jun 2011) 4.5 2.7 1.7 2.9 3.6 4.5 7.8 9.5
2012(Apr 2011) 4.5 2.9 1.8 2.1 4.1 4.5 7.8 9.5
Source: IMF, World Economic Outlook.
WEO Real GDP Growth Projections(percent change from a year earlier)
Forecasts have been downgraded further since September
2005 2006 2007 2008 2009 2010 2011 2012 2013-6
-4
-2
0
2
4
6
8
10
June 2011 baseline
CurrentUpper-bound baseline
DevelopingHigh-incomeWorld
Projected growth
Source: World Bank DEC Prospects Group
Eurozone financing: 10y government bonds yields (sources: Bloomberg and RGE)
Change in 5-year sovereign credit-default swap, basis points (as of Oct.31st)*
Arge
ntina
Ukr
aine
Croa
tiaRo
man
iaBu
lgar
iaKa
zakh
stan
Lith
uani
aTu
rkey
Russ
iaTh
aila
ndSo
uth
Afric
aM
alay
sia
Chin
aVe
nezu
ela
Indo
nesi
aPh
ilipp
ines
Colo
mbi
aBr
azil
Mex
ico
Chile
Peru
Gre
ece
Italy
Port
ugal
Fran
ceSp
ain
Ger
man
yJa
pan
USA
Irela
nd
-100
0
100
200
300
400
500 1,655
* Change since the beginning of July.
Developing countriesHigh-income countries
Contagion has increased sovereign credit default swap rates worldwide
Sources: Bloomberg and World Bank DEC Prospects Group
13
European banking-sector counterparty-risk concerns persist despite pledge to recapitalize
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-110
50
100
150
200
250
300
350
400
Indications of rising concerns about counter-party risk in European banking system
Interbank overnight spreads, basis points
United States (LIBOR-OIS spread)
Europe (EURIBOR-EONIA spread)
Sources: Datastream and World Bank DEC Prospects GroupSources: Datastream and World Bank DEC Prospects Group
(Latest reading, 88.1)
Market perceptions and political turmoil are impacting the real-side of the world economy
• Change in mood about recent growth performance
– Data revisions (for high-income countries)– Weaker than anticipated second quarter results
• Financial market turmoil reflects both disappointing (backward-looking) economic news and growing (forward-looking) fears (sovereign debt concerns, perceived lack of political consensus on how to address economic problems…)
• Increased uncertainty and shaken confidence may dampen investment and increase precautionary savings
Impact on developing countries can be significant if further deterioration of economic conditions in high-
income countries materializes
• Direct financial channel potentially important for Latin America & Caribbean and Europe & Central Asia regions (due to integrated bank ownership)
• Implications for world trade non-trivial• Should wealth effects and confidence be affected more
markedly than growth could be weaker by two percent or more
• If financial-sector solvency is affected or a market-induced credit event occurs more serious consequences could be envisaged
Fiscal space: 42% of developing countries have a government deficit greater than 4% of GDP in 2010,
versus only 18% in 2007
Source: World Bank DEC Prospects Group
The “elephant” in the room
The implications of the European sovereign debt crisis
• Signs of contagion with CDS spreads rising even in some core Euro Area countries
• Banking-sector exposure to European sovereign debt is an issue of concern• Markets remain uncertain about commitment to adjustment; lack of
consensus on the role of the ECB; moreover, the current debt overhang plus fiscal/financial imbalances, and limitations on the use of exchange-rate policy constrain growth prospects
• Uncertainty can transform temporary liquidity problems into solvency crises…• Sovereign debt crises: history suggests that growth (unlikely in the near
future…), fiscal adjustment (growing political resistance…), inflation (the experience of the 1920s vs the reality of the 2010s), debt restructuring (financial engineering and real debt relief…) and financial repression are some of the usual channels to cope with unsustainable debt/GDP ratios
The trade channel: MENA, ECA and SSA have the closest ties to high-spread European economies
Latin Americ
a & Carib
bean
East Asia
& Pacifi
c
South Asia
Sub-Saharan Africa
Europe &
Central A
sia
Middle East & North
Africa
0
5
10
15
20
25
30
35
40
45Percent of merchandise exports destined to Europe
9.5
4.2
16.3
7.3
6.2
4.8
Arab spring events have affected investment, economic activity and labor markets
Industrial production (% change, 3m/3m, seasonally adjusted annualized rates)
Unemployment rates (%)Tourist arrivals (% change over same
period last year)
Source: UNWTO. Source: Government statistics.
