Global Global Global Economic Economic Economic Prospects Prospects Prospects Volume 6 Volume 6 Volume 6 | January 2013 | January 2013 | January 2013 The World Bank Assuring growth over the medium term 3 Global Economic Prospects Assuring growth over the medium term January 2013 4 © 2013 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 16 15 14 13 This work is a product of the staff of The World Bank with external contributions. Note that The World Bank does not necessarily own each component of the content included in the work. The World Bank therefore does not war- rant that the use of the content contained in the work will not infringe on the rights of third parties. The risk of claims resulting from such infringement rests solely with you. 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Under the Creative Commons Attribution license, you are free to copy, dis- tribute, transmit, and adapt this work, including for commercial purposes, under the following conditions: Attribution—Please cite the work as follows: The World Bank. 2013. Global Economic Prospects, Volume 6, January 2013. Washington, DC: World Bank. Doi: 10.1596/ 978-0-8213-9882-1 License: Creative Commons Attribution CC BY 3.0 Translations—If you create a translation of this work, please add the following disclaimer along with the attribu- tion: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. All queries on rights and licenses should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org . ISBN (electronic): 978-0-8213-9882-1 DOI: 10.1596/ 978-0-8213-9882-1 Cover photo: Jonathan Guy; Cover design: Roula I. Yazigi The cutoff date for the data used in the report was January 9, 2013. Dollars are current U.S. dollars unless otherwise indicated. 5 Acknowledgments This report is a product of the Prospects Group in the Development Economics Vice Presidency of the World Bank. Its principal authors were Andrew Burns and Theo Janse van Rensburg. The project was managed by Andrew Burns, under the direction of Hans Timmer and the guidance of Kaushik Basu. Several people contributed substantively to the report. The modeling and data team was led by Theo Janse van Rensburg, assisted by Trung Thanh Bui, Muhammad Adil Islam, Irina Magyer, and Sabah Zeehan Mirza. The projections, regional write-ups and subject annexes were produced by Dilek Aykut (Finance, Europe & Central Asia), John Baffes (Commodities), Damir Cosic (Commodities & Latin America & Caribbean), Allen Dennis (Sub -Saharan Africa and International Trade), Sanket Mohapatra (South Asia, Middle East & North Africa, Industrial Production and Exchange Rates), Eung Ju Kim (Finance), Cristina Savescu (Latin America & Caribbean, Indus- trial Production), Theo Janse van Rensburg (Latin America & Caribbean and High-Income Countries) and Ekaterine Vashakmadze (East Asia & the Pacific and Inflation). Regional projections and annexes were produced in coordination with country teams, country directors, and the offices of the regional chief economists and PREM directors. The short-term commodity price forecasts were produced by John Baffes, Damir Ćosić, and Betty Dow. The remittances forecasts were produced by Gemechu Ayana Aga and Dilip K. Ratha. Simulations were performed by Irina Magyer and Theo Janse van Rensburg. The accompanying online publication, Prospects for the Global Economy, was produced by a team comprised of Sarah Crow, Betty Dow, Muhammad Adil Islam, Vamsee Krishna Kanchi, Sabah Mirza, Katherine Rollins, and Dana Vorisek, with technical support from David Horowitz, Ugendran Machakkalai, and Malarvishi Veerappan. Cynthia Case-McMahon, Indira Chand, and Merrell Tuck-Primdahl managed media relations and the dissemina- tion. Hazel Macadangdang managed the publication process. Several reviewers offered extensive advice and comments. These included Abdul de Guia Abiad, Ahmad Ahsan, Jorge Araujo, Merli Baroudi, Deepak Bhattasali, Andrew Beath, Zeljko Bogetic, Oscar Calvo-Gonzalez, Kevin Carey, Mei Leng Chang, Shubham Chaudhuri, Punam Chuhan-Pole, Tito Cordella, Jose Cuesta, Uri Dadush, Au- gusto de la Torre, Shantayanan Devarajan, Tatiana Didier, Hinh Truong