Broad-Based Upturn, but for How Long JANUARY 2018 EMBARGOED NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JANUARY 9, 2018 AT 400 PM EDT 900 PM GMT/UTC 2018 International Bank for Reconstruction and Development / e World Bank 1818 H Street NW, Washington, DC 20433 Telephone 202-473-1000; Internet www.worldbank.org Some rights reserved 1 2 3 4 21 20 19 18 is work is a product of the sta of e World Bank with external contributions. e ndings, interpretations, and conclusions expressed in this work do not necessarily reect the views of e World Bank, its Board of cutive Directors, or the governments they represent. e World Bank does not guarantee the accuracy of the data included in this work. e boundaries, colors, denominations, and other ination shown on any map in this work do not imply any judgment on the part of e World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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ISSN 1014-8906 ISBN paper 978-1-4648-1163-0 ISBN electronic 978-1-4648-1245-3 DOI 10.1596/978-1-4648-1163-0 Cover design Bill Pragluski Critical Stages. e cuto date for the data used in this report was December 19, 2017. Summary of Contents Chapter 1 Special Focus 1 Chapter 2 Chapter 3 Special Focus 2 Boxes iii Global Outlook Broad-Based UpturnWill It Last 1 With the Benet of Hindsight e Impact of the 2014-16 Oil Price Collapse . 49 Regional Outlooks . 73 Building Solid Foundations How to Promote Potential Growth . 157 Education Demographics and Global Inequality 217 Box 1.1 Is the global economy turning the corner 8 Box 1.2 Low-income countries Recent developments and outlook 24 Box 1.3 Regional perspectives Recent developments and outlook 30 Box 2.1.1 Potential growth in East Asia and Pacic 82 Box 2.2.1 Potential growth in Europe and Central Asia 97 Box 2.3.1 Potential growth in Latin America and the Caribbean 111 Box 2.4.1 Potential growth in the Middle East and North Africa 123 Box 2.5.1 Potential growth in South Asia . 132 Box 2.6.1 Potential growth in Sub-Saharan Africa 144 Box 3.1 What is potential growth . 161 Box 3.2 Understanding the recent productivity slowdown Facts and explanations 168 Box 3.3 Moving together Investment and potential output 173 Box 3.4 e long shadow of contractions over potential output . 178 Box 3.5 Productivity and investment growth during res . 188 Global Outlook Broad-Based UpturnWill It Last 1 Summary 3 Major economies Recent developments and outlook 7 United States 7 Euro Area . 13 Japan 13 China . 14 Global trends 15 Global trade . 15 Financial markets . 16 Commodities . 17 Emerging market and developing economies Recent developments and outlook 19 Recent developments 19 Commodity-exporting EMDEs . 19 Commodity-importing EMDEs. 21 Low-income countries . 22 EMDE outlook 22 Risks to the outlook 28 Upside risk Stronger-than-expected growth in large economies 28 Downside risk Disorderly adjustment of nancial market conditions 29 Downside risk Policy uncertainty and geopolitical risks . 33 Downside risk Increased restrictions to trade . 34 Downside risk Sharper-than-expected slowdown in potential growth 34 Region-specic downside risks 35 Policy challenges . 35 Challenges in major economies . 35 Challenges in emerging market and developing economies . 38 References . 44 Box 1.1 Is the global economy turning the corner 8 Box 1.2 Low-income countries Recent developments and outlook . 24 Box 1.3 Regional perspectives Recent developments and outlook 30 Table of Contents Chapter 1 Foreword xi Acknowledgments . xiii cutive Summary . xv Abbreviations . xvii v EMBARGOED NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JANUARY 9, 2018 AT 400 PM EDT 900 PM GMT/UTC Regional Outlooks . 73 East Asia and Pacific 75 Recent developments . 75 Outlook 78 Risks 79 Box 2.1.1 Potential growth in East Asia and Pacic 82 Europe and Central Asia 91 Recent developments . 91 Outlook 93 Risks 93 Box 2.2.1 Potential growth in Europe and Central Asia . 97 Latin America and the Caribbean 105 Recent developments . 105 Outlook 107 Risks . 108 Box 2.3.1 Potential growth in Latin America and the Caribbean 111 vi Special Focus 1 With the Benet of Hindsight e Impact of the 2014-16 Oil Price Collapse . 