Global Growth to Weaken to 2.6% in 2019, Substantial Risks Seen (World Bank in its June 2019 Global Economic Prospects)

Global economic growth is forecast to ease to a weaker-than-expected 2.6% in 2019 before inching up to 2.7% in 2020. Growth in emerging market and developing economies is expected to stabilize next year as some countries move past periods of financial strain, but economic momentum remains weak, according to the last figures released by World Bank.

Emerging and developing economy growth is constrained by sluggish investment, and risks are tilted to the downside. These risks include rising trade barriers, renewed financial stress, and sharper-than-expected slowdowns in several major economies, the World Bank says in its June 2019 Global Economic Prospects: Heightened Tensions, Subdued Investment. Structural problems that misallocate or discourage investment also weigh on the outlook.

Key facts

Government debt has risen substantially in emerging and developing economies, as hard-won cuts in public debt ratios prior to the financial crisis have to a large extent been reversed. Emerging and developing economies need to strike a careful balance between borrowing to promote growth and avoiding risks associated with excessive borrowing.

Growth rates in low-income countries are expected to rise to 6% in 2020 from 5.4% in 2019, but that is still not enough to substantially reduce poverty. While a number of low-income countries progressed to middle income status between 2000 and 2018, the remaining low-income countries face steeper challenges to achieving similar progress. Many are poorer than the countries that made the leap to higher income levels and are fragile, disadvantaged by geography and heavily reliant on agriculture.

Investment growth among emerging and developing economies is expected to remain subdued and below historical averages, held back by sluggish global growth, limited fiscal space, and structural constraints. A sustained pickup in investment growth is necessary to meet key development goals. Business climate reforms can help encourage private investment.

Sharp currency depreciations are more common in emerging and developing economies than in advanced economies, and central banks are often required to respond to these fluctuations to maintain price stability. The exchange rate pass-through to inflation is more limited when central banks pursue credible inflation targets, operate within a flexible exchange rate regime, and are independent of the central government.

“In the current environment of low global interest rates and weak growth, additional government borrowing might appear to be an attractive option for financing growth-enhancing projects.” said World Bank Prospects Group Director Ayhan Kose. “However, as the long history of financial crises has repeatedly shown, debt cannot be treated as a free lunch.”

Europe and Central Asia prospects

Regional growth is expected to firm to 2.7% in 2020 from a four-year low of 1.6% this year as Turkey recovers from an acute slowdown.

Excluding Turkey, regional growth is expected to grow 2.6% in 2020, slightly up from 2.4% this year, with modest growth in domestic demand and a small drag from net exports.

In Central Europe, fiscal stimulus and the resulting boost to private consumption will begin to fade in some of the subregion’s largest economies next year, while growth is expected to modestly recovery to 2.7% in Eastern Europe and moderate to 4% in Central Asia. Growth in the Western Balkans is anticipated to rise to 3.8% in 2020.

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