The World Bank’s Speed Bump Signal

The World Bank’s half-year Global Economic Prospects update described a “bumpy start” which will keep global growth under 3 percent as developing countries register below 5 percent expansion for 2014 for the third time in a row annually. The latter’s flat performance should be succeeded with medium term 5.5 percent results more in line with potential as high-income import demand offsets tighter monetary conditions. Supply-side bottlenecks hurt most emerging market regions and East Asia’s average growth will level to 7 percent by 2016 as Sub-Sahara Africa’s settles at 5 percent. Latin America and Europe output will climb only 2 percent this year as the former is often operating at full capacity and Russia-Ukraine trade and investment battles stymie that continent. South Asia and MENA in contrast should show surges as India realizes infrastructure reforms and Iran and Iraq export oil and Egypt and Jordan overcome conflict. Short-term risks are “less pressing “ according to the publication as depreciations and interest rate hikes in key vulnerable economies have tackled current account deficits and rapid credit extension, although inflation and payments imbalances remain high in places like Brazil and Turkey. It posits that Ukraine escalation could deliver business and consumer confidence blows amounting to 1 percent of developing world GDP.  As monetary policy normalizes through mid-decade fiscal deterioration may also warrant attention as post-crisis debt levels are up 10 percent in half the emerging market universe. Non-performing loans are a main risk in Europe and Central and South Asia as domestic and foreign debt servicing costs rise. Adjustments to boost competitiveness and productivity must again assume priority after the “firefighting and demand management” phase of recovery. China, Mexico, the Philippines and Colombia are among a group with “ambitious agendas” and China’s transformation is especially crucial with its influence on Asia and commodity exports. Developing country industrial production up 3.5 percent in Q1 was just half the past decade’s pace with the Chinese slump most notable but Indonesia, South Africa, Peru and others also affected. PMIs have since strengthened but the trend toward “cyclical deceleration” persists, the Bank believes. Capital flows have rebounded with modest exchange rate damage since last May compared to previous episodes, as benchmark index bond yields are 1.5 percent lower and most equity markets have fully recouped mid-2013 losses.

Global credit easing and yield appetite have fostered repair even as the commodities complex splits between firm energy prices and falling metals and agriculture. Copper’s plunge did not seem to harm demand for Zambia’s April debt market return at an 8.5 percent yield as it also considered a new IMF program to restore fiscal probity. Kenya soon after completed its long-planned debut placement at lower cost despite farm export reliance and tourism warnings associated with a spate of terrorist incidents. The Finance Minister had to postpone the issue until repayment cleanup from a previous scandal was ensured in a repeat operation.