49 Introduction . 51 What were the main drivers of the oil price plunge 52 U.S. shale oil production . 52 e role of OPEC policies 54 e role of demand conditions 54 e oil price collapse The relative importance of supply and demand . 55 How did the recent oil price collapse impact the global economy 56 Impact on oil exporters 56 Impact on oil importers . 57 What was the policy response in oil exporters and oil importers 59 Policy response in oil exporters 59 Monetary policy 59 Fiscal policy . 60 Structural policy 61 Policy response in oil importers . 63 Monetary policy 63 Fiscal policy . 63 Structural policy 63 Concluding remarks and implications for the future . 64 Annex SF1.1 Decomposition of supply and demand shocks to oil prices Bayesian structural vector autoregressive model approach 67 References . 68 Chapter 2 Chapter 2 vii Building Solid Foundations How to Promote Potential Growth 157 Introduction 159 Evolution of potential growth What happened 164 Drivers of the slowdown in potential growth 166 Total factor productivity growth 166 Physical capital accumulation . 172 Labor supply 176 Prospects for potential growth What could happen 181 Policy options to lift potential growth 183 Raising physical capital 183 Raising human capital 184 Raising labor supply . 185 Raising productivity . 186 Res for growth More important should history repeat itself 190 Box 3.1 What is potential growth . 161 Box 3.2 Understanding the recent productivity slowdown Facts and explanations 168 Box 3.3 Moving together Investment and potential output . 173 Box 3.4 e long shadow of contractions over potential output . 178 Box 3.5 Productivity and investment growth during res . 187 Annex 3.1 Potential output estimates using the production function approach 193 Annex 3.2 Potential output estimates using statistical lters 199 Chapter 3 Middle East and North Africa . 117 Recent developments . 117 Outlook 118 Risks 120 Box 2.4.1 Potential growth in the Middle East and North Africa 123 South Asia 127 Recent developments . 127 Outlook 128 Risks 130 Box 2.5.1 Potential growth in South Asia . 132 Sub-Saharan Africa 137 Recent developments . 137 Outlook 139 Risks 141 Box 2.6.1 Potential growth in Sub-Saharan Africa . 144 References . 149 EMBARGOED NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JANUARY 9, 2018 AT 400 PM EDT 900 PM GMT/UTC Education Demographics and Global Inequality 217 Introduction . 219 Recent evolution of global inequality . 220 Education wave and the global labor market 221 Education wave and global inequality 222 Conclusions 225 Annex SF2.1 ology, data, and measures of inequality 226 References . 227 Figures 1.1 Summary - Global prospects . 5 1.2 Global risks and policy challenges . 6 1.3 Advanced economies . 7 1.4 United States 13 1.5 Euro Area . 14 1.6 Japan 14 1.7 China . 15 1.8 Global trade 16 1.9 Global finance 17 1.10 Commodity markets . 18 1.11 Activity in EMDEs . 19 1.12 Activity in EMDE commodity exporters . 20 1.13 Activity in EMDE commodity importers excluding China . 21 1.14 EMDE growth prospects 23 1.15 Global growth forecasts Uncertainty and the balance of risks 28 1.16 Upside risks of stronger-than-expected growth in large economies 29 1.17 Financial market risks . 32 1.18 Policy uncertainty and geopolitical risks 33 1.19 Trade protectionism . 34 1.20 Slowing potential growth . 35 1.21 Monetary and fiscal policies in advanced economies . 36 1.22 Structural policy in advanced economies . 37 1.23 Policy challenges in China 37 viii Statistical Appendix 231 Chapter 3 Special Focus 2 Annex 3.3 TFP and potential output growth during investment booms and busts . 203 Annex 3.4 Long-term eects of output contraction. 204 Annex 3.5 Impact of res 205 References 206 1.24 EMDE monetary policy 38 1.25 EMDE scal policy . 39 1.26 EMDE structural policy 40 1.27 Education and inequality 41 SF1.1 e oil price plunge of 2014-16 in perspective . 51 SF1.2 U.S. shale oil activity and OPEC policy 53 SF1.3 Oil demand trends 54 SF1.4 Oil supply and demand shock decomposition . 