Global Economic Growth to Edge Up to 3% in 2018


January 10, 2018//-The World Bank has projected global economic growth to edge up to 3.1 percent in 2018 after a much stronger-than-expected 2017, as the recovery in investment, manufacturing, and trade continues.

Growth in advanced economies is expected to moderate slightly to 2.2 percent in 2018, as central banks gradually remove their post-crisis accommodation and the upturn in investment growth stabilizes, according to the January 2018 Global Economic Prospects report.

Growth in emerging market and developing economies as a whole is projected to strengthen to 4.5 percent in 2018, as activity in commodity exporters continues to recover amid firming prices, it added.

Global Outlook

A broad-based cyclical global recovery is underway, aided by a rebound in investment and trade, against the backdrop of benign financing conditions, generally accommodative policies, improved confidence, and the dissipating impact of the earlier commodity price collapse.

Global growth is expected to be sustained over the next couple of years—and even accelerate somewhat in emerging market and developing economies (EMDEs) thanks to a rebound in commodity exporters.

Although near-term growth could surprise on the upside, the global outlook is still subject to substantial downside risks, including the possibility of financial stress, increased protectionism, and rising geopolitical tensions.

Particularly worrying are longer-term risks and challenges associated with subdued productivity and potential growth. With output gaps closing or already closed in many countries, supporting aggregate demand with the use of cyclical policies is becoming less of a priority.

Focus should now turn to the structural policies needed to boost potential growth and living standards, the report urged.

Regional Perspectives

Growth in most EMDE regions with large numbers of commodity exporters recovered in 2017, with the notable exception of the Middle East and North Africa, mainly due to oil production cuts. These regions are generally expected to see faster growth during the forecast horizon, as commodity prices rise and the impact of the earlier terms of trade shock diminishes.

The robust pace of expansion in EMDE regions with a substantial number of commodity importers is expected to continue. Risks to the outlook have become more balanced in some regions, but continue to tilt down in all of them.

This edition of Global Economic Prospects titled ‘Broad-based Upturn But for How Long?’ includes a chapter on the sources of slowing global potential growth and policy options to raise it, as well as two special focus pieces—on the impact of the 2014-16 oil price collapse and the potential implications of improving education for inequality.

Building Solid Foundations

How to Promote Potential Growth. Despite a recent acceleration of global economic activity, potential output growth is flagging. At 2.5 percent, 2013-17 potential growth was 0.5 percentage point below its longerterm average and 0.9 percentage points below its average a decade ago, with an even steeper decline in EMDEs.

More than one-half of the deceleration reflects weaker-than-average rates of capital accumulation, but weaker total factor productivity growth and demographic trends have also played a role.

These forces are not expected to diminish over the next decade and, unless counterred, will depress global and EMDE potential growth further by 0.2 and 0.5 percentage point, respectively, over the next decade.

Policy initiatives to lift physical and human capital, encourage labor force participation, and improve institutions could help reverse this trend, the World Bank Group’s flagship report urged.

With the Benefit of Hindsight: The Impact of the 2014-16 Oil Price Collapse. The 2014-16 collapse in oil prices was one of the largest in modern history, but failed to provide an expected boost to global growth.

The short-term benefits of falling oil prices to global growth were muted by several factors, including the low responsiveness of activity in key oil-importing emerging markets, economic rebalancing in China, and the dampening impact of a sharp contraction in energy investment and a rapid appreciation of the U.S. dollar on growth in the United States.

Among oil-exporting countries, those with flexible exchange rates, more diversified economies, and larger fiscal buffers fared better than others.

Since 2014, many countries have taken advantage of lower prices to reduce energy subsidies, and some have implemented broader structural reforms.

Education Demographics and Global Inequality

An expected shift in the skill composition of the global labor force will have important consequences for the future of global inequality. Specifically, a better-educated labor force from emerging market and developing economies will likely reduce inequality between countries.

It could mitigate, especially in EMDEs, the deterioration of within-country inequality that may result from other developments, including increasing urbanization, skill-biased technological change, labor market frictions that cause persistent unemployment, or trade that raises skill premia.

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