The Global Economy: Heightened Tensions, Subdued Growth

 

David Malpass
World Bank Group President

The global economy has slowed to its lowest pace in three years. It is on track to stabilize, but its momentum is fragile and subject to substantial risks.

International trade and investment have been weaker than expected at the start of the year, and economic activity in major advanced economies, particularly the Euro Area, and some large emerging market and developing economies has been softer than previously anticipated.

Growth in the emerging and developing world is expected to pick up next year as the turbulence and uncertainty that afflicted a number of countries late last year and this year recedes, the World Bank’s June 2019 Global Economic Prospects: Heightened Tensions, Subdued Investment reports.

A number of risks could disrupt that delicate momentum: a further escalation of trade disputes between the world’s largest economies, renewed financial turmoil in emerging and developing economies, or a more abrupt deceleration of economic growth among major economies than is currently envisioned.

Of particular concern is a slowdown in global trade growth to the lowest level since the financial crisis ten years ago and a tumble in business confidence.

“Stronger economic growth is essential to reducing poverty and improving living standards,” said World Bank Group President David Malpass. “Current economic momentum remains weak, while heightened debt levels and subdued investment growth in developing economies are holding countries back from achieving their potential. It is urgent that countries make significant structural reforms that improve the business climate and attract investment. They also need to make debt management and transparency a high priority so that new debt adds to growth and investment.”

Because equitable growth is essential to alleviating poverty and increasing shared prosperity, emerging market and developing economies need to reinforce the protections they have against sudden economic downdrafts, the report cautions.

Economic policymakers and their constituents face multiple critical issues to sustain momentum in this fragile environment. This edition of the GEP examines several of them:

  • The recent rise in debt levels increases the urgency of selecting projects carefully for maximum benefit, better debt management and greater clarity about loans.
  • Subdued investment in emerging market and developing economies raises concern about how these economies can fulfill extensive investment needs to meet development goals.
  • The concentration of poverty in low-income countries raises questions about overcoming obstacles to faster growth in those economies.
  • The risk of renewed financial stress is a reminder of the importance of resilient central banks and monetary policy frameworks that can mitigate the pass-through effects of currency depreciations to inflation.

The World Bank produces the GEP twice a year, in January and June, as part of its in-depth analysis of key global macroeconomic developments and their impact on member countries. The GEP provides intelligence in support of achieving development goals and is a trusted resource for member countries, stakeholders, civil organizations and researchers.

Debt Reckoning

Rising debt levels are increasingly a concern. Many emerging and developing economies have borrowed heavily and their hard-won reductions of public debt before the global financial crisis have eroded. Emerging and developing economy debt has climbed by an average of 15 percentage points to 51 percent of GDP in 2018.

Debt accumulation can be justified because of the need for growth-enhancing projects, such as investments in infrastructure, health and education. And indeed, the needs are massive: World Bank analysis finds that low- and middle-income countries will need in the range of $640 billion to $2.7 trillion in investment a year to meet development goals by 2030. In addition, prudent government spending can help a country ride out an economic downturn.

But excessive debt carries serious risks. Even in an environment of low interest rates, debt can accumulate to unsustainable levels. A government spending large amounts to service debt is allocating less on other important activities. High debt also raises the possibility in the minds of investors and consumers that governments may eventually raise taxes to rein in deficits, chilling business and consumer spending. In extreme cases, elevated debt can lead to defaults and bailouts.

So how much debt is too much? Every government has to strike the right balance.Those with sound balance sheets may find that borrowing to boost growth is appropriate. Economies in shakier fiscal shape may need be more cautious and find ways to enhance revenues first.

Those that do borrow would benefit from better debt management and greater debt transparency. Debt should be contracted with a view to maintaining stability and preserving resilience.


“It is urgent that countries make significant structural reforms that improve the business climate and attract investment. They also need to make debt management and transparency a high priority so that new debt adds to growth and investment.”
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