A World Bank Group Flagship ReportGlobal Economic Prospects JUNE 2019 Heightened Tensions, Subdued InvestmentJUNE 2019 Global Economic Prospects 2019 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 22 21 20 19 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of cutive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other ination shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail pubrightsworldbank.org. ISSN 1014-8906 ISBN paper 978-1-4648-1398-6 ISBN electronic 978-1-4648-1399-3 DOI 10.1596/978-1-4648-1398-6 Cover design Bill Pragluski Critical Stages. The cutoff date for the data used in this report was May 23, 2019. III Summary of Contents Chapter 1 Special Focus 1.1 Special Focus 1.2 Chapter 2 Special Focus 2.1 Boxes Global Outlook Weak Momentum, Heightened Risks 1 Investment Subdued Prospects, Strong Needs .53 Currency Depreciations, Inflation, and Central Bank Independence 67 Regional Outlooks 87 Growth in Low-Income Countries Evolution, Prospects, and Policies .131 Box 1.1 Debt No free lunch .11 Box 1.2 Short-term growth prospects for LICs 22 Box 1.3 Regional perspectives Recent developments and outlook 27 V Table of Contents Chapter 1 Foreword.xi Acknowledgments . xiii cutive Summary . xv Abbreviations . xvii Global Outlook Weak Momentum, Heightened Risks .1 Summary 3 Major economies Recent developments and outlook . 7 United States8 Euro Area 8 Japan .9 China 9 Global trends . 10 Global trade . 10 Financial markets 17 Commodity markets 19 Emerging market and developing economies Recent developments and outlook . 20 Recent developments. 21 Outlook. 26 Risks to the outlook 30 Renewed trade tensions and policy uncertainty 31 Financial stress episodes . 32 Sharper-than-expected slowdowns in major economies 34 Region-specif_ic downside risks 35 Policy challenges. 36 Challenges in advanced economies 36 Challenges in emerging market and developing economies 38 Box 1.1 Debt No free lunch 11 Box 1.2 Short-term growth prospects for LICs . 22 Box 1.3 Regional perspectives Recent developments and outlook . 27 References 45 VI Regional Outlooks . 87 East Asia and Pacific 89 Recent developments 89 Outlook 91 Risks 92 Europe and Central Asia 95 Recent developments 95 Outlook 97 Risks . 99 Latin America and the Caribbean 103 Recent developments 103 Outlook 105 Risks 106 Middle East and North Africa . 109 Recent developments 109 Outlook 110 Risks 111 South Asia . 115 Recent developments 115 Special Focus 1.1 Chapter 2 Investment Subdued Prospects, Strong Needs . 53 Recent developments and prospects 55 Drivers of investment growth . 56 Implications and policy responses . 60 Annex SF1.1.1 Empirical analysis . 62 References . 65 Special Focus 1.2 Currency Depreciations, Inflation, and Central Bank Independence 67 Introduction 69 Pass-through across countries and over time 70 Pass-through to inf_lation and underlying shocks . 73 Pass-through and country characteristics . 76 Conclusion 78 Annex SF1.2.1 ology . 79 References . 83 VII Special Focus 2.1 Growth in Low-Income Countries Evolution, Prospects, and Policies 131 Introduction.133 What has supported growth in LICs since 2001 135 How have these factors affected LIC progression to MIC income levels .139 Prospects for further LIC progression .141 Conclusion.143 References 146 Outlook 117 Risks 118 Sub-Saharan Africa 121 Recent developments 121 Outlook 123 Risks 124 References 128 Statistical Appendix . 149 Selected Topics 157 1.1 Global growth prospects . 5 1.2 Global risks and policy challenges 6 1.3 Advanced economies 7 1.4 United States 7 1.5 Euro Area . 8 1.6 China . 9 1.7 Global trade 10 1.1.1 Government debt, deficits, and multipliers . 13 1.1.2 Borrowing costs and fiscal positions . 15 1.8 Global finance . 18 1.9 Commodity markets 19 1.10 Activity in EMDEs 20 1.2.1 Short-term economic prospects for LICs 23 1.11 EMDE growth prospects 26 1.3.1 Regional growth 27 1.12 EMDE per capita income growth and poverty 30 1.13 Balance of risks 31 Figures VIII 1.14 Risk of renewed trade tensions and policy uncertainty 32 1.15 Risk of renewed financial stress 33 1.16 Risk of sharp slowdowns in major economies 35 1.17 Climate risks and poverty . 