The Global Economic Outlook:An Uneven Recovery?

Carlos A. Primo BragaSpecial Representative and Director for Europe, External Affairs Vice-

Presidency, The World Bank

 Presentation at the Università di Pavia/Istituto Universitario di Studi Superiori/Collegio Santa Caterina da Siena 

November 25, 2011

The views expressed here are those of the author and do not necessarily reflect the views of the World Bank, or those of its Executive Directors or

the governments they represent.

“Theory is when you understand everything, but nothing works.Practice is when everything works, but nobody understands why.

At this station, theory and practice are united, so nothing works and nobody understands why.” (Source: Fisher, 2011)

What is the global economic outlook? A mix of good and bad news…

• Commodity prices increase has moderated and inflationary pressures are down• Japanese recovery is proceeding well• Emerging markets growth remains strong (and developing countries are expected

to grow between 5.6 and 4.7% in 2012)BUT• Eurozone strains have increased• Political uncertainty about US budget discussions• Weaker underlying growth momentum in High Income Countries (2012 forecasts

between 1.8 and 1.1% versus 2.2% forecast of mid-year)• Major global stock market correction (more than $5 trillion since July)• Even though developing countries fundamentals remain strong, contagion is

generating significant headwinds and major capital outflows• Moreover, developing countries have now a more restricted fiscal space compared

to 2008

In short: downside risks have increased

Commodity prices have stabilized or are falling

Sources: Datastream and World Bank DEC Prospects Group

Impact of Japan disaster is fading Car production

12-month percent change, number of units produced

Note: 2011 Source: OECD/Toyota Motor Corporation and Honda Motor Co. Ltd monthly reports.

2011 GDP compares well with 2007, in most cases

• For example, GDP is below its 2007 level in only 8 out of 30 ECA countries

-20

-10

0

10

20

30

40

% c

ha

ng

e fro

m 2

007

CH

NTK

MU

ZBIN

DA

ZE TJK

BLR

KSV

ALB

KA

ZBRA

KG

ZPO

LKO

RM

DA

TUR

GEO

MKD

SRB

MN

ERU

SBIH

MEX

CA

NBG

RSV

KD

EUC

ZERO

MU

SAFR

ASV

NH

UN

GBR

ARM

JPN

HRV

ITA

UKR

LTU

EST

LVA

Deviations of 2011 real GDP from the 2007 level

BUT…

The Outlook According to the IMF

World U.S. Euro area Japan Brazil Russia India China2011

(Sept 2011) 4 1.5 1.6 -0.5 3.8 4.3 7.8 9.5

2011 (Jun 2011) 4.3 2.5 2.0 -0.7 4.1 4.8 8.2 9.6

2011(Apr 2011) 4.4 2.8 1.6 1.4 4.5 4.8 8.2 9.6

2012(Sept 2011) 4 1.8 1.1 2.3 3.6 4.1 7.5 9

2012(Jun 2011) 4.5 2.7 1.7 2.9 3.6 4.5 7.8 9.5

2012(Apr 2011) 4.5 2.9 1.8 2.1 4.1 4.5 7.8 9.5

Source: IMF, World Economic Outlook.

WEO Real GDP Growth Projections(percent change from a year earlier)

Forecasts have been downgraded further since September

2005 2006 2007 2008 2009 2010 2011 2012 2013-6

-4

-2

0

2

4

6

8

10

June 2011 baseline

CurrentUpper-bound baseline

DevelopingHigh-incomeWorld

Projected growth

Source: World Bank DEC Prospects Group

Eurozone financing: 10y government bonds yields (sources: Bloomberg and RGE)

Change in 5-year sovereign credit-default swap, basis points (as of Oct.31st)*

Arge

ntina

Ukr

aine

Croa

tiaRo

man

iaBu

lgar

iaKa

zakh

stan

Lith

uani

aTu

rkey

Russ

iaTh

aila

ndSo

uth

Afric

aM

alay

sia

Chin

aVe

nezu

ela

Indo

nesi

aPh

ilipp

ines

Colo

mbi

aBr

azil

Mex

ico

Chile

Peru

Gre

ece

Italy

Port

ugal

Fran

ceSp

ain

Ger

man

yJa

pan

USA

Irela

nd

-100

0

100

200

300

400

500 1,655

* Change since the beginning of July.

