Global Economic Development: The Growth is Slowing Down and Moving East

Economic growth rate is perceived to be the most important indicator of global well-being; almost every international organization refers to economic growth expectations in defining global economic trends.

However, the year 2016’s forecasts on global economic growth has brought certain disappointments and concerns to the professional community.

In June 2016, the World Bank released a comprehensive report on global economic prospects indicating that the global growth is forecasted to be at 2.4% in 2016, which was downgraded from the previous forecast of 2.9% projected in January.

The reason for downgraded projections on economic growth are related to the fact that commodity-exporting emerging market and developing economies have struggled to adapt to lower prices for oil and other key commodities, and this accounts for 40% of the downward revision.

As Jim Yong Kim, the World Bank Group President, commented, This sluggish growth underscores why it’s critically important for countries to pursue policies that will boost economic growth and improve the lives of those living in extreme poverty. Economic growth remains the most important driver of poverty reduction, and that’s why we’re very concerned that growth is slowing sharply in commodity-exporting developing countries due to depressed commodity prices.

The growth of Asian economies

While the world is expected to grow at a pace no higher than 3%, projections suggest that China will be growing at 6.7% in 2016 (after 6.9% in 2015).

Even more promising forecasts were expressed about India’s economic expansion, which is expected to hold steady at 7.6%. India, the region’s largest economy, showed strengthening activity, as did Pakistan, Bangladesh and Bhutan.

Overall, the East Asia and Pacific region is expected to grow at 6.3% in 2016. In the regions excluding China, the growth is projected to be slightly lower – 4.8%.

This outlook assumes an orderly growth slowdown in China accompanied by steady progress on structural reforms and appropriate policy stimulus as needed. Growth in the rest of the region is expected to be supported by rising investments in several large economies (Indonesia, Malaysia, Thailand), and strong consumption supported by low commodity prices (Thailand, the Philippines, Vietnam), the report suggests.

The economic growth rate for South Asia is more promising. The region is expected to grow at 7.1% this year despite the weaker-than-expected growth in advanced economies, which has dampened export growth in the region. The World Bank suggests that most South Asian economies have benefited from the decline in oil prices, low inflation, and steady remittance flows.

Middle East and Africa on the rise

Middle East and North Africa are projected to grow at 2.9% in 2016 with the main reason for the slight improvement in regional growth to be an expected strong recovery in the Islamic Republic of Iran following the lifting of sanctions in January. An envisaged upturn in average oil prices in 2017 is projected to support a recovery in regional growth to 3.5% in 2017.

Sub-Saharan Africa is also expected to experience growth of 2.5% in 2016, which is lower than 2015 projections due to low commodity prices, weak global activity and tightening financial conditions.

Oil exporters are not likely to experience any significant pickup in consumption growth, while lower inflation in oil importers should support consumer spending. However, food price inflation due to drought, high unemployment, and the effect of currency depreciation could offset some of this advantage. Investment growth is expected to slow in many countries as governments and investors cut or delay capital expenditures in a context of fiscal consolidation.

Eastern Europe and Central Asia on slight surge

Geopolitical concerns, including flare-ups of violence in eastern Ukraine and the Caucasus and terror attacks in Turkey, are playing a major role in economic growth forecasts. However, Europe and Central Asia are expected to grow at relatively low 1.2%, which is explained to be dragged down by continuing recession of the Russian economy. Excluding Russia, the region is expected to expand at a rate of 2.9% rate.

Growth forecasts for Eastern Europe have been downgraded from January’s predictions as countries adjust to lower prices for oil, metals and agricultural commodities. Activity in the western part of the region will benefit from moderate growth in the Euro Area and strengthening domestic demand, helped by subdued fuel costs.

LATAM and Caribbean on decline

Unlike major Asian economies, the Latin American and Caribbean region are expected to experience a 1.3% decline in 2016, which would make the second year of recession in a row. However, in 2017, the region is expected to expand again and gain momentum of ~2% by 2018.

South America alone is expected to experience a deeper decline of 2.8% this year, but may have a recovery in 2017. However, the Mexican and Central American sub-regions are expected to grow at 2.7% this year due to the economic ties with the US and strong exports.

One country to experience relatively significant decline is Brazil. Brazil’s economy is forecasted to recess at 4% in 2016 and further in 2017. Policy tightening, rising unemployment, shrinking real incomes and political uncertainty are among some of the reasons for the decline.

Advanced and emerging economies overlook

Commodity-importing emerging markets and developing economies have been more resilient than exporters, although the benefits of lower prices for energy and other commodities have been slow to materialize. These economies are forecast to expand at a 5.8% rate in 2016, down modestly from the 5.9% pace estimated for 2015, as low energy prices and the modest recovery in advanced economies support economic activity.

As Kaushik Basu, the World Bank Chief Economist and Senior Vice President, commented, As advanced economies struggle to gain traction, most economies in South and East Asia are growing solidly, as are commodity-importing emerging economies around the world. However, one development that bears caution is the rapid rise of private debt in several emerging and developing economies. In the wake of a borrowing boom, it is not uncommon to find non-performing bank loans, as a share of gross loans, to quadruple.