55 SF1.5 Global activity 56 SF1.6 Activity in oil-exporting EMDEs 57 SF1.7 Activity in oil-importing economies 58 SF1.8 Policy response in oil-exporting EMDEs . 60 SF1.9 Oil dependency in oil-exporting EMDEs 62 SF1.10 Res and Doing Business scores . 63 SF1.11 Policy response in oil-importing economies 64 SF1.12 Long-term outlook . 65 2.1.1 EAP Recent developments . 76 2.1.2 China . 77 2.1.3 EAP Outlook and risks 78 2.2.1 ECA Recent developments . 92 2.2.2 ECA Outlook and risks 94 2.3.1 LAC Recent developments . 106 2.3.2 LAC Outlook and risks 107 2.4.1 MENA Recent developments . 118 2.4.2 MENA Outlook and risks 119 2.5.1 SAR Recent developments . 128 2.5.2 SAR Outlook and risks . 129 2.6.1 SSA Recent developments 138 2.6.2 SSA Outlook and risks . 140 3.1 Global growth . 160 3.2 Evolution of potential growth . 164 3.3 Regional potential growth . 165 3.4 Drivers of potential growth . 166 3.5 Total factor productivity growth . 167 3.6 Investment growth 176 3.7 Demographics . 177 3.8 Potential growth prospects 182 3.9 Policies to stem declining potential growth . 184 3.10 Growth and crisis scenarios . 191 Figures ix EMBARGOED NOT FOR PUBLICATION, BROADCAST, OR TRANSMISSION UNTIL TUESDAY, JANUARY 9, 2018 AT 400 PM EDT 900 PM GMT/UTC Figures 1.1 Real GDP . 4 1.2 List of emerging market and developing economies . 43 Annex SF1.1 Country classification . 66 2.1.1 East Asia and Pacific forecast summary . 80 2.1.2 East Asia and Pacific country forecasts 81 2.2.1 Europe and Central Asia forecast summary . 95 2.2.2 Europe and Central Asia country forecasts 96 2.3.1 Latin America and the Caribbean forecast summary . 109 2.3.2 Latin America and the Caribbean country forecasts 110 2.4.1 Middle East and North Africa forecast summary 121 2.4.2 Middle East and North Africa economy forecasts . 122 2.5.1 South Asia forecast summary 131 2.5.2 South Asia country forecasts . 131 2.6.1 Sub-Saharan Africa forecast summary . 142 2.6.2 Sub-Saharan Africa country forecasts 143 Annex 3.1.1 Country and year coverage 197 Annex 3.1.2 Regression results of total factor productivity . 197 Annex 3.1.3 Regression results of labor force participation rates . 198 Annex 3.2.1 Country and year coverage 202 Annex 3.3.1 Potential growth, TFP growth, and investment . 203 Annex 3.4.1 Impulse response of potential growth to contraction events . 204 x Tables Annex A3.2.1 Global output gap 201 Annex A3.3.1 Potential growth around investment booms and busts in EMDEs Alternative measures . 203 SF2.1 Globalization and inequality . 220 SF2.2 Evolution of inequality, 1988-2013 221 SF2.3 Future supply of skilled workers . 222 SF2.4 Global inequality in 2012 and 2030 . 223 xi Foreword “Cinema,” Martin Scorsese once said, “is a matter of what’s in the frame and what’s out.” e same could be said about economic growth, as this January 2018 edition of Global Economic Prospects GEP illustrates. On the one hand, the GEP points out that, for the rst time since the global nancial crisis, all major regions of the world are experiencing an uptick in economic growth. e current, broad-based growth acceleration is a welcome trend and could be self-reinforcing. On the other hand, stepping outside the frame of short-term forecasting, the GEP observes that growth in investment and in total factor productivity TFP has been declining over the past ve years. anks to demographic trends, labor force growth has also been slowing in many parts of the world. is means that potential outputthe amount the economy can produce if labor and capital were fully employedwould grow at a subdued pace in the future. e current demand-led recovery is likely to run up against supply constraints. e decline in TFP growth is particularly troubling since this has been a key source of rising living standards in many countries in the past. e combination of what’s in the original frame and what’s outsidethe movie, if you likeis a clarion call for public action. To arrest and possibly reverse this decline in potential growth, emerging market and developing economies need to accelerate investment in both physical and human capital, especially if TFP growth is likely to remain