Developing countriesHigh-income countries

Contagion has increased sovereign credit default swap rates worldwide

Sources: Bloomberg and World Bank DEC Prospects Group

13

European banking-sector counterparty-risk concerns persist despite pledge to recapitalize

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-110

50

100

150

200

250

300

350

400

Indications of rising concerns about counter-party risk in European banking system

Interbank overnight spreads, basis points

United States (LIBOR-OIS spread)

Europe (EURIBOR-EONIA spread)

Sources: Datastream and World Bank DEC Prospects GroupSources: Datastream and World Bank DEC Prospects Group

(Latest reading, 88.1)

Market perceptions and political turmoil are impacting the real-side of the world economy

• Change in mood about recent growth performance

– Data revisions (for high-income countries)– Weaker than anticipated second quarter results

• Financial market turmoil reflects both disappointing (backward-looking) economic news and growing (forward-looking) fears (sovereign debt concerns, perceived lack of political consensus on how to address economic problems…)

• Increased uncertainty and shaken confidence may dampen investment and increase precautionary savings

Impact on developing countries can be significant if further deterioration of economic conditions in high-

income countries materializes

• Direct financial channel potentially important for Latin America & Caribbean and Europe & Central Asia regions (due to integrated bank ownership)

• Implications for world trade non-trivial• Should wealth effects and confidence be affected more

markedly than growth could be weaker by two percent or more

• If financial-sector solvency is affected or a market-induced credit event occurs more serious consequences could be envisaged

Fiscal space: 42% of developing countries have a government deficit greater than 4% of GDP in 2010,

versus only 18% in 2007

Source: World Bank DEC Prospects Group

The “elephant” in the room

The implications of the European sovereign debt crisis

• Signs of contagion with CDS spreads rising even in some core Euro Area countries

• Banking-sector exposure to European sovereign debt is an issue of concern• Markets remain uncertain about commitment to adjustment; lack of

consensus on the role of the ECB; moreover, the current debt overhang plus fiscal/financial imbalances, and limitations on the use of exchange-rate policy constrain growth prospects

• Uncertainty can transform temporary liquidity problems into solvency crises…• Sovereign debt crises: history suggests that growth (unlikely in the near

future…), fiscal adjustment (growing political resistance…), inflation (the experience of the 1920s vs the reality of the 2010s), debt restructuring (financial engineering and real debt relief…) and financial repression are some of the usual channels to cope with unsustainable debt/GDP ratios

The trade channel: MENA, ECA and SSA have the closest ties to high-spread European economies

Latin Americ

a & Carib

bean

East Asia

& Pacifi

c

South Asia

Sub-Saharan Africa

Europe &

Central A

sia

Middle East & North

Africa

0

5

10

15

20

25

30

35

40

45Percent of merchandise exports destined to Europe

9.5

4.2

16.3

7.3

6.2

4.8

Arab spring events have affected investment, economic activity and labor markets

Industrial production (% change, 3m/3m, seasonally adjusted annualized rates)

Unemployment rates (%)Tourist arrivals (% change over same

period last year)

Source: UNWTO. Source: Government statistics.

Source: World Bank based on data from Datastream

Growth and unemployment

-2

-1

0

1

2

3

4

5

6

7

8

9

1990-99

2000-08

Growth accelerated in response to reforms but not enoughto address the key challenges facing the region (average,annual growth rates in %)

0

5

10

15

20

25

30

35

40

North Africa

Middle East

SA LAC World Sub Saharan Africa

South Asia

East Asia

The MENA region has the highest youth unemployment rate in the world (%)

0 20 40 60 80 100

MENA

SA

LAC

ECA

SSA

EAP

total female

MENA has the lowest participation rate, and also among women (% of working age population)

The young population has been soaring in MENA

MENA’s job problem cannot be attributed solely to a slow pace of job creation relative to growth

• Oil importers record a slow response of job creation to income growth• Oil exporters create jobs at a fast pace relative to growth so their main

problem is low income growth• In all MENA countries, job quality is an issue

Employment-growth elasticities, 2004-08

Source: ILO.

