The World Bank, 2014.

 

This edition of the Global Economic Prospects, a World Bank flagship report, describes the forces acting on the global economy and its implications on developing countries using evidence based analysis. The report includes forecasts for individual developing regions and countries, as well as a research focused chapter examining capital flows and risks to developing countries.

 

The report describes a global economy that is at a turning point. For the first time in five years, there are indications that a self-sustaining recovery has begun among high-income countries – suggesting that they may now join developing countries as a second engine of growth in the global economy. The stronger growth in high-income countries reflects progress in both private- and public-sector healing in the wake of the financial crisis. In particular, the drag from fiscal consolidation and policy uncertainty is expected to ease sharply in the United States and in high-income Europe. The stronger growth in rich countries is expected to boost demand for the exports of developing countries and contribute to a modest acceleration in their growth. Overall, global trade growth which has been particularly weak is expected to strengthen over next few years reaching about 5.1 percent by 2016. 

 

The counterpart to the strengthening and normalization of output in high-income countries will be a normalization of policy – including a gradual withdrawal of quantitative easing policies. Despite the turmoil that was associated with the speculation about the beginning of the taper during the spring and summer of 2013, the impact thus far of the actual announcement and initial implementation of the taper has been very smooth. The Global Economic Prospects describes a baseline scenario where this gradual process is assumed to continue, resulting in a modest reduction in capital flows to developing countries from 4.6 percent of their GDP in 2013 to around 4.0 percent in 2016.Whatever drag this implies for developing country growth is more than offset by the additional export demand due to stronger high-income country growth. While the smooth adjustment process is the most likely scenario, the novelty of the unwinding process has only begun and the rapid spike in long-term interest rates during the summer of 2013 suggests that a much more abrupt rise in long-term interest 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 pushing one or more countries into crisis. Evidence suggests that countries with large current account deficits or those that have had a rapid accumulation of credit in recent years could be most vulnerable to a precipitous tightening of international financial conditions. 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.