Dinh, Sebastian Eckardt, Olga Emelyanov, Pablo Fajnzylber, Manuela V. Ferro, Caroline Freund, Bernard G. Funck, Ejaz Ghani, David Michael Gould, Guenter Heidenhof, Bert Hofman, Zahid Hussain, Elena Ianchovichina, Satu Kristina Kahkonen, Markus Kitzmul- ler, Auguste Tano Kouame, David Kuijper, Roumeen Islam, Jeffrey D. Lewis, Connie Luff, Ernesto May, Denis Medvedev, Juan Carlos Mendoza, Claudia Nassif, Antonio M. Ollero, Kwang Park, Samuel Pienknagura, Miria Pigato, Mohammad Zia Qureshi, Susan R. Razzaz, Christine M. Richaud, Kaspar Richter, Elliot Riordan, David Rosenblatt, Sudhir Shetty, Carlos Silva-Jauregui, Yvonne M. Tsikata, Cevdet Unal, Mark Roland Thomas, Axel van Tortsenberg, Sergei Ulatov, Aristomene Varoudakis, Gallina Vincelette, Ekaterina Vostroknutova, Herman Jorge Winkler, Soonhwa Yi, Juan F. Zalduendo, and Albert Zeufack. 6 Table of Contents Main Text 1 Topical Annexes Financial markets 33 Industrial production. 43 Inflation. 49 Global trade 59 Exchange rates 65 Prospects for commodity markets 75 Regional Annexes East Asia & the Pacific 91 Europe & Central Asia 103 Latin America & the Caribbean 115 Middle East & North Africa 125 South Asia 139 Sub-Saharan Africa 155 Four years after the onset of the global financial crisis, the world economy continues to struggle. Developing economies are still the main driver of global growth, but their output has slowed compared with the pre-crisis period. To regain pre-crisis growth rates, developing countries must once again emphasize internal productivity -enhancing policies. While headwinds from restructuring and fiscal consolidation will persist in high-income countries, they should become less intense allowing for a slow acceleration in growth over the next several years. Financial market conditions have improved dramatically since June The cumulative effect of national- and EU-wide measures to improve fiscal sustainability, and the augmentation of measures that the European Central Bank (ECB) would be willing to take in defense of the Euro have resulted in a significant improvement in global financial markets. Unlike past episodes of reduced tensions, when market conditions improved only partially, many market risk indicators have fallen back to levels last seen in early 2010 – before concerns about Euro Area fiscal sustainability took the fore. The decline in financial market tensions has also been felt in the developing world.  International capital flows to developing countries, which fell by between 30 and 40 percent in May-June, have reached new highs.  Developing country bond spreads (EMBIG) have declined by 127 basis points (bps) since June, and are now 282 bps below their long- term average levels.  Developing country stock markets have increased by 12.6 percent since June (10.7 percent for high-income markets) but the real-side recovery is weak and business- sector confidence low While signals from financial markets are encouraging, those emanating from the real-side of the global economy are more mixed. Growth in developing countries accelerated in the third quarter of 2012, including in major middle- income countries such as Brazil and China, where mid-year weakness contributed to the global slowdown. Early indications for the fourth quarter point to a continued acceleration in East Asia & the Pacific, Europe & Central Asia and South Asia; but slowing in Latin America & the Caribbean. Among high-income countries, investment and industrial activity in the United States show unusual weakness – seemingly due to uncertainty over the stance of fiscal policy in the run up to November‘s elections and the end-of- 2012 fiscal cliff. In Japan, the economy appears to be contracting – in part because of political tension with China over the sovereignty of islands in the region and the expiration of automobile purchase incentives. Activity in Europe ceased to contract at alarming rates in Q3, but the economy appears to have weakened again in Q4 — perhaps reflecting weak demand for capital goods from the United States and Japan. Prospects are for a modest acceleration of growth between 2013 and 2015 Overall, the global