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Quantifying uncertainties in global growth forecasts

Franziska Ohnsorge's picture
Figure 1. Risks to Global Growth
Upside risks to global growth have increased since January while downside risks for current-year growth have reached post-crisis highs.

A 90% confidence interval implies a 90% chance of growth falling within the given range
Source: World Bank Global Economic Prospects report June 2016.
Note: “90 percent JAN16” is the 90 percent confidence interval of a fanchart based on data available for the January 2016 Global Economic Prospects report

Assessing economic forecast uncertainty and the balance of risks to the growth outlook is critical to effective policymaking. Lower-probability but high-impact events can lead to significant deviations from baseline projections, and this  should be factored into policy design. The World Bank’s most recent Global Economic Prospects unveiled a tool to quantify uncertainty around global growth forecasts and presented it in the form of a fan charts (Figure 1)

The approach adopted in the Global Economic Prospects report consists of two steps.

First, a number of measurable risk indicators that are typical sources of forecast errors for global growth forecasts are selected. Three were chosen: equity price futures, oil price futures and bond term spreads (the difference between short and long term interest rates). For instance, greater volatility in oil price futures could be associated with rising uncertainty around global growth forecasts, while a downward trend in equity price futures could signal rising downside risks to growth.

Second, the probability distributions of forecasts for these three indicators are then mapped to the distribution of global growth forecasts. Both the degree of uncertainty and the balance of risks to the forecast are approximated by weighted averages of the standard deviation and skewness implied by the distributions of expectations for the risk indicators. The weights are estimated in a vector autoregression model (Ohnsorge, Some, and Stocker 2016). To account for potential asymmetry in the distributions of risks, a two-piece normal distribution is assumed, in line with other studies.

The recent credit surge, seen in historical context

Franziska Ohnsorge's picture

Since the global financial crisis, credit to the private nonfinancial sector in emerging markets and developing economies (EMDEs) has surged. Within this overall surge, however, there has been considerable divergence between commodity-exporting and -importing economies. In commodity-importing EMDEs, credit-to-GDP ratios are high by historical standards but are now stable or declining. In commodity-exporting EMDEs, in contrast, credit growth has been near a pace associated with past credit booms, but private sector credit levels are still moderate, and, with a few exceptions, still well below thresholds identified as warning signs.

An opportunity for East Asia in plunging oil prices

Axel van Trotsenburg's picture
Image "Pro Pit" by Aaron Webb is licensed under CC BY-NC-SA 2.0
Image "Pro Pit" by Aaron Webb is licensed under CC BY-NC-SA 2.0

“Never let an opportunity pass by, but always think twice before acting,” says a Japanese proverb with particular pertinence for East Asia today.

Plunging oil prices present a significant opportunity for most of the region’s developing countries to strengthen the competitiveness of their economies and take advantage of the ongoing global recovery.

The drop in oil prices — over 50% since mid-2014 — reflects several years of increasing oil supply, particularly in North America, along with decreased geopolitical risks to global production, OPEC’s efforts to maintain production levels and market share, and weaker-than-expected global growth last year. These factors are likely to persist, with oil prices expected to remain low through at least 2016.

Most countries in East Asia, including Japan, benefit from the price decline because they are oil importers. They can expect more rapid economic growth, lower inflation and improved current account balances.

Global Economic Outlook in One Thousand Words

Kaushik Basu's picture

[All numbers cited in this essay are from the World Bank’s latest Global Economic Prospects. The analysis is mine.]

The economic prospect for the world in 2014 is best described as uneventful. It is a strange world we live in that this is the good news. After six years of turmoil marked by financial crises and long stretches of recession in several countries, it is indeed heartening that we are headed for uneventful times with a slow pick-up in global growth.

The world in 2013 grew by 2.4%. We are forecasting a growth of 3.2% in 2014. This is the point forecast. There is a lot that is happening around it, with some countries expected to make a strong recovery, some weak, and some actually slowing. And for each country there are bands of possibilities around their respective point forecasts.

World Economy – a glass half empty or half full?

LTD Editors's picture

As Kaushik Basu said yesterday, downside risks to the global economy have diminished, market conditions look better, borrowing costs in advanced economies are down from worrying levels seen last June, and developing country growth is still in the 5 percent range. Yet this improvement is transmitting to the real side very minimally.

That was just one of the takeaways from Global Economic Prospects 2013, launched January 15. A new-look global outlook site allows users to access a wealth of analysis, forecasts and data for the world’s economies.

Global Economy and Development Roundup

Swati Mishra's picture

In the recently released Global Economic Prospects June 2012, World Bank experts warned of long period of volatility. Resurgence of the Euro Area tensions had eroded economic gains of first 4 months of 2012, said the report.  And as the leaders of the 27 European Nations convened in Brussels yesterday to tackle the crisis, it was labeled as the “last chance” summit. The outcome: Up All Night, But Consensus Finally Reached, says a story. According to the story, published today, “Yet, despite what were described as tense and grinding negotiations, decisions announced early Friday morning appear to represent important steps towards the survival of the embattled euro zone—and in both the short- and long-term context of the crisis.” This much needed move comes at a crucial point and will hopefully have a positive impact on developing countries. However, a lot remains to be done. Following is a sampling of some interesting research and analysis by World Bank as well as others highlighting issues of current import to global economy and development.

Year of uncertainties and vulnerabilities ahead

Andrew Burns's picture

A new year has just begun. A year fraught with uncertainties brought on by a heady slide down which began in August 2011. A turn for the worse in the European debt crisis and the downgrade of the US sovereign rating sent financial markets around the globe in a tailspin.

In a matter of five months, stock markets around the world recorded $6.5 trillion (or.

The global economy ushers in new phase of recovery, but vigilance is required

Justin Yifu Lin's picture
Photo: © World Bank

Two years after the crisis triggered by the collapse of Lehman Brothers, the world economy has entered a new phase of recovery. Most developing countries have recovered to pre-crisis (or close to pre-crisis) levels of activity and have transitioned from a bounce-back phase to more mature growth.

We estimate in our new online Global Economic Prospects 2011 report that the growth rate for the world economy was 3.9% in 2010 and is likely to be to 3.3% this year, then 3.6 % in 2012.

The GDP growth rate for developing countries was a robust 7 percent in 2010, up sharply from 2% growth in 2009. This year we project the developing world will record GDP growth of 6%, then edge to an estimated 6.1% in 2012. This far outstrips the high income countries, which grew by 2.8% in 2010 and are estimated to growth by 2.4% this year and 2.7% next year.