JUNE 2016 2016 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 19 18 17 16 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. Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. 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All queries on rights and licenses should be addressed to the Publishing and Knowledge Division, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax 202-522-2625; e-mail pubrightsworldbank.org. ISBN paper 978-1-4648-0777-0 ISBN electronic 978-1-4648-0778-7 DOI 10.1596/978-1-4648-0777-0 ISSN 1014-8096 Cover design Bill Pragluski Critical Stages. The cutoff date for the data used in this report was May 31, 2016. Global Economic Prospects at 25 This year marks the 25th anniversary of the Global Economic Prospects, a World Bank Group flagship report prepared by the Prospects Group in the Development Economics Vice Presidency. In the early 1970s, the World Bank started producing notes on “Prospects for Developing Countries.” These began to be made public in the late 1970s. In 1991, the outlook section of the World Development Report was converted into a stand-alone report. In May 1991, the first Global Economic Prospects reportcalled “Global Economic Prospects and the Developing Countries”was launched as a al publication for wide dissemination. Since its inception in 1991, the Global Economic Prospects report has examined international economic developments and the outlook for growth, with a special focus on emerging market and developing economies. It has analyzed a wide range of topical macroeconomic, financial, and structural policy challenges these economies face. Emerging markets and developing economies had an extremely challenging period in the early 1990s. Unfortunately, many of today’s difficulties appear to be echoes of the 1991 edition “Today, rising uncertainties from different, yet related, directions portend difficulties to come Individually, none of these dark economic clouds would be sufficient to dampen the short-term prospects for the world economy. But together they present compelling evidence that the world economy is in for a turbulent period in the short term.” “ The impact of external circumstances on developing countries will depend crucially on how individual countries manage these contingencies. Policies in industrial countries will need to be sensitive to the concerns of “emerging and developing countries” and make it easier for them to restore momentum to the growth process. This would be especially important for low-income countries that have relatively few strategic options open to them for sustained development.” Global Economic Prospects, May 1991 v Table of contents Chapter 1 Foreword xi Acknowledgments xiii Abbreviations xv Global Outlook Divergences and Risks 1 Summary and key messages . 3 Major economies Recent developments and outlook . 7 Global trends .12 Emerging market and developing economies Recent developments and outlook .17 Box 1.1 Low-income countries Recent developments and outlook.20 Outlook . 24 Box1.2 Regional perspectives Recent developments and outlook 26 Risks to the outlook 28 Policy challenges 35 References .46 Special Focus 1 Recent Credit Surge in Historical Context 55 Introduction 57 Evolution of private sector credit 58 Recent credit growth in light of past episodes 62 Current credit levels Warning signs 64 Conclusion 65 Annex SF1.1 Robustness rcises 67 References . 74 Special Focus 2 Quantifying Uncertainties in Global Growth Forecasts . 77 Selected risk indicators 79 Risk indicators and global growth. 81 Balance of risks to global growth 83 Conclusion 83 Annex SF2.1 Estimating the distribution of the global growth forecast . 85 References . 92 Regional Outlooks . 97 East Asia and Pacific . 99 Recent developments . 99 Box 2.1.1 Macroeconomic policy developments in selected EAP countries . 100 Outlook . 101 Risks 103 Policy challenges . 103 Europe and Central Asia 109 Recent developments . 109 Outlook . 112 Risks . 113 Policy challenges . 114 Latin America and the Caribbean 119 Recent developments . 119 Box 2.3.1 Sub-regional divergence in Latin America and the Caribbean 121 Outlook . 124 Risks 126 Policy challenges . 127 Middle East and North Africa .131 Recent developments . 131 Outlook . 134 Risks 136 Policy challenges . 137 South Asia .141 Recent developments . 141 Outlook . 144 Risks 145 Policy challenges . 146 Sub-Saharan Africa 151 Recent developments . 151 Outlook . 153 Box 2.6.1 Macroeconomic effects of low commodity prices in Sub-Saharan Africa 154 Risks 157 Policy challenges . 158 References . 161 vi Chapter 2 Figures 1.1 Global prospects 5 1.2 Global prospects continued 6 1.3 Activity and policy space in major advanced economies 7 1.4 United States.8 1.5 Euro Area .9 1.6 Japan 10 1.7 China . 11 1.8 Financial markets . 12 1.9 Financial markets continued . 13 1.10 Commodity markets 14 1.11 Commodity markets continued . 15 1.12 Global trade . 16 1.13 Activity in EMDEs 17 1.14 External and fiscal buffers in EMDEs . 19 1.1.1 Recent developments and outlook in LICs 20 1.1.2 Recent developments and outlook in LICs continued 21 1.15 Private indebtedness in EMDEs 24 1.16 Growth outlook for EMDEs . 25 1.2.1 Regional Growth . 27 1.17 Risks to global growth prospects 29 1.18 Catch-up of EMDEs] income to advanced economies 30 1.19 Risks China and commodity exporters 31 1.20 Geopolitical risks and policy uncertainty 32 1.21 Financial market fragilities 33 1.22 Stagnation in advanced economies . 34 1.23 Slower globalization and risk of protectionism. 35 1.24 Unrealized gains from low oil prices . 36 1.25 Monetary policy in advanced economies . 37 1.26 Fiscal policy in advanced economies . 