Risks persist in face of stabilizing global economy

The global economy is on track to stabilize, but its momentum is fragile and subject to substantial risks.

The global economy 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.
This is according to the World Bank’s June 2019 Global Economic Prospects: Heightened Tensions, Subdued Investment.
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.
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.

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 US$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.

Investment deceleration

Linked to worries about sluggish global growth, weak investment growth raises concerns about the long-term economic prospects of emerging market and developing economies.
Despite a recent modest pickup, investment growth is expected to be below long-term averages in coming years.
This means that the progress emerging and developing economies had made in catching up to advanced economies is slowing.
Slower capital deepening also exerts a drag on the productivity of a country.
This too stirs worry about filling gaping development needs over the next decade.
Reallocating resources from unproductive areas and increasing spending efficiency are ways to boost public investment.
Removing business constraints, addressing market inefficiencies and weak corporate governance are strategies to promote private investment.
Authorities can provide greater clarity about the direction of policy and seek enhanced integration into global value chains.
Commodity exporting economies can seek greater diversification as a means of reducing vulnerability to the volatility of natural resource markets.

Falling behind

A further troubling aspect of the tepid economic pace is what it means for the poorest economies.
Rapid economic growth in some low-income countries since the turn of the century reduced poverty, and many climbed to middle-income status.
But what are the prospects for those countries that are still classified as low-income, based on having a per capita income of $995 or less in 2017?
The number of low-income countries has declined since 2001 from 64 to 34 in 2019, driven by the end of conflicts in several countries, debt relief, and trade integration with larger, economically more vibrant countries.
However, the challenges to the remaining low-income countries are steeper than for those that have moved up.
Many of today’s low-income countries are starting from particularly weak income positions.
Also, more than half of today’s low-income countries are affected by fragility, conflict and violence.
And most of them are geographically disadvantaged by being isolated or landlocked, making trade integration tougher.
Add to this that many are heavily reliant on agriculture, putting them at greater vulnerability to extreme weather and less able to join global value chains.
That prospects for commodity demand are softening as growth in major economies slows; and that debt vulnerabilities have climbed sharply.
All of this makes the prospects for progress appear daunting.
To achieve stronger growth among low-income countries, policymakers, citizens, and the international community look to both external and internal drivers of growth as well as steps to mitigate risk.
Domestically, developing stronger financial systems and promoting financial inclusion and strengthening governance and business climates to support the private sector can help.
Integration into global trade and encouraging foreign direct investment are ways a country can look beyond its borders for growth.

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