The World Bank’s Sky Writing Scare

In its January Global Economic Prospects publication the World Bank, in transition to a new President, warns of “darkening skies” on lower growth and trade, financial market and commodity difficulties. Emerging and developing economy GDP expansion will again be an under original forecast 4.2% in 2019 and only rise another half a point over the medium term to fall short of 5%. This sober outlook is subject to further “downside risk” with higher government and private sector debt in most of the group, including low-income countries, and current account deficit financing in the face of costlier and more volatile banking and portfolio inflows. Trade shocks are another blow with the world’s biggest economies China and the US threatening higher tariffs as goods volume shrank in the first half of last year with slight recovery since. Protectionist measures affect parts assembly in particular to upset global value chains, and renegotiation of longstanding pacts as between North American partners has also complicated planning. Services and technology trade continues with liberalization as a partial offset, despite the absence of multilateral talks the WTO previously hosted.  Aside from Argentina and Turkey in outright crisis financial market sentiment was negative and contagion was evident in more liquid locations to an extent not experienced since the Federal Reserve taper tantrum five years ago. Bond issuance evaporated for periods and the 150 basis point yield spike on the external index was the sharpest in two decades. FDI and remittances in contrast stabilized, with outward investment from China “robust” under the Belt and Road initiative, the report comments. Commodities prices were mixed as energy fluctuated agriculture and metals slipped, but values should improve this year, with oil coming in at an estimated $67/barrel.

Domestic demand softened with gross capital formation lagging, and commodity importer growth slowed the most, while Asia maintained the lead through infrastructure projects. Poor country performance is at a 5.5-6% clip, but 40% of their population is still in extreme poverty, and fiscal-current account deficits and debt levels all increased. Commercial borrowing exceeds 30% of the total in Ethiopia, Mozambique, Senegal and Zimbabwe, and weather and health related emergencies are another drag. Africa separately will grow at only half that pace at odds with the former “rising” narrative, while the sprinters include Rwanda and Tanzania mainly due to public investment. Per capita developing market income will climb 3% this year, even as underlying demographic and productivity trends are less positive. Dollar strength could aggravate currency and banking system pressures, and tip companies into default with IMF programs not a natural solution for this squeeze. Trade disputes can transform into geopolitical ones, with security already precarious in the MENA region especially. China has adopted looser fiscal and monetary policies, but the broader universe has limited room in view of exchange rate depreciation and budget deficits. Bank health is a priority and officials should consider macro-prudential steps to deleverage, as the long period of low inflation may end as cross-border integration and central bank independence unravel. Emerging markets should concentrate on upgrading human capital, and tapping small business potential and eliminating informality are two promising rays in the gloom, the World Bank concludes.