36 1.18 Monetary and fiscal policies in advanced economies 37 1.19 Structural policies in advanced economies 38 1.20 EMDE monetary policy . 39 1.21 EMDE fiscal policy 41 1.22 EMDE structural policies . 42 SF1.1.1 Investment trends and prospects 55 SF1.1.2 Decomposition of EMDE investment trends . 57 SF1.1.3 Drivers of investment growth in EMDEs . 59 SF1.1.4 Implications of weak investment growth in EMDEs . 60 SF1.2.1 EMDE exchange rates, monetary policy rates, and inflation in 2018 70 SF1.2.2 Correlation between inflation and effective exchange rate changes . 71 SF1.2.3 Pass-through during significant currency depreciations 72 SF1.2.4 Variance decompositions of exchange rate movements, 1998-2017 . 74 SF1.2.5 Shock-specific pass-throughs, 1998-2017 . 75 SF1.2.6 Average pass-through . 76 SF1.2.7 Global economic integration and pass-through . 77 SF1.2.8 Monetary policy frameworks and pass-through . 78 Annex Figure SF1.2.1.1 Robustness of pass-through estimates One- versus two-quarter sign restrictions . 80 Annex Figure SF1.2.1.2 Robustness of pass-through estimates Additional sign restriction to identify domestic demand shocks. 81 2.1.1 EAP region excluding China Recent developments 90 2.1.2 China Recent developments . 91 2.1.3 EAP region Outlook and risks 92 2.2.1 ECA Recent developments. 96 2.2.2 ECA Outlook and risks . 97 2.3.1 LAC Recent developments 104 2.3.2 LAC Outlook and risks 105 2.4.1 MENA Recent developments 110 2.4.2 MENA Outlook and risks.111 2.5.1 SAR Recent developments 116 2.5.2 SAR Outlook and risks .117 IX Tables 2.6.1 SSA Recent developments .122 2.6.2 SSA Outlook and risks .123 SF2.1.1 LIC growth since 2001134 SF2.1.2 Cyclical and structural factors supporting LIC growth 135 SF2.1.3 Domestic factors supporting LIC growth.137 SF2.1.4 Factors supporting LIC progression to MIC income levels.139 SF2.1.5 Features of today’s LICs 141 SF2.1.6 Challenges LICs face in reducing poverty 143 1.1 Real GDP . 4 1.2.1 Low-income country forecasts . 25 1.2 Emerging market and developing economies. 44 SF1.1.1 Economies in sample 61 Annex Table SF1.1.1.1 Correlates of investment growth 64 SF1.2.1 Countries and sample periods . 83 2.1.1 East Asia and Pacific forecast summary. 94 2.1.2 East Asia and Pacific country forecasts 94 2.2.1 Europe and Central Asia forecast summary . 100 2.2.2 Europe and Central Asia country forecasts 101 2.3.1 Latin America and the Caribbean forecast summary 107 2.3.2 Latin America and the Caribbean country forecasts . 108 2.4.1 Middle East and North Africa forecast summary . 113 2.4.2 Middle East and North Africa economy forecasts 114 2.5.1 South Asia forecast summary. 119 2.5.2 South Asia country forecasts 120 2.6.1 Sub-Saharan Africa forecast summary. 126 2.6.2 Sub-Saharan Africa country forecasts . 127 SF2.1.1 Low-income countries 144 XI Global growth has continued to weaken and momentum remains fragile. As this edition of the Global Economic Prospects report documents, investment is sluggish. Downside risks to growth predominate, including rising trade barriers, a build-up of government debt, and deeper-than-expected slowdowns in several major economies. Substantial challenges are clouding the global economic outlook in both the near and long term. For emerging market and developing economies EMDEs, lackluster investment is particularly concerning. Investment growth in these economies is expected to remain weak and below historical averages, held back by sluggish global growth; limited fiscal space; and structural constraints that misallocate or discourage investment such as poor business environments, labor and product market controls, and weak governance. Subdued investment weakens the foundations for the sustained growth that is needed to alleviate extreme poverty and advance shared prosperity. In an era of low interest rates, government borrowing might appear to be an attractive option to finance