The World Bank’s Circuitous Cyclical Bounce
The World Bank’s January Global Economic Prospects report was upbeat over immediate and medium-term developing world growth, with the average put at 4.5% this year, but noted long-range productivity drags which could dent the story without labor, education and business climate breakthroughs. Recovery was clear in 2017 with commodity price upswings and big countries like Brazil and Russia out of recession, and the low-income group will outperform at 5.5% as they are in an earlier phase of capital accumulation with favorable demographic trends. “Disorderly” financial markets remain a risk with steeper borrowing costs hurting corporate balance sheets in particular, alongside geopolitical and trade protection threats. For commodity importers output gaps are near zero, and fiscal and monetary policies generally may be exhausted in extending the cycle placing the onus on structural changes that boost investment quality and living standards. Chinese growth will drop half a point to under 6.5% in 2018, as housing slowdown and bank regulatory crackdown take hold, and ongoing dangers include state corporate debt above 250% of GDP and the aging disproportionately male population. Global trends have been positive with trade volume due to rise 4% annually despite value chain stabilization and spreading tariff and procedural barriers on an estimated three-quarters of G20 member exports. Advanced economy gradual central bank rate and balance sheet normalization has been “accommodative,” with portfolio and banking allocation driving cross-border capital flow rebound with FDI “broadly stable.” However European bank lines are still “subdued” as they regroup on the continent under common supervisory norms, despite 20% oil and metals price jumps in client countries last year while food values fell slightly.
Industrial production as measured by PMIs is at multi-year peaks, and lower inflation has supported private consumption. Gulf and African energy exporters have struggled with price fluctuations and delayed budget and exchange rate adjustments, with security and social tensions a byproduct. In India investment has been “soft”, while EU structural funds aided Hungary and Poland. Mexico faces NAFTA renegotiation, but smaller Asian economies benefited from China’s Belt and Road infrastructure scheme. Poorer countries reduced poverty, but in one-third per capita income shrank with political upheaval worsening in places like the Democratic Republic of Congo. In this category fiscal and current account deficits fell, but government debt went the opposite for an average 55% of GDP. More trade-dependent emerging markets will reap gains from stronger industrial world investment, but “stretched” asset valuations raise doubts, and impaired credit quality, combined with higher leverage and historic low risk compensation, could spur corporate bond reversal. China could be especially susceptible after a prolonged debt boom and financial stress there would have wide-ranging “adverse” effects. Bank profitability is solid but capital buffer erosion is pronounced in India, Russia, South Africa and elsewhere. The UK-EU Brexit standoff, Korea and Middle East conflict, bilateral and regional trade pact modification, and international migration waves are other obstacles. Oil prices could slip again as green energy alternatives become less expensive and easily connected, and expansionary Chinese fiscal policy may spike public debt as sustainability is a core issue in the larger universe, especially if sovereign contingent liabilities are counted. Better skills and training are vital to future economic health, but the prescription could also worsen inequality in coming cyclical turns, the Bank concludes.