economic environment remains fragile and prone to further disappointment, although the balance of risks is now less skewed to the downside than it has been in recent years. Global growth is expected to come in at a relatively weak 2.3 and 2.4 percent in 2012 and 2013 respectively and gradually strengthen to 3.1 and 3.3 percent in 2014 and 2015 (table 1). Global Economic Prospects January 2013: Assuring growth over the medium term Overview & main messages 2 Table 1. The global outlook in summary (percent change from previous year, except interest rates and oil price) 2011 2012 2013e 2014f 2015f Global conditions World trade volume (GNFS) 6.2 3.5 6.0 6.7 7.0 Consumer prices G-7 Countries 1,2 5.3 -0.6 -0.1 0.9 1.0 United States 2.4 2.1 2.4 2.5 2.5 Commodity prices (USD terms) Non-oil commodities 20.7 -9.5 -2.0 -3.2 -2.8 Oil price (US$ per barrel) 3 104.0 105.0 102.0 102.2 102.1 Oil price (percent change) 31.6 1.0 -2.9 0.2 -0.1 Manufactures unit export value 4 8.9 -1.9 1.9 2.2 1.9 Interest rates $, 6-month (percent) 0.8 0.5 0.7 1.1 1.4 €, 6-month (percent) 1.6 0.2 0.5 1.2 1.5 International capital flows to developing countries (% of GDP) Developing countries Net private and official inflows 4.9 4.1 4.2 4.2 4.2 Net private inflows (equity + debt) 4.7 4.1 4.2 4.2 4.1 East Asia and Pacific 4.9 3.5 3.8 4.1 4.2 Europe and Central Asia 5.7 4.8 5.3 5.2 4.8 Latin America and Caribbean 5.5 5.7 5.2 4.7 4.3 Middle East and N. Africa 1.3 1.1 1.4 1.6 1.9 South Asia 3.5 3.3 3.4 3.5 3.4 Sub-Saharan Africa 5.3 5.0 4.7 4.7 4.9 Real GDP growth 5 World 2.7 2.3 2.4 3.1 3.3 Memo item: World (2005 PPP weights) 3.8 3.0 3.4 3.9 4.1 High income 1.6 1.3 1.3 2.0 2.3 OECD countries 1.5 1.2 1.1 2.0 2.3 Euro Area 1.5 -0.4 -0.1 0.9 1.4 Japan -0.7 1.9 0.8 1.2 1.5 United States 1.8 2.2 1.9 2.8 3.0 Non-OECD countries 5.0 2.9 3.5 3.8 3.8 Developing countries 5.9 5.1 5.5 5.7 5.8 East Asia and Pacific 8.3 7.5 7.9 7.6 7.5 China 9.3 7.9 8.4 8.0 7.9 Indonesia 6.5 6.1 6.3 6.6 6.6 Thailand 0.1 4.7 5.0 4.5 4.5 Europe and Central Asia 5.5 3.0 3.6 4.0 4.3 Russia 4.3 3.5 3.6 3.9 3.8 Turkey 8.5 2.9 4.0 4.5 5.0 Romania 2.5 0.6 1.6 2.2 3.0 Latin America and Caribbean 4.3 3.0 3.5 3.9 3.9 Brazil 2.7 0.9 3.4 4.1 4.0 Mexico 3.9 4.0 3.3 3.6 3.6 Argentina 8.9 2.0 3.4 4.1 4.0 Middle East and N. Africa 6 -2.4 3.8 3.4 3.9 4.3 Egypt 7 1.8 2.2 2.6 3.8 4.7 Iran 1.7 -1.0 0.6 1.6 2.8 Algeria 2.5 3.0 3.4 3.8 4.3 South Asia 7.4 5.4 5.7 6.4 6.7 India 7, 8 6.9 5.1 6.1 6.8 7.0 Pakistan 7 3.0 3.7 3.8 4.0 4.2 Bangladesh 7 6.7 6.3 5.8 6.2 6.5 Sub-Saharan Africa 4.5 4.6 4.9 5.1 5.2 South Africa 3.1 2.4 2.7 3.2 3.3 Nigeria 6.7 6.5 6.6 6.4 6.3 Angola 3.4 8.1 7.2 7.5 7.8 Memorandum items Developing countries excluding transition countries 6.5 5.2 5.8 6.0 6.0 excluding China and India 4.5 3.3 4.0 4.3 4.4 7. 8. Real GDP at market prices. GDP growth rates calculated using real GDP at factor cost, which are customarily reported in India, can vary significantly from these growth rates and have historically tended to be higher than market price GDP growth rates. Growth rates stated on this basis, starting with FY2011-12 are 6.5, 5.4, 6.4, 7.1, and 7.3 percent – see table SAR.2 in the South Asia regional annex. In keeping with national practice, data for Bangladesh, Egypt, India, and Pakistan are reported on a fiscal year basis in table 1.1. Aggregates that depend on these countries are calculated using data compiled on a calendar year basis. Source: World Bank. Notes: PPP = purchasing power parity; e = estimate; f = forecast. 1. Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. 2. In local currency, aggregated using 2005 GDP weights. 3. Simple average of Dubai, Brent, and West Texas Intermediate. 4. Unit value index of manufactured exports from major economies, expressed in USD. 5. Aggregate growth rates calculated using constant 2005 dollars GDP weights. 6. Comparison with the summer 2012 GEP is not included as country coverage [...]