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Prospects Daily: World Bank’s Global Economic Prospects report expects muted global growth, led by developing countries

The World Bank’s semiannual Global Economic Prospects report released on June 12 says risks from advanced economies have eased and global growth is firming. Global GDP is expected to expand about 2.2% this year and strengthen to 3.0% and 3.3% in 2014 and 2015. Global trade is expected to grow less quickly than in the past, expanding only 4.0% in 2013, compared to the pre-crisis pace of 7.3%.

The report says financial market conditions in high-income countries have improved over the past year and acute risks have diminished. But fiscal consolidation, high unemployment and still weak consumer and business confidence will keep growth in high income-countries this year to a modest 1.2%, firming to 2.0% in 2014 and 2.3% by 2015. Economic contraction in the Euro Area is projected to be 0.6% for 2013, and growth is expected to be a modest 0.9% in 2014 and 1.5% in 2015.

Developing-country growth is projected to be around 5.1% in 2013, strengthening to 5.6% and 5.7% in 2014 and 2015, respectively. The majority of developing countries have more-or-less fully recovered from the 2008 financial crisis. For many of these countries, current and projected growth is broadly in line with underlying potential growth. Reflecting improvement in financial conditions, international bond issuance by developing countries has reached record levels, while bank lending and equity issuance are up by almost 70% as compared with first 5 months of 2012.

New risks and challenges for developing countries include the potential effects of quantitative easing in Japan, the challenges that eventual withdrawal of QE in the United States might bring, and a steeper than projected decline in international commodity prices (for commodity exporters). The report says given capacity constraints, to achieve higher growth on a sustained basis, most developing countries need to prioritize structural reforms like easing the cost of doing business, opening up to international trade flows and foreign investment, and investing in infrastructure and human capital.

Link to Global Economic Prospects June 2013

In other news

Financial Markets…World stock markets continued to slide on Thursday as a sell-off in global financial markets accelerated on growing concerns over the prospect of central banks’ stimulus programs. Notably, developing-country shares, proxied by the MSCI Emerging Market index, sank 1.7% to the lowest level in 10 months with Chinese and Indonesian shares leading the decline (dropping 2.8% and 6.8%, respectively).

The yen surged against the dollar today, appreciating to a 10-week high of 93.75 in earlier trading, as lingering slumps in Japanese stocks unwound bets the yen would continue to depreciate. The currency’s three-day gain of 5% is the largest since October 2008.

U.S. Treasuries advanced along with German and Japanese bonds as the global stock-market rout boosted demand for safe-haven government debt. The yield on the benchmark 10-year U.S. bonds fell as much as 7 basis points to 2.16%, while comparable German yield slide for a third day, dropping 2 bps to 1.57%. Japan’s 10-year yield declined 7 ½ bps to 0.795% earlier, the biggest drop in two months.

High-income Economies…Retail sales growth in the U.S. slowed to an annualized 2.8% in the three months ending in May (3m/3m saar) from 4.6% in April, despite improving labor and housing markets. US unemployment claims dropped by 12,000 to 334,000 in the week ended June 8 from 346,000 in the previous week, according to the Labor Department.

Canada’s new housing price index rose 2.0% (y/y) in April, the same rate as the previous month, as a spring rebound in real estate continued in most cities. Canada’s central bank warned that housing prices could be subject to “a sharper correction” than the so-called soft-landing now under way.

The Bank of Korea left its benchmark interest rate unchanged at 2.5%, after a 25 basis point rate cut in April, citing a modest recovery in activity (exports, construction investment), but downside to growth from the possibility of an earlier-than-expected tapering off of US quantitative easing policy.

Developing EconomiesEast Asia and the Pacific: Indonesia's central bank raised its benchmark interest rate by 25 basis points to 6%. The rate hike comes for the first time since 2011 in a bid to contain rising inflation expectations and to counter a slide in the rupiah.

Latin America and the Caribbean:  Brazil’s retails sales growth slowed in April to 3.1% (y/y), down from slightly from 3.2% in the previous month. The government introduced a subsidized loan scheme totaling $8.7bn for low-income families to purchase furniture and appliances.

Sub-Saharan Africa: South Africa's wholesale sales growth recovered sharply in April by 8.8% (m/m sa), reversing last month's 5.8% contraction (m/m sa). On y/y basis, wholesale trade advanced 7.2%, compared to a 0.5% drop in the previous month.

Ethiopia’s inflation increased to 6.3% (y/y) in May, up from 6.1% in April 2013, with non-food-price inflation still being the main driver of higher prices.

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