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Global Economic Prospects: Weak investment in uncertain times

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The January 2017 Global Economic Prospects forecasts a subdued recovery in 2017 after the weakest year since the financial crisis.

The pickup in growth is expected to come from the receding of obstacles that have recently held back growth among commodity exporters, and from solid domestic demand in commodity importers.  Major emerging economies—including Russia and Brazil—are anticipated to recover from recession as commodity prices bottom out.

A significant concern clouding the outlook is that weak investment—whether building transport infrastructure, improving education systems, or strengthening health care facilities—will be a drag on the medium-term growth prospects in many emerging markets and developing economies.

The balance of risks skews to possibilities that could result in slower growth than anticipated, principally due to heightened uncertainty about the direction of economic policies in major economies. However, there is also the potential that growth could exceed expectations if fiscal stimulus is implemented in major economies.

World economic growth is projected to pick up to 2.7 percent in 2017 from a sluggish rate of 2.3 percent in the year just ended. East Asia and the Pacific and South Asia—emerging and developing economy regions that are home to many commodity-importing economies—are projected to experience solid growth. India is seen as sustaining a growth rate above 7 percent, while China is anticipated to expand 6.5 percent.

The picture is mixed for regions populated by commodity exporters. Latin America and the Caribbean and Europe and Central Asia are expected to gain steam in 2017, but this is principally due to improving fortunes in recession-plagued Brazil and Russia. Recovering oil prices will spur faster output in the Middle East and North Africa. 
   
Growth is also forecast to rebound in Sub-Saharan Africa. But some commodity exporters in the region continue to struggle with the effects of the commodity price slide since 2011, and the improvement there is notably weaker than previously expected.

The January edition of the report takes an in-depth look at how developments in the U.S. economy, the world’s largest, can have effects far beyond its shores. A surge in U.S. growth – whether due to expansionary fiscal policies or other reasons – could provide a significant boost to the global economy.

At the same time, tightening U.S. financial conditions – whether due to faster-than-expected U.S. Federal Reserve policy tightening or other reasons – would be felt across global financial markets, and could have adverse effects on emerging and developing economies that rely heavily on external financing.

Also, any prolonged uncertainty about the course of U.S. economic policy could dampen global growth prospects. By the same token, developments in the rest of the world feed back to the United States, which is deeply integrated with trading and financial partners around the globe.

The report also examines the slowing of investment growth in emerging market and developing economies since 2010. This deceleration has been most pronounced in the largest emerging markets and commodity-exporters. Investment growth is now below its long-term average in the greatest number of emerging and developing economies in the last 25 years, not counting during serious global recessions.

These economies account for more than one-third of global GDP and about three-quarters of the world’s poor. Weak investment is a significant challenge for these countries in light of substantial needs as they seek to expand economic activity, accommodate rapid urbanization, and achieve a host of other development goals.  Further, sluggish investment sets back future growth prospects by slowing the accumulation of wealth and productivity growth.

Policy priorities depend on individual economy circumstances and depend on the ability to lower interest rates or provide stimulus through tax or spending policies. However, policymakers should be ready to deploy the full range of policies at their disposal to accelerate investment growth.

For emerging and developing economies, investment in human and physical capital would help narrow unmet needs in skills and infrastructure and support growth for the long term. Rebuilding policy space, addressing vulnerabilities, and enhancing international integration by promoting trade and foreign direct investment would also boost resilience and improve growth prospects.
 

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