https://www.worldbank.

org/en/news/feature/2020/01/08/january-2020-global-economic-prospects-
slow-growth-policy-challenges

January 2020 Global Economic

Prospects: Slow growth, policy
challenges
STORY HIGHLIGHTS

 The world economy is poised for a modest rebound this year, but
outlook is fragile.

 Emerging, developing economy growth to accelerate in 2020 as some

emerging economies recover from periods of stress.

 Rise in debt, slowdown in productivity pose challenges for policymakers.

Following its weakest performance since the global financial crisis, the world
economy is poised for a modest rebound this year– if everything goes just
right.

Hanging over this lethargic recovery are two other trends that raise questions
about the course of economic growth: the unprecedented runup in debt
worldwide, and the prolonged deceleration of productivity growth, which needs
to pick up to bolster standards of living and poverty eradication.
Global growth is set to rise by 2.5% this year, a small uptick from 2.4% in
2019, as trade and investment gradually recover, the World Bank’s semi-
annual Global Economic Prospects forecasts. Advanced economies are
expected to slow as a group to 1.4% from 1.6%, mainly reflecting lingering
weakness in manufacturing.

Emerging market and developing economies will see growth accelerate to

4.1% from 3.5% last year. However, the pickup is anticipated to come largely
from a small number of large emerging economies shaking off economic
doldrums or stabilizing after recession or turbulence. For many other
economies, growth is on track to decelerate as exports and investment remain
weak.

A worrying aspect of the sluggish growth trend is that even if the recovery in
emerging and developing economy growth takes place as expected, per
capita growth will remain below long-term averages and will advance at a
pace too slow to meet poverty eradication goals. Income growth would in fact
be slowest in Sub-Saharan Africa – the region where 56 percent of the world’s
poor live.
 Per capita income growth lags behind long-term averages. © World Bank Group

And even this modest rally could be disrupted by any number of threats.
Trade disputes could re-escalate. A sharper-than-expected growth slowdown
in major economies such as China, the United States, or the Euro Area would
similarly reverberate widely. A resurgence of financial stress in large emerging
markets, as was experienced in Argentina and Turkey in 2018, an escalation
of geopolitical tensions, or a series of extreme weather events could all have
adverse effects on economic activity around the world.

Debt Wave
One feature overshadowing the outlook is the largest, fastest, and most
broad-based wave of debt accumulation among emerging and developing
economies in the last 50 years. Total debt among these economies climbed to
about 170% of GDP in 2018 from 115% of GDP in 2010. Debt has also
surged among low-income countries after a sharp drop over 2000-2010.
The current wave of debt differs from previous ones in that there has been an
increase in the share of non-resident holdings of EMDE government debt,
foreign currency-denominated private EMDE debt, and, for low-income
countries, borrowing from financial markets and non-Paris Club bilateral
creditors, raising concerns about debt transparency and debt collateralization.

In emerging and developing economies over the last decade, growth has slowed while debt has increased. © World Bank Group

Public borrowing can be beneficial and spur economic development, if used to

finance growth- enhancing investments, such as in infrastructure, health care,
and education. Debt accumulation can also be appropriate in economic
downturns as a way to stabilize economic activity.

However, the three previous waves of debt accumulation have ended badly –
sovereign defaults in the early 1980s; financial crises in the late 1990s; the
need for major debt relief in the 2000s; and the global financial crisis in 2008-
2009. And while currently low interest rates mitigate some of the risks, high
debt carries significant risks. It can leave countries to vulnerable to external
shocks; it can limit the ability of governments to counter downturns with fiscal
stimulus; and it can dampen longer-term growth by crowding out productivity-
enhancing private investment.

This means that governments need to take steps to minimize risks associated
with debt buildups. Sound debt management and debt transparency can keep
a lid on borrowing costs, enhance debt sustainability, and reduce fiscal
risks. Strong regulatory and supervisory regimes, good corporate governance,
and common international standards can help contain risks, ensure that debt
is used productively, and identify vulnerabilities early.

Productivity Slowdown
Yet another aspect of the disappointing pace of global growth is the broad-
based slowdown in productivity growth over the last ten years. Growth in
productivity – output per worker – is essential to raising living standards and
achieving development goals.

An extensive look at productivity trends in this edition of Global Economic

Prospects focuses on how the productivity slowdown has affected emerging
and developing economies. Average output per worker in emerging and
developing economies is less than one-fifth that of a worker in an advanced
economy, and in low-income economies that figure drops to 2%.
 Since the global financial crisis, there has been a broad-based slowdown in productivity in emerging and developing economies. © World Bank Group

Among emerging and developing economies, which have a history of

productivity growth surges and setbacks, the slowdown from 6.6% in 2007 to
a trough of 3.2% in 2015 has been the steepest, longest, and broadest on
record. The slowdown is due to weaker investment and efficiency gains,
dwindling gains from the reallocation of resources to more productive sectors,
and slowing improvements in the key drivers of productivity, such as
education and institutional quality.

How to rekindle productivity growth? The outlook for productivity remains

challenging. Therefore, efforts are needed to stimulate private and public
investment; upgrade workforce skills to boost firm productivity; help resources
find the most productive sectors; reinvigorate technology adoption and
innovation; and promote a growth-friendly macroeconomic and institutional
environment.

Two other issues merit consideration in this edition of the outlook: adverse
consequences of price controls and inflation prospects in LICs.
While price controls are sometimes considered a useful tool to smooth price
fluctuations for good and services such as energy and food, they can also
dampen investment and growth, worsen poverty outcomes, and lead to
heavier fiscal burdens. Replacing them with expanded and targeted social
safety nets alongside the encouragement of competition and an effective
regulatory environment, can be beneficial both to poverty eradication and to
growth.

And while inflation has declined sharply among low-income countries over the
last 25 years, keeping it low and stable cannot be taken for granted. Low
inflation is associated with more stable output and employment, higher
investment, and falling poverty rates. However, rising debt levels and fiscal
pressures could put some economies at risk of disruptions that could send
prices sharply higher. Strengthening central bank independence, making the
monetary authority’s objectives clear, and cementing central bank credibility
are essential to keep prices anchored.

While the global economic outlook for 2020 envisions a fragile upward path
that could be upended, there is high degree of uncertainty around the forecast
given unpredictability around trade and other policies. If policy-makers
manage to mitigate tensions and clarify unsettled issues in a number of areas
– they could prove the forecast wrong by sending growth higher than
anticipated.