Global growth edges up to 2.7 % despite weak investment forecasts the World Bank
Global economic growth is forecast to accelerate moderately to 2.7 % in 2017 after a post-crisis low last year as obstacles to activity recede among emerging market and developing economy commodity exporters, while domestic demand remains solid among emerging and developing commodity importers, the World Bank said in a report released on January 10, 2017
Growth in advanced economies is expected to edge up to 1.8 % in 2017, the World Bank’s January 2017 Global Economic Prospects report said. Fiscal stimulus in major economies—particularly in the United States—could generate faster domestic and global growth than projected, although rising trade protection could have adverse effects. Growth in emerging market and developing economies as a whole should pick up to 4.2 % this year from 3.4 % in the year just ended amid modestly rising commodity prices.
Nevertheless, the outlook is clouded by uncertainty about policy direction in major economies. A protracted period of uncertainty could prolong the slow growth in investment that is holding back low, middle, and high income countries.
“After years of disappointing global growth, we are encouraged to see stronger economic prospects on the horizon,” World Bank Group President Jim Yong Kim said. “Now is the time to take advantage of this momentum and increase investments in infrastructure and people. This is vital to accelerating the sustainable and inclusive economic growth required to end extreme poverty.”
The report analyses the worrisome recent weakening of investment growth in emerging market and developing economies, which account for one-third of global GDP and about three-quarters of the world’s population and the world’s poor. Investment growth fell to 3.4 % in 2015 from 10 percent on average in 2010, and likely declined another half percentage point last year.
Slowing investment growth is partly a correction from high pre-crisis levels, but also reflects obstacles to growth that emerging and developing economies have faced, including low oil prices (for oil exporters), slowing foreign direct investment (for commodity importers), and more broadly, private debt burdens and political risk.
“We can help governments offer the private sector more opportunities to invest with confidence that the new capital it produces can plug into the infrastructure of global connectivity,” said World Bank Chief Economist Paul Romer. “Without new streets, the private sector has no incentive to invest in the physical capital of new buildings. Without new work space connected to new living space, the billions of people who want to join the modern economy will lose the chance to invest in the human capital that comes from learning on the job.”
Emerging market and developing economy commodity exporters are expected to expand by 2.3 % in 2017 after an almost negligible 0.3 % pace in 2016, as commodity prices gradually recover and as Russia and Brazil resume growing after recessions.
Commodity-importing emerging market and developing economies, in contrast, should grow at 5.6 % this year, unchanged from 2016. China is projected to continue an orderly growth slowdown to a 6.5 % rate. However, overall prospects for emerging market and developing economies are dampened by tepid international trade, subdued investment, and weak productivity growth.
Among advanced economies, growth in the United States is expected to pick up to 2.2 %, as manufacturing and investment growth gain traction after a weak 2016. The report looks at how proposed fiscal stimulus and other policy initiatives in the United States could spill over to the global economy.
Highlights from the Special Focus on the US Economy and the World
Impact of the U.S. economy. Shocks to the U.S. economy transmit to the rest of the world through a
wide range of channels. With an estimated nominal GDP of more than $18 trillion in 2016, the United States is the world’s single largest economy. (Figure 1.A-1.D). It accounts for 22 percent of global GDP, 12 percent of global trade, 11 percent of bank foreign claims, and 35 percent of global stock market capitalization. The U.S. dollar is the most widely used currency in global trade and financial transactions.
Baseline forecasts. Absent concrete plans, baseline forecasts do not incorporate possible policy changes by the incoming U.S. administration. U.S. growth is expected to recover modestly from a subdued 1.6 percent in 2016 to 2.2 percent in 2017 (unchanged from June 2016 forecasts). Global growth is expected to increase to 2.7 percent in 2017, from a post-crisis low of 2.3 percent in 2016, driven in particular by receding obstacles to activity in commodity-exporting EMDEs. Many details of the new U.S. administration’s policy plans have yet to be announced. Until comprehensive and specific proposals are available, the overall impact of U.S. policy changes on U.S. and global activity cannot be assessed. However, the isolated impact of some individual components can be analyzed.
U.S. tax policy changes: The fiscal proposals put forward by the new U.S. administration include a cut in the statutory corporate income tax rate from 35 to 15 percent; a cut in personal income taxes, especially for the highest-income earners; a reduction in the number of individual income tax brackets; and changes to the structure of tax deductions. If fully implemented, these measures could—without consideration of additional policy changes by the new administration—raise U.S. GDP growth forecasts to 2.2-2.5 % in 2017 and 2.5-2.9 % in 2018. These estimates depend on the timing of the tax cuts, the reaction of monetary policy authorities, the amount of slack remaining in the U.S. economy, and responses of business and household expectations. In addition, these estimates do not specifically take into account fiscal sustainability considerations.
Other U.S. policy changes: The incoming U.S. administration has signaled a number of measures to stimulate infrastructure investment. It has also suggested sizable cuts in non-defense spending, likely accompanied by increases in defence spending. While specific proposals have not yet been made, it is possible that, on net, overall federal spending will be reduced. Accordingly, the impact of corporate and personal income tax cuts and infrastructure spending on aggregate demand could be offset in the near-term if overall federal spending is also cut. This offsetting effect would depend on the size of the net reduction in government outlays and on the estimated fiscal multiplier of various spending categories. Until additional details are unveiled, it is difficult to quantify the potential impact of these measures on the outlook. Other policy proposals mentioned by the new administration include changes to trade agreements and import tariffs. If they lead to higher import costs, policy initiatives to renegotiate trade agreements could be detrimental to U.S. and global activity.
U.S. growth spillovers: Stronger U.S. growth would help global activity by raising U.S. demand for trading partners’ exports. A 1 percentage-point increase in U.S. growth could boost growth after one year by 0.8 percentage point in other advanced economies, and by 0.6 percentage point in EMDEs (Figure 1.E). Investment could respond even more strongly. In the illustrative scenario of unfunded
U.S. tax policy changes discussed above, global growth could rise by up to 0.1 percentage point in 2017 and by at least 0.3 percentage point in 2018, depending on the timing of tax cuts and the reaction of U.S. monetary policy authorities.
U.S. uncertainty spillovers: Even without any policy action by the United States, heightened uncertainty about potential policy initiatives could set back already-weak global investment. Increased uncertainty driven by financial market volatility or ambiguity about the direction and scope of policies could discourage investors that base their decisions about long-term investments on stable financing conditions and predictable policies. A sustained 10 % increase in U.S. economic policy uncertainty as captured by the Economic Policy Uncertainty Index could, after one year, reduce U.S. output growth by about 0.15 percentage point, EMDE output growth by 0.2 percentage point, and EMDE investment growth by 0.6 percentage point (Figure 1.F).
Spillovers from the world to the United States: Important as the U.S. economy is to the global economy, the U.S. economy also benefits from the strength of its linkages with the rest of the world. Much global value chain activity is conducted through U.S. multinational corporations and their affiliates abroad. U.S. multinationals have accounted for a sizeable share of U.S. output and labour productivity growth and their presence in financial markets is large. In turn, foreign multinationals operating in the United States provide a considerable share of U.S. employment and exports. As a result, growth setbacks originating in other economies, especially in other advanced economies, can reduce activity in the United States.