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Prospects Weekly: Prospects are for a slow acceleration in global economic growth driven by high-income economies, Growth in developing countries is expected to rise modestly

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The latest edition of Global Economic Prospects was released this week. The report notes that for the first time in five years there are indications of a self-sustaining recovery in high-income economies, which is expected to contribute to an acceleration in global growth from 2.4 percent in 2013 to 3.5 percent in 2016. Growth in developing economies is expected to pick up modestly, but to remain slower than in pre-crisis years, reflecting a downward adjustment to more sustainable growth. Headwinds from the inevitable normalization of monetary policy in high-income economies are expected to be offset by stronger high-income demand for developing countries' exports. While the most likely scenario is that of an orderly adjustment to the withdrawal of quantitative easing in the US, an abrupt reaction could expose vulnerabilities in developing economies with large external or domestic imbalances and rapid credit growth.

Prospects are for a slow acceleration in global economic growth driven by high-income economies. Reduced drags from fiscal consolidation and policy uncertainty along with further strengthening of private sector recoveries is projected to lift high-income GDP growth from only 1.3 percent in 2013 to 2.2 percent this year and 2.4 percent in each of 2015 and 2016. The recovery is most far advanced in the United States, where signs of a sustained improvement in activity have led to the start of the tapering of quantitative easing policies by the U.S. Federal Reserve. This strengthening of output marks a significant shift from recent years when developing countries alone pulled the global economy forward. Along with providing a second engine for global growth, stronger high-income demand will be an important tailwind for developing country trade, helping offset the inevitable tightening of global financial conditions that will arise as monetary policy in high-income economies is normalized.

Growth in developing countries is expected to rise modestly, but to remain slower than in pre-crisis years. Most developing countries have fully recovered from the 2008 crisis and GDP is projected to grow by 5.3 percent this year, rising to 5.7 percent in 2016. Still, this will be about 2.2 percentage points weaker than it was during the pre-crisis boom period. The slower growth is not cause for concern, however, with two-thirds of this reflecting a decline in the cyclical component of growth and less than one-third due to slower potential growth. Growth in East Asia & the Pacific, Latin America & the Caribbean and Sub-Saharan Africa is broadly in line with potential and further increases will have to come from supply side reforms that increase potential. Positive spillovers from the recovery in the Euro Area and reduced private sector and banking consolidation should help a slow recovery in developing Europe & Central Asia, while large negative output gaps in South Asia should gradually close as India’s growth picks up. However, persistent policy tensions in the Middle East & North Africa are likely to hold back a vigorous rebound there, with growth likely to remain weak in the near term.

Prospects will be sensitive to the pace at which extraordinary monetary support measures in high-income economies are withdrawn. So far market reactions to the actual start of the taper in the US have been orderly, and developing country adjustment to rising global interest rates is likely to continue to be smooth. However, a much more abrupt rise in long-term rates is also a possibility, if less likely. In such a disorderly adjustment scenario, capital flows to developing countries could decline temporarily by 50 percent or more for a period of several months – potentially creating vulnerabilities for countries with large current account deficits or those that have had a rapid accumulation of credit in recent years. Other risks, such as those deriving from uncertainty over US debt-ceiling discussions, crisis in the Euro Area and high borrowing and investment rates in China have become less likely but remain.

Download the Prospects Weekly as PDF here.