By Ramya Raghavan
The World Bank has made its forecasts for the world economy and they see optimistic prospects for the immediate future. Growth in the world economy is predicted to accelerate to 3.1% this year due to a recovery in investment, trade, and manufacturing, before slowing slightly.
Advanced economies can expect to average at 2.2% growth in 2018, with investment stabilising as a result of the termination of post-crisis stimulation measures by central banks. Emerging and developing economies are expected to grow at 4.5% as their commodity exports recover.
This would mark the first time that growth in the world economy would hit its full potential since the financial crisis. Jim Yong Kim, the World Bank’s president, said that “The broad-based recovery in global growth is encouraging, but this is no time for complacency.”
Regional economic prospects:
East Asia and the Pacific
Growth in East Asia and the Pacific is expected to slip to 6.2% in 2018, down from an estimated 6.4% in 2017. The region faces risks due to the rise of trade protectionism, geopolitical tensions and the possibility of financial stress. A possible slowdown in the region’s major economies, in particular China, poses further risk. A shrinking labour force due to an aging population is also an important long-term demographic change that will contribute to slowing productivity.
Europe and Central Asia
From an estimated 3.7% in 2017, growth in Europe and Central Asia is anticipated to drop to 2.9% in 2018. With recovery driven by commodity exporters, risks to the regional economy include policy uncertainty and a further decline in oil prices.
Latin America and the Caribbean
Growth in Latin America and the Caribbean is forecasted to accelerate to 2% in 2018, from an estimated 0.9% in 2017. The upswing is primarily driven by growing private consumption and investment among the commodity-exporting nations. The risks to the regional economy include natural disasters, policy uncertainty, trade protectionism in the United States and a deterioration of domestic fiscal conditions.
The Middle East and North Africa
Economies within the Middle East and North Africa are expected to boom, with an anticipated growth rate of 3% in 2018, up from an estimated 1.8% in 2017. This momentum will be driven by the implementation of institutional reforms across the region and the easing of fiscal constraints due to stabilisation of oil prices. Tourism may also bolster growth in economies that are not reliant on oil exports and can provide some stability at a time of turbulent oil prices. Risks to the regional outlook include the ongoing weakness in the price of oil and continued geopolitical conflicts.
Growth in South Asia is expected to advance to 6.9% in 2018, from an estimated 6.5% in 2017. This growth is expected to be stimulated by a recovery in exports, high levels of consumption and a revival of investments due to policy reforms. There is also the possibility of a slowdown due to natural disasters, increasing global financial volatility and the failure to implement reforms.
Growth in sub-Saharan Africa is forecasted to accelerate to 3.2% in 2018 from an anticipated 2.4% in 2017. The stronger growth is projected to be driven by a stabilisation in commodity prices and the implementation of institutional reform. Risks to regional outlook include a fall in commodity prices and higher-than-expected rises in global interest rates.
Long-term growth prospects
While developing and emerging economies are growing faster than last year, this upswing is primarily seen as short-term. There is an ongoing debate centred around whether the capacity of the world economy is sufficient to encourage growth beyond the current rate. This poses concerns for the capability of the economy to expand further, even after the full employment of labour and capital is achieved.
An implication of the economy operating at full capacity is that standard economic tools, such as reduced interest or tax rates or increased government spending, fail to stimulate further economic growth. In the long run, potential growth is slowing down as a result of lacklustre advances in productivity rates, lower investment and an aging workforce.
Long-run economic deceleration is affecting economies that account for over 65% of global GDP. If efforts are not taken to ensure increases in potential growth over the next decade, average global growth may slow down by a quarter percentage point. A greater impact will be felt by emerging and developing economies, which face a drop of half a percentage point over the same period.
Enhancing potential growth
World Bank Senior Director for Development Economics, Shantayanan Devarajan recently said that “An analysis of the drivers of the slowdown in potential growth underscores the point that we are not helpless in the face of it”. Policy makers in particular need to consider possible initiatives for boosting the long-term potential.
Reforms should be initiated by governments across sectors such as education, services, health and infrastructure. Productivity can be improved by developing a healthier, better skilled and educated workforce and building better infrastructure. Through policy reforms, governments can move towards a sustainable economic growth model, as opposed to using traditional monetary and fiscal measures which are aimed only at boosting the demand for goods and services.
In the words of the World Bank Group President Jim Yong Kim “This is a great opportunity to invest in human and physical capital. If policy makers around the world focus on these key investments, they can increase their countries’ productivity, boost workforce participation, and move closer to the goals of ending extreme poverty and boosting shared prosperity.”
Challenges to the global outlook
However, risks to global outlook persist. Forecasted expansion can be derailed by the sudden tightening of global financing, which may be caused by growing concerns about the economic future in the global capital markets. Furthermore, escalating trade restrictions and rising geopolitical tensions have resulted in a slowdown in global trade and remain a risk to the global outlook.
In the long run, the ability of the economy to capitalise on reduced poverty levels and improved living standards remains uncertain. It is urgent that governments impliment further productivity-enhancing reforms as investments fall and most prosperous populations continue to age. With a brighter economic picture in both developing and developed economies and unemployment rates falling to pre-crisis levels, the challenge will lie with policy makers to implement good economic policies and eschew protectionism. It is more critical now than ever to make the case for greater investment and innovation in the economy.
Featured Image Source: Flickr
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