... credible medium- term plan to reduce spending and increase revenues Moreover, it assumes that the deal includes agreement to provide for a medium- term path for the debt ceiling that is consistent with the medium- term plan Prospects, will depend importantly on how the remaining fiscal challenges of the United States, are dealt with While the January 1, 2013 agreement on tax measures resolved most of the immediate... surrounding the debt ceiling is needed Policy uncertainty has already dampened growth Should policymakers fail to agree such measures, a loss of confidence in the currency and an overall increase in market tensions could reduce US and global growth by 2.3 and 1.4 percent respectively unusually high investment rate over the medium to long -term is not expected to perturb global growth, there would be... That said, the steep weakening of activity in Germany and France toward the end of 2012 serves as a stark reminder of the importance that confidence will play in the Euro Area recovery The more policy markers persist in pursuing the reform agenda of strengthening Euro Area institutions, improving fiscal balances at the national level and strengthening structural policies to raise the growth potential... discoveries (Sierra Leone, Niger and Mozambique) in recent years are expected to underpin a return to the region‘s pre-crisis growth rate of 4.9 percent in 2013 and even stronger growth in 2014/15 Nonetheless, risks remain tilted to the downside, as the global economy remains fragile Weaker growth in China, ongoing fiscal consolidation in the Euro Area and the United States could potentially derail the. .. 2013 In the outer years of the forecast, growth should pick up to around 3 percent, as the contractionary effects of continued consolidation are partially offset by improved confidence that the fiscal accounts are returning to a sustainable path Should the fiscal impasse remain unresolved, the implications for growth in the United States and the rest of the world could be much more negative (see the more... confidence effects in the rest of the world are assumed to be less severe (partly reflecting the smaller size of the overall crisis) Nevertheless, growth in developing countries is reduced by 1.1 percentage points on average in 2013 As economies, gradually recover the overall impact declines — but developing-country GDP would still be 0.3 percent lower than in the baseline even two years after the simulated... countries In the above mentioned scenario, oil prices are 22 Global Economic Prospects January 2013 Main Text In this potentially volatile environment, developing countries need to rebuild buffers and pursue cautious macroeconomic policies policy making more challenging than normal But these difficulties are magnified by uncertainty over both the level and rate of growth of potential output (the level... stance in the context of low inflation across the region However, the envisaged recovery remains vulnerable to a renewed crisis in the Euro Area, weaker than expected recovery in the US, and the possibility that a decline in Chinese investment is not offset by robust consumption growth GDP growth in Europe and Central Asia is estimated to have eased to 3.0 percent in 2012 from 5.5 percent in 2011 as the. .. developing-world borrowers has recovered as well, coming in at a post-crisis high of $62bn in 2012Q4 (figure 5) The recovery appears to have begun in the second quarter of 2012 and likely Western banks have been gradually increasing their exposures in the developing world Although European banks are likely to continue to rebuild their balance sheets going forward, the 6 Global Economic Prospects January 2013... the Euro Area, much more needs to be done before the risk of further crises can taken off the table In the United States the major fiscal contraction threatened by the fiscal cliff has passed, but uncertainty continues to surround the future path of fiscal policy and the threat of serious economic disruption posed by the persistent possibility that the debt-ceiling will not be raised is also a source . 2013 The World Bank Assuring growth over the medium term 3 Global Economic Prospects Assuring growth over the medium term. strengthen to 3.1 and 3.3 percent in 2014 and 2015 (table 1). Global Economic Prospects January 2013: Assuring growth over the medium term Overview