A Not-So-Better Economy




The economic prospect for the world, in 2014, is best described as uneventful. It is a strange world we live in that this is the good news. After six years of turmoil marked by financial crises and long stretches of recession in several countries, it is indeed heartening that we are headed for uneventful times with a slow pick-up in global growth.

The world in 2013 grew by 2.4pc. It is forecasted to grow at 3.2pc in 2014. This is the point forecast.

There is a lot that is happening around it, with some countries expected to make a strong recovery, some weak, and some actually slowing. And for each country there are bands of possibilities around their respective point forecasts.

There is good news from the world’s biggest economy, theUS. It saw a slow and steady improvement through 2013, though there was wobble at the end.

The December jobs data showed a sharp drop in job creation and even sharper drop in the number of people looking for jobs. This had markets in a tizzy.

Some experts argued this was a consequence of the harsh winter. All I can say is that those who find meteorological explanations of labor market movements compelling are lucky. For me, December remains an enigma.

I would add that curtailing unemployment benefits now is ill-advised: It will drive more people into the labor force and, with jobs scarce, this will push up unemployment and drive relatively needy people out of jobs. Nevertheless, the overall prediction for theUSis good. Gross domestic product (GDP) growth should rise from 1.8pc in 2013 to 2.8pc in 2014.

Among other countries that predicted to recover strongly areMexico(1.4pc to 3.4pc),India(4.8pc to 6.2pc) andAngola(5.1pc to 8.1pc).Mexico’s strong links to US manufacturing, along with reforms in the energy and labor sectors, contribute to this optimism. ForIndia, the forecast is buoyed by robust savings and investment rates and a slow but steady fiscal improvement.

ForAngola, expansion in the oil and gas sector and steady improvement in some development indicators contribute to the positive outlook.

The Eurozone emerged from recession in the middle of last year and, though its overall growth in 2013 was negative (-0.4pc), it is expected to grow at the slow but positive rate of 1.1pc this year. This is good news but there is enough reason to be cautious about 2014.

There are major reforms still pending. The recent announcement for developing a Single Resolution Mechanism (SRM) to deal with failing banks was welcome but, reading the fine print, it is evident that there is a lot left to be done. As of now, the SRM is being planned as a relatively small fund of 55 billion euro, which will come into effect only in 2015 and not be fully financed till 2025.

Paradoxically, most of the unequivocal good news in recent times has come out ofAfrica. Growth forecast for Sub-Saharan Africa in 2014 is 5.3pc, up from last year’s 4.7pc.

This is a small but sure-footed improvement.Africahas some deep comparative advantages.

Demographic dividend in the form of rising ratio of working age population to dependent population (those below 15 years of age and above 65 years) is visible all overAfrica. In North andSouth Africa, this ratio has, in fact, risen in every country over the past three decades.

Further, what is not widely known is that the continent’s capital inflow-to-GDP ratio is today higher than for any other developing region. If inroads can be made on improving governance, as some nations have done in recent times,Africacan become “a hub of dynamism”.

Africa’s fate is however linked toChina’s in a way that we may not have seen before, which prompts one to ask, where doesChinastand?

In 2013,Chinagrew by 7.7pc. It is expected thatChinawill perform once again at that elevated level in 2014.

But unlike many other countries, the Chinese forecast comes with a relatively wider band around it. This stems fromChina’s stretched finances.Chinais among the countries where domestic credit has grown fastest over the past few years.

Domestic credit growth as percentage of GDP between 2007 and 2012 was over 25pc forChina. And its stock of credit – at 160pc of GDP – is among the highest in the world. The plus side in the case ofChinais that the bulk of this is used to fund investment. The minus side is thatChinainvests so heavily that the marginal returns to investment are low.

The upshot isChinaneeds to rein in some of this credit and also corral its large shadow banking sector. The problem arises from the fact that there is no handbook for doing this.

Reining in the financial sector is a combination of science and intuition and there is always the risk of a misstep. Should that happen,China’s growth rate could plummet for a year or two. Even though this will not last long, given the economy’s global connectivity, even a short, sharp slowdown will leave a trail of collateral damage for the world and, prominently, for Africa.

I do not expect theUStaper to have a large negative impact on emerging economies for three reasons. The Fed’s announcement of a possible taper earlier last year caused a huge (and over) reaction; so, much of the adjustment has already occurred, in anticipation.

The taper will occur in tandem with improvements in theUSeconomy. The latter is such good news for all nations that this will blunt the negative effect of the rise in interest rates. But all nations with restrictions on capital account convertibility and currencies that are not globally traded – a vast majority of developing nations – can taper the effect of the taper by easing liquidity within their own national boundaries.

 



By Kusha Basu
Kusha Basu (PhD) is vice president for development economics and chief economist of World Bank. This commentary first appeared on Let’s Talk Development.

Published on January 19, 2014 [ Vol 14 ,No 716]


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