January 2020: World Bank “Global Economic Prospects – Slow Growth, Policy Challenges”

Global Outlook: Fragile, Handle with Care. Global growth is expected to recover to 2.5 percent in 2020—up slightly from the post-crisis low of 2.4 percent registered last year amid weakening trade and investment—and edge up further over the forecast horizon. This projected recovery could be stronger if recent policy actions—particularly those that have mitigated trade tensions—lead to a sustained reduction in policy uncertainty. Nevertheless, downside risks predominate, including the possibility of a re-escalation of global trade tensions, sharp downturns in major economies, and financial disruptions in emerging market and developing economies (EMDEs). The materialization of these risks would test the ability of policymakers to respond effectively to negative events. Associated policy challenges are compounded by high debt levels and subdued productivity growth. Many EMDEs need to rebuild macroeconomic policy space to enhance resilience to possible adverse developments and to pursue decisive structural reforms.

Regional Prospects. Growth in almost all EMDE regions has been weaker than expected, reflecting downgrades to almost half of EMDEs. Activity in most regions is expected to pick up in 2020-21, but the recovery will largely depend on a rebound in a small number of large EMDEs, some of which are emerging from deep recessions or sharp slowdowns.

Fading Promise: How to Rekindle Productivity Growth. A broad-based slowdown in labor productivity growth has been underway since the global financial crisis. In EMDEs, the slowdown has reflected weakness in investment and moderating efficiency gains as well as dwindling resource reallocation between sectors. The pace of improvements in key drivers of labor productivity—including education, urbanization, and institutions—has slowed or stagnated since the global financial crisis and is expected to remain subdued. To rekindle productivity growth, a comprehensive approach is necessary: facilitating investment in physical, intangible, and human capital; encouraging reallocation of resources towards more productive sectors; fostering firm capabilities to reinvigorate technology adoption and innovation; and promoting a growth-friendly macroeconomic and institutional environment. Specific policy priorities will depend on individual country circumstances.

The Fourth Wave: Rapid Debt Buildup. The global economy has experienced four waves of debt accumulation over the past fifty years. The first three ended with financial crises in many EMDEs. During the current wave, which started in 2010, the increase in debt in these economies has already been larger, faster, and more broad-based than in any of the previous three waves. Current low interest rates—which markets expect to be sustained into the medium term—appear to mitigate some of the risks associated with high debt. However, EMDEs are also confronted by weak growth prospects, mounting vulnerabilities, and elevated global risks. A menu of policy options is available to reduce the likelihood of the current debt wave ending in crises and, if crises were to take place, to alleviate their impact.

Price Controls: Good Intentions, Bad Outcomes. The use of price controls is widespread across EMDEs, including for food and key imported and exported commodities. While sometimes used as a tool for social policy, price controls can dampen investment and growth, worsen poverty outcomes, cause countries to incur heavy fiscal burdens, and complicate the effective conduct of monetary policy. Replacing price controls with expanded and better-targeted social safety nets, coupled with reforms to encourage competition and a sound regulatory environment, can be both pro-poor and pro-growth. Such reforms need to be carefully communicated and sequenced to ensure political and social acceptance. Where they exist, price control regimes should be transparent and supported by well-capitalized stabilization funds or national hedging strategies to ensure fiscal sustainability.

Low for How Much Longer? Inflation in Low-Income Countries. Inflation in LICs has declined sharply to a median of 3 percent in mid-2019 from a peak of 25 percent in 1994. The drop has been supported by the move to more flexible exchange rate regimes, greater central bank independence, and a generally more benign external environment since the 1990s. However, low LIC inflation cannot be taken for granted amid mounting fiscal pressures and the risk of exchange rate shocks. To maintain low and stable inflation, monetary and fiscal policy frameworks need to be strengthened and supported by efforts to replace price controls with more efficient policies.

Full report downloadable here