growth-enhancing investment projects. Debt is often an important tool for development and poverty reduction, and sustainable borrowing can help countries finance investments in infrastructure, health, education, and other essential areas. To be additive to growth, however, debt has to be transparent and well managed. Otherwise, it becomes more of a burden than a benefit by increasing vulnerability to crises, eroding the effectiveness of macroeconomic policy, and weighing on investment and growth. Unsustainable debt levels have become increasingly troublesome in the last few years, with incentives often working against transparency. As this report highlights, EMDE government debt is higher than before the global financial crisis by an average of 15 percentage points of GDP. The bottom line is that EMDEs need to strike a careful balance between acquiring debt to promote investment growth and avoiding risks associated with excessive levels and hidden s of debt. This report also details the difficulties low-income countries face in the effort to improve living standards. A number of these countries achieved middle-income status between 2000 and 2018, but current low-income countries face a steeper road to deliver the same progress. Relative to countries that made the earlier leap to middle-income ranks, many of today’s low-income countries are poorer, more fragile, constrained geographically, and heavily reliant on subsistence agriculture. It will take comprehensive policy changes to tackle these difficulties. Policymakers have a wide range of options to bolster investment and growth. In light of the idable challenges, big policy adjustments are urgently needed, including decisive action to undertake structural res for growth that will lead to stronger development outcomes for countries. David Malpass President The World Bank Group Foreword XIII Global and regional surveillance work was coordinated by Carlos Arteta. The primary authors of this report were Jongrim Ha, Patrick Kirby, Rudi Steinbach, Marc Stocker, Naotaka Sugawara, Temel Taskin, Ekaterine Vashakmadze, Dana Vorisek, Collette M. Wheeler, and Lei Sandy Ye. Other contributors included John Baffes, Csilla Lakatos, Peter Nagle, Franz Ulrich Ruch, and Hakan Yilmazkuday. Research assistance was provided by Liu Cui, Ishita Dugar, Mengyi Li, Maria Hazel Macadangdang, Claudia Marchini, Julia R.R. Norfleet, Jinxin Wu, and Heqing Zhao. Modeling and data work were provided by Rajesh Kumar Danda and Julia R.R. Norfleet. The online publication was produced by Graeme Littler and Mikael Reventar. Mark Felsenthal managed media relations and dissemination. Mark Felsenthal and Graeme Littler provided editorial support, with contributions from Adriana Maximiliano. Regional projections and write-ups were produced in coordination with country teams, country directors, and the offices of the regional chief economists. The print publication was produced by Maria Hazel Macadangdang, Adriana Maximiliano, and Quinn Sutton, in collaboration with Luiz H. Almeida, Andrew Charles Berghauser, Adam Broadfoot, Aziz Gkdemir, Michael Harrup, and Jewel McFadden. The analysis benefited from comments and suggestions by staff members from World Bank Group country teams and other World Bank Group Vice Presidencies as well as cutive Directors in their discussions of the report on May 23, 2019. However, both forecasts and analysis are those of the World Bank Group staff and should not be attributed to cutive Directors or their national authorities. Acknowledgments This World Bank Group Flagship Report is a product of the Prospects Group in the Equitable Growth, Finance and Institutions EFI Vice Presidency. The project was managed by M. Ayhan Kose and Franziska Ohnsorge, under the general guidance of Ceyla Pazarbasioglu. XV Global Outlook. Global growth in 2019 has been downgraded to 2.6 percent, 0.3 percentage point below previous forecasts, reflecting weaker-than-expected international trade and investment at the start of the year. Growth is projected to