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Prospects Weekly: Global Economic Prospects revised projections for developing-country growth in 2014, Prospects vary across developing regions, Easing of global financing conditions should support activity in the short-term

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The June 10th edition of Global Economic Prospects revised projections for developing-country growth in 2014 downwards by 0.5 percentage points, to 4.8%, implying a third consecutive year of sub-5% growth. Much of the downgrade reflected first quarter weakness that delayed rather than derailed an anticipated acceleration in activity. A firming recovery in high-income countries and the recent easing of global financing conditions are projected to lift growth in most developing regions later this year, reaching an average 5.3% in 2015 and 5.5% in 2016. Tail risks have receded, but prospects remain sensitive to potential volatility in financial markets associated with the eventual normalization of monetary policy in high-income countries.
Despite weak activity in the first quarter, global growth is expected to accelerate during the second half of the year and into 2015 and 2016 - supported by strengthening demand from high-income countries. The soft first quarter mainly reflected temporary setbacks, including an unusually cold winter in the US, the conflict in the Ukraine and labor and political unrest in several developing countries (e.g. Thailand, South Africa). Global growth is expected to gain momentum as the year progresses, averaging 2.8% in 2014 before reaching 3.4% and 3.5% respectively in 2015 and 2016 (broadly in line with earlier forecasts). The bulk of the acceleration will come from high-income countries, notably the U.S. and the Euro Area. Reduced drag from fiscal consolidation, improving labor market conditions and continued support from highly accommodative monetary policies should lift high-income GDP growth to 1.9% in 2014, from 1.3% in 2013, and to 2.4 and 2.5% in 2015 and 2016. The contribution of high-income country imports to global trade growth will more than double, from 1.6 percentage points recently to around 3.5 percentage points by 2016. This will boost developing-country exports and strengthen GDP growth from 4.8% in 2014 to 5.3 and 5.5% in 2015 and 2016.
Prospects vary across developing regions but capacity constraints in many countries and rebalancing in others will preclude a stronger pickup in growth. In particular, supply-side constraints limit the room for further acceleration in the faster growing regions of Sub-Saharan Africa and East Asia, while economic rebalancing should slow growth in China from 7.6% this year to 7.4% by 2016. In South Asia, the expected growth revival is underpinned by a cyclical pick-up in India supported by a renewed drive for reforms, while a modest turn-around from a weak performance this year in Argentina, Brazil and Mexico should increase growth in Latin America and the Caribbean from a sluggish 1.9% in 2014 to around 3.5% in 2016. Eastern Europe and Central Asia is expected to benefit from a mending Euro Area economy and reduced tensions in the Ukraine conflict, which is estimated to knock 1 percentage point off regional growth this year. In the Middle-East a rebound from stagnation last year will reflect a partial recovery from the conflict-generated lows of recent years.

A significant easing of global financing conditions should support activity in the short-term, but adds to medium-term risks. After a brief period of market turmoil at the start of the year, expectations of a drawn-out period of monetary policy accommodation in high-income countries drove bond yields and financial market volatility to historically low levels. This has contributed to a recovery in capital inflows and declining borrowing costs in developing countries, unwinding half of the increase observed since the spring of last year. While supportive in the short-term, the recent decline in global interest rates means that these will have to rise from a lower base when the eventual normalization occurs. This could potentially provoke new episodes of market volatility for developing countries – especially if some of the adjustments that have occurred thus far are reversed. Rather than allowing imbalances to mount, developing countries should take advantage of the short window of opportunity provided by favorable external financing conditions to address domestic vulnerabilities and undertake the structural reforms that will support future resilience and the stronger growth that will be necessary to eliminate poverty by 2030.

Download the Prospects Weekly as PDF here.

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