Source: World Bank based on data from Datastream
Growth and unemployment
-2
-1
0
1
2
3
4
5
6
7
8
9
1990-99
2000-08
Growth accelerated in response to reforms but not enoughto address the key challenges facing the region (average,annual growth rates in %)
0
5
10
15
20
25
30
35
40
North Africa
Middle East
SA LAC World Sub Saharan Africa
South Asia
East Asia
The MENA region has the highest youth unemployment rate in the world (%)
0 20 40 60 80 100
MENA
SA
LAC
ECA
SSA
EAP
total female
MENA has the lowest participation rate, and also among women (% of working age population)
The young population has been soaring in MENA
MENA’s job problem cannot be attributed solely to a slow pace of job creation relative to growth
• Oil importers record a slow response of job creation to income growth• Oil exporters create jobs at a fast pace relative to growth so their main
problem is low income growth• In all MENA countries, job quality is an issue
Employment-growth elasticities, 2004-08
Source: ILO.
ECA: job losses remain a big concern
Unemployment rates (percent, latest available)
BLR*
KAZ¹
CZE‡
MDA
‡
SVN
‡
TUR‡
BGR*
*
EST‡
ALB*
*
LVA*
*
MN
E*
MKD
**
0
10
20
30
40
50
ECA average
Youth unemployment rates in select ECA countries (percent, Q1 2011)
KAZ
RUS
CZE
SVN
MDA TU
RES
TRO
MPO
LH
UN
BGR
LVA
SVK
LTU
HRV SR
BM
KD
0
10
20
30
40
50
60
ECA average
• ECA: Unemployment increased significantly during the crisis; 1 in 8 are unemployed
• Youth unemployment is a concern; 3 in 10 young adults are unemployed
Source: Employment Monitor-- http://go.worldbank.org/B8MMAI31I0
•Thanks to cfrom the crisis
Equatorial GuineaAngolaChadSudanNigeriaCameroonCongo, Rep.Gabon
LiberiaMozambiqueSierra LeoneRwandaSao Tome and Princ.EthiopiaTanzaniaCape VerdeMaliBurkina FasoBotswanaGhanaThe GambiaMauritiusNamibiaSenegalNigerBeninZambiaMadagascar
KenyaMalawiSouth AfricaGuineaLesothoSwazilandSeychellesBurundiCongo, Dem. Rep.ComorosCARTogoCôte d’IvoireEritreaGuinea-BissauZimbabwe
0.0-5.0 5.0 10.0 15.0 20.0 25.0
Per
cent
age
of to
tal A
fric
an p
opul
atio
n
30%
40%
30%
Oil countries
Growth 4% or higher
Growth less than 4%
Average GDP growth rates 1998-2008
SSA: A more inclusive and sustained growth
Sub Saharan Africa GDP growth
GDP Growth - SSA
Growth performance in SSA
Source: World Development Indicators, World Bank.
GDP growth in Sub-Saharan Africa by country groups
Infrastructure deficit(billion dollars/year)
Total gap $93
Current expenditures $45
Potential efficiency gains $17________________________
Funding gap $31
Africa’s infrastructure deficit
Concluding remarks• Global recovery more vulnerable. Recent turbulence in financial markets
and uncertainty about future prospects is impacting growth in both high-income and developing countries
• Risks of contagion are increasing and may have serious consequences for the global economy
• Mechanisms to address the Eurozone crisis need to be rapidly deployed• Developing countries are in a more vulnerable position than in 2007/8• Structural reforms to foster job creation remain critical (although as the
Arab Spring illustrates expansion of employment opportunities may not be enough if these opportunities fall short of the expectations of job seekers – particularly in the case of educated youth)
References• Fischer, R.W., 2011, “Explaining Dissent on the FOMC Vote for
Operation Twist (with reference to Jan Mayen Island, Paul Volcker and Thor’s Hammer),” Dallas, Texas: Federal Reserve Bank of Dallas.
• IMF, World Economic Outlook, several years• Primo Braga, C.A., and G.A. Vincelette, eds, 2010, Sovereign Debt
and the Financial Crisis: Will This Time Be Different?, Washington, D.C.: The World Bank.
• World Bank, 2011, Africa’s Future and the World Bank’s Support to It, Washington, D.C.: Africa Region, The World Bank.
• World Bank, 2011, “Developing Trends: September 2011,” Washington, D.C.: Development Prospects Group, The World Bank.
• World Bank, 2011, Investing for Growth and Jobs, Washington, D.C.: MENA Region, The World Bank.