ECA: job losses remain a big concern

Unemployment rates (percent, latest available)

BLR*

KAZ¹

CZE‡

MDA

‡

SVN

‡

TUR‡

BGR*

*

EST‡

ALB*

*

LVA*

*

MN

E*

MKD

**

0

10

20

30

40

50

ECA average

Youth unemployment rates in select ECA countries (percent, Q1 2011)

KAZ

RUS

CZE

SVN

MDA TU

RES

TRO

MPO

LH

UN

BGR

LVA

SVK

LTU

HRV SR

BM

KD

0

10

20

30

40

50

60

ECA average

• ECA: Unemployment increased significantly during the crisis; 1 in 8 are unemployed

• Youth unemployment is a concern; 3 in 10 young adults are unemployed

Source: Employment Monitor-- http://go.worldbank.org/B8MMAI31I0

•Thanks to cfrom the crisis

Equatorial GuineaAngolaChadSudanNigeriaCameroonCongo, Rep.Gabon

LiberiaMozambiqueSierra LeoneRwandaSao Tome and Princ.EthiopiaTanzaniaCape VerdeMaliBurkina FasoBotswanaGhanaThe GambiaMauritiusNamibiaSenegalNigerBeninZambiaMadagascar

KenyaMalawiSouth AfricaGuineaLesothoSwazilandSeychellesBurundiCongo, Dem. Rep.ComorosCARTogoCôte d’IvoireEritreaGuinea-BissauZimbabwe

0.0-5.0 5.0 10.0 15.0 20.0 25.0

Per

cent

age

of to

tal A

fric

an p

opul

atio

n

30%

40%

30%

Oil countries

Growth 4% or higher

Growth less than 4%

Average GDP growth rates 1998-2008

SSA: A more inclusive and sustained growth

Sub Saharan Africa GDP growth

GDP Growth - SSA

Growth performance in SSA

Source: World Development Indicators, World Bank.

GDP growth in Sub-Saharan Africa by country groups

Infrastructure deficit(billion dollars/year)

Total gap $93

Current expenditures $45

Potential efficiency gains $17________________________

Funding gap $31

Africa’s infrastructure deficit

Concluding remarks• Global recovery more vulnerable. Recent turbulence in financial markets

and uncertainty about future prospects is impacting growth in both high-income and developing countries

• Risks of contagion are increasing and may have serious consequences for the global economy

• Mechanisms to address the Eurozone crisis need to be rapidly deployed• Developing countries are in a more vulnerable position than in 2007/8• Structural reforms to foster job creation remain critical (although as the

Arab Spring illustrates expansion of employment opportunities may not be enough if these opportunities fall short of the expectations of job seekers – particularly in the case of educated youth)

References• Fischer, R.W., 2011, “Explaining Dissent on the FOMC Vote for

Operation Twist (with reference to Jan Mayen Island, Paul Volcker and Thor’s Hammer),” Dallas, Texas: Federal Reserve Bank of Dallas.

• IMF, World Economic Outlook, several years• Primo Braga, C.A., and G.A. Vincelette, eds, 2010, Sovereign Debt

and the Financial Crisis: Will This Time Be Different?, Washington, D.C.: The World Bank.

• World Bank, 2011, Africa’s Future and the World Bank’s Support to It, Washington, D.C.: Africa Region, The World Bank.

• World Bank, 2011, “Developing Trends: September 2011,” Washington, D.C.: Development Prospects Group, The World Bank.

• World Bank, 2011, Investing for Growth and Jobs, Washington, D.C.: MENA Region, The World Bank.