The World Bank’s Morose Momentum Mooring

The World Bank’s June Global Economic Prospects, the first out under new President Malpass, underscores “weak momentum” into the second half, with emerging market GDP growth slackening to a post-2015 low of 4%. Global trade expansion has slowed to 2.5% exacerbated by the US-China tariff fight, with industrial recession widespread and Asia’s semiconductor supply chain particularly hit. All forms of debt accumulated rapidly the past decade, with the government and corporate to national income ratios at 50% and 100% respectively, and the composition increasingly in commercial and non-Paris Club hands. Almost half of low-income countries are at risk of debt distress, after burdens were eliminated under previous official relief programs. Over the next decade this load will keep average growth below 4.5%, 2% less than the rate preceding 2008. The developing world will not have the $2-trillion plus needed annually for infrastructure and poverty reduction for the 2030 UN Goals and debt-service will constrain fiscal and monetary policy. Bond and stock flows have fluctuated with the Federal Reserve refraining from further rate hikes, but bank export lines are down, and FDI has been mixed on geopolitical and security factors. Commodity prices picked up through June, with oil increasing due to sanctions and conflict supply pressure, while base metals softened with Asian demand and agriculture was largely stable despite weather events. Although poor economy growth will continue at 5.5%, current account gaps are over 9% of GDP and must be offset by declining foreign aid and investment eating into reserve positions. For emerging economies 40% will decelerate this year, with lingering financial drag across regions and in Argentina, Brazil, Nigeria, South Africa and Turkey in particular. East Asia will drop to 6%, and Europe and Latin America 1.5%. The Middle East will be under the latter and Sub-Sahara Africa, 3% and then rise into the next decade with higher domestic demand.

Trade relations are “fragile” and tariff changes will be “complex and discretionary” to heighten uncertainty, according to the review. In addition to Washington and Beijing at odds, the North American pact’s replacement has not been ratified and Brexit will trigger a shakeup in EU arrangements. Low-grade corporate defaults could spread in tougher financial markets and currency depreciation, which would also trigger foreign investor flight from local government bonds where average ownership is 40%. The US, Euro area and China are over half of world output, and accounted for two-thirds of growth in 2018, and the three face slowdown and confidence risks. Climate change is a general threat affecting small island states and overpopulated farmlands in Africa especially. Structural reforms should be a priority, including power access, logistics and transport, digital technology and corporate governance improvements. Agricultural productivity  gains are even more urgent against extreme weather patterns, and can draw on less pesticide use to protect the environment and workers. On debt the Bank urges prudent management and tracking. as the IIF finalized a proposed transparency code for private sector lending to low-income sovereigns. It would cover a full range of instruments, and report interest rate ranges with a several month time lag. A central repository will collect and safeguard the records, and may take a year to set up when economic prospects could again shift momentum, according to the proposal.

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