38 1.27 Structural res in advanced economies 39 1.28 China’s macroeconomic and structural policies . 40 1.29 Monetary policy in EMDEs 41 1.30 Fiscal policy in EMDEs . 42 Statistical Appendix 167 vii 1.31 Structural res in EMDEs . 43 1.32 Poverty in commodity-exporting countries . 44 SF1.1 Credit growth in EMDEs 58 SF1.2 Credit to corporates and households 59 SF1.3 Composition of credit to corporates . 59 SF1.4 Corporate bond and equity markets . 60 SF1.5 Characteristics of credit booms 61 SF1.6 Macroeconomic developments during credit booms 62 SF1.7 Characteristics of deleveraging episodes 63 SF1.8 Macroeconomic developments during deleveraging episodes . 64 SF1.9 Comparison Credit and early warning indicators . 65 SF1.10 Risks 65 Annex SF1.1 Developments during credit booms . 67 Annex SF1.2 Developments during deleveraging episodes . 68 SF2.1 Uncertainty and balance of risks for risk factors 81 SF2.2 Risks to global growth . 82 Annex SF2.1 Risks to growth January and June 2016 87 Annex SF2.2 Probability of growth outcomes 88 2.1.1 EAP growth 101 2.1.2 China Activity, exchange rates, and, external accounts 102 2.1.3 EAP excluding China Selected indicators 103 2.1.4 EAP excluding China Selected indicators continued. 104 2.1.5 Vulnerabilities 105 2.1.6 Policy issues 106 2.2.1 Key indicators . 110 2.2.2 Remittances 111 2.2.3 Terms of trade 112 2.2.4 Recent developments at the country level . 113 2.2.5 External financing . 114 2.2.6 Monetary and fiscal policy 115 2.3.1 GDP growth Latin America and the Caribbean . 120 2.3.2 Exchange rates and sovereign bond spreads 120 2.3.3 Export growth and current account balances 122 viii 2.3.4 Inflation rates and policy rates 123 2.3.5 Fiscal indicators .124 2.3.6 Regional outlook 125 2.3.7 External debt 126 2.3.8 Total factor productivity growth and infrastructure quality . 128 2.4.1 Growth and oil production 132 2.4.2 Macroeconomic conditions in oil-importing countries . 133 2.4.3 Macroeconomic conditions in oil-exporting countries . 134 2.4.4 Growth outlook . 135 2.4.5 Policy outlook in oil-exporting countries 136 2.4.6 Risks. 137 2.4.7 Policy challenges . 138 2.5.1 Domestic growth . 142 2.5.2 Foreign direct investment and PMIs . 142 2.5.3 Inflation 143 2.5.4 Fiscal indicators 143 2.5.5 Current account balances and remittances. 144 2.5.6 Banking sector vulnerabilities 147 2.6.1 Economic activity 152 2.6.2 External sector developments 153 2.6.3 Exchange rates and inflation developments . 156 2.6.4 Fiscal developments . 157 2.6.5 Outlook 158 Tables 1.1 Real GDP . 4 1.1.1 Low-income countries Real GDP .23 Annex 1 List of emerging market and developing countries .45 Annex SF1.1 Review of selected literature Vulnerabilities arising from credit surges 69 Annex SF2.1 Global growth dispersion weights VAR estimates 88 Annex SF2.2 Global growth skewness weights OLS estimates .88 Annex SF2.3.A Literature review Fan chart construction ology .89 Annex SF2.3.B Literature review Estimation of weight parameters for risk factors 91 Annex SF2.3.C Literature review Measurement of dispersion and skewness 91 ix 2.1.1 East Asia and Pacific forecast summary 107 2.1.2 East Asia and Pacific country forecasts. 107 2.2.1 Europe and Central Asia forecast summary 116 2.2.2 Europe and Central Asia country forecasts . 117 2.3.1 Latin America and the Caribbean forecast summary 129 2.3.2 Latin America and the Caribbean country forecasts. 130 2.4.1 Middle East and North Africa forecast summary 139 2.4.2 Middle East and North Africa country forecasts . 140 2.5.1 South Asia forecast summary 148 2.5.2 South Asia country forecasts. 149 2.6.1 Sub-Saharan Africa forecast summary 159 2.6.2 Sub-Saharan Africa country forecasts. 160 x Although the global financial crisis is now seven years behind us, the world’s economy is still struggling to regain momentum. Growth continues to falter in advanced economies and, while there is considerable divergence of perance across emerging market and developing economies, their overall growth remains below potential. Looking ahead, the prospects of global growth remain muted. Emerging market and developing economies face challenges, including the fall-out of sluggish advanced economy growth, tighter financial conditions, and stubbornly low commodity prices, though the latter impacts economies differently, depending on their nature of trade. Exporters of oil and other key commodities have been particularly hard hit, while their importers have been more resistant to economic headwinds. Overall, the global outlook faces pronounced risks of another stretch of muted growth. This is the somber message that underlies the June 2016 issue of the World Bank Group’s Global Economic Prospects. In addition to presenting detailed outlooks for the global economy and for each of the world’s emerging market and developing regions, this report analyses two topical policy challenges for policymakers to navigate. The first charts an important vulnerability that risks sidetracking economic recovery in emerging and developing economies the rapid increase in private-sector credit since 2010. This buildup has been greatest among commodity exporting countries, where credit levels had been modest. In contrast, credit has been stagnant or shrinking among commodity importing countries, where previously it had been considerably higher than in commodity exporters. The second has to do with tools for assessing the risks surrounding prospects for the world economy and concludes that forecast uncertainty has increased since January 2016, while the balance of risks for global growth has further tilted to the downside. Foreword The world economy is projected to expand at 2.4 percent in 2016, roughly at the same insipid pace we