Bucking the Trend—
Overcoming Uncertainty, Shocks and
Disruption with Qualitative Growth
The global economy has now entered its sixth year of stagnation, and the growth outlook for 2017 shows a continuation of this trend. A projected stabilization in energy and commodity prices may provide a small tailwind for resource rich economies in 2017, but the medium-term trend continues to be dominated by weaker growth in key inputs, notably investment and labor supply. Modest positive signals emerge from the base scenario showing some strengthening in qualitative growth factors, such as more advanced technology, improved labor force skills, and greater productivity. But those potentially favorable factors are under pressure from ongoing political, policy and economic uncertainties around the world. This risks further inertia caused by a wait-and-see attitude among corporate and governments. Businesses have to prepare for more disruptions from geopolitical tensions, policy uncertainty, financial market volatility, and rapid changes in technology, but they also need to stay focused on leveraging the qualitative sources of growth with investment in technology and business productivity even—or especially—in times of stagnation.
Growth in South Asia is expected to reach 7.1 percent in 2016, and to strengthen to 7.3 percent by 2018, underpinned by robust domestic demand. In the near term, consumption spending continues to benefit from low oil prices and modest inflation rates, although these effects will wane in the medium term. An accommodative monetary stance, public investments in infrastructure, and progress on the structural reform agenda should support growth. Risks to the forecast are weighted to the downside. On the external front, volatility in financial markets could lead to large capital outflows from the most vulnerable emerging market economies in the region. Lower remittance inflows could dampen consumption spending and the growth outlook in the region’s smaller economies. Domestic risks include slower-than-expected progress in structural reform, vulnerabilities in bank and corporate balance sheets, and fiscal challenges.
EAST ASIA & PACIFIC
Regional growth slowed to 6.5 percent in 2015, and is expected to decelerate to 6.2 percent during 2016-18. The gradual slowdown in China more than offsets a nascent pickup in activity elsewhere in the region, supported by public investment and robust private consumption. Short-term risks are broadly balanced. On the downside, they include a sharper-than-expected slowdown in China (although a low-probability scenario), and tighter financing conditions amid high corporate and household leverage in the region. Since the region is highly open to trade, a pickup in advanced country growth, or further declines in commodity prices, are upside risks.
MIDDLE EAST AND NORTH AFRICA
Growth in the Middle East and North Africa was an estimated 2.6 percent in 2015, slightly weaker than in 2014. The sharp drop in oil prices over the past two years and the continuation of several serious conflicts are major factors holding back activity in the region. Growth is expected to be little changed in 2016, at 2.9 percent. The marginal improvement is largely due to the expected strong recovery in the Islamic Republic of Iran following the lifting of sanctions in January 2016. Growth in most other oil-exporting countries, including most Gulf Cooperation Council countries, will weaken in 2016, while performance in oil-importing countries will be mixed because of varied macroeconomic and geopolitical challenges. Risks to the outlook are tilted to the downside and include further declines in oil prices, the escalation of conflict in some countries, and fragile security conditions in others.
EUROPE AND CENTRAL ASIA
Economic activity in emerging market Europe and Central Asia stagnated in 2015, driven by the deep recession in the Russian Federation. Excluding Russia, regional growth remained at the 2014 rate of 2.5 percent. Turkey saw continued robust growth, while commodity exporters generally slowed. Despite the uptick in oil prices in April and May, they remain at low levels and continue to exert pressure on key oil exporters, including Azerbaijan, Kazakhstan and Russia, where government policy buffers are eroding. Regional growth is expected to pick up to only 1.2 percent in 2016, as the Russian economy contracts further (albeit at a shallower pace) and political uncertainty in Turkey and Ukraine weighs on confidence. With a return to positive growth in Russia and Ukraine, regional growth will accelerate to about 2.6 percent in 2017-18. Key downside risks include geopolitical flare-ups, pressures from persistently low oil prices, less favorable external financing conditions as substantial bond repayments come due, and political polarization.
LATIN AMERICA AND THE CARIBBEAN
Latin America and the Caribbean is expected to face another year of weak economic performance due to domestic challenges among the region’s largest economies, depressed commodity prices, and tighter regional monetary conditions. Output is expected to shrink another 1.3 percent this year, after declining 0.7 percent in 2015, marking a second consecutive year of recession for the first time in more than 30 years. Brazil and the República Bolivariana de Venezuela are in deep recessions, while Argentina is expected to contract modestly as it embarks on a period of macroeconomic policy adjustments toward more sustainable growth. In contrast, Mexico, Central America, and the Caribbean are expected to expand at moderate rates in 2016, boosted by robust growth in exports and tourism. The region as a whole is projected to return to growth in 2017-18, as domestic constraints gradually loosen and net exports continue picking up.
Growth in Sub-Saharan Africa is projected to slow again in 2016, to 2.5 percent, down from an estimated 3.0 percent in 2015. The forecast is 1.7 percentage points lower than the January 2016 projections. Low commodity prices, tightening global financial conditions, and drought in parts of the region will continue to weigh on growth this year. The recovery is expected to strengthen to an average of 4.1 percent in 2017-18, driven by a gradual improvement in the region’s largest economies and as commodity prices stabilize. Nonetheless, risks to the outlook remain tilted to the downside, including a sharper-than-expected slowdown in major trading partners, further decline in commodity prices, delays in adjusting to the negative terms-of-trade shocks, worsening drought conditions, and political and security uncertainties.