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India's growth is projected at 5.5 percent in FY2014-15, accelerating to 6.3 percent in 2015-16 and 6.6 percent in 2016-17

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Shifting priorities; building for the future-Global Economic Prospects-World Bank

Developing countries are headed for a third consecutive year of disappointing growth below 5 percent, as first quarter weakness in 2014 has delayed an expected pick-up in economic activity, says the World Bank's latest Global Economic Prospects report.

In contrast, recovery in high-income countries is gaining momentum, despite first quarter weakness in the United States. These economies are expected to grow by 1.9 percent in 2014, accelerating to 2.4 percent in 2015 and 2.5 percent in 2016. The Euro Area is on target to grow by 1.1 percent this year, while the United States economy, which contracted in the first quarter due to severe weather, is expected to grow by 2.1 percent this year (down from the previous forecast of 2.8 percent).

 

The global economy is expected to pick up speed as the year progresses and is projected to expand by 2.8 percent this year, strengthening to 3.4 and 3.5 percent in 2015 and 2016, respectively. High-income economies will contribute about half of global growth in 2015 and 2016, compared with less than 40 percent in 2013.

Firming global growth and a modest pickup in industrial activity should help lift South Asia's growth to 5.3 percent in 2014. Although growth should improve during the course of 2014, a weak start to the year will weigh on annual growth. Regional growth is projected to rise to 5.9 percent in 2015 and 6.3 percent in 2016 (with most of this acceleration focused on India), supported by a gradual pickup of domestic investment and rising global demand. India's growth is projected at 5.5 percent in FY2014-15, accelerating to 6.3 percent in 2015-16 and 6.6 percent in 2016-17. Medium-term growth in Pakistan and Nepal is projected at about 4 percent, and in Bangladesh at about 6 percent. In Sri Lanka, annual growth is forecast to remain broadly stable at 7.2 percent in 2014, moderating to 6.7 percent by 2016.

The forecasts assume that reforms are undertaken to ease supply-side constraints (particularly in energy and infrastructure), improve productivity, and strengthen the business environment, which would help to raise the region's underlying growth potential. Continued fiscal consolidation would create additional space for private investment, while maintaining a credible monetary policy stance (together with a gradual easing of supply-side constraints) would help to reduce inflation. Regional capital flows are forecast to rebound to $115 billion in 2014, and then rise broadly in line with GDP (to 4.5 percent of GDP)below the level of 5.6 percent of GDP in 2012, mainly reflecting tighter international financial conditions.

The outlook for the East Asia and the Pacific region continues to reflect several counterbalancing factors, including domestic adjustment, volatile financing conditions, political crisis in Thailand, and bumpy, but sustained recovery in global demand for exports. Overall growth in the region is expected to slow insignificantly to 7.0 percent by 2016, about 2 percentage points slower than the pre-crisis boom years but broadly in line with potential. Growth for China is expected to ease gradually to 7.6 percent in 2014 and to 7.4 percent by 2016, with less, but only gradually declining, reliance on credit-induced investment-led growth. The adjustment to more balanced growth will continue to pose challenges and the rebalancing process is expected to remain slow and volatile as adjustment-induced slowing is offset by loosening fiscal and monetary policies aimed at meeting annual growth targets. Regional growth (excluding China) is projected to gradually accelerate to 5.5 percent by 2016 as external demand solidifies, adjustment is completed and tensions ease in Thailand. Large imbalances will increasingly weigh on the outlook of a number of smaller economies, including Lao, PDR, Mongolia and Papua New Guinea, calling for strong policy actions.

The outlook for the developing Europe and Central Asia region has weakened in the near term, owing to a sharper-than-expected slowdown in a number of large economies in the region, including Turkey, Kazakhstan, and Ukraine. Growth in the region is expected to temporarily weaken to 2.4 percent in 2014 before picking up to 3.7 and 4.0 percent in 2015 and 2016, respectively.

While most developing countries in the Central and Eastern Europe sub-region are expected to see strengthening in growth this year as they continue to benefit from stronger import demand from the Euro Area, Turkey remains vulnerable to domestic and external shocks, including higher inflation, political uncertainty, and tighter global financial conditions. For the developing CIS, a marked slowdown is expected this year, reflecting weaker revised forecast for Kazakhstan and Ukraine, as well as broader spillovers from the slowdown in Russia and China, the largest trading and investment partners, and a weakening trend in key commodity prices. The developing CIS is also exposed to worsening geopolitical tensions in Russia and Ukraine. Belarus is heavily exposed through trade linkages to Ukraine and Russia as are Armenia and Moldova, while remittances from Russia are a substantial share of GDP in Armenia, Kyrgyz Republic, Moldova and Tajikistan. Despite emerging challenges, medium-term growth prospects for Sub-Saharan Africa remain favorable. Regional GDP growth is projected to remain stable at 4.7 percent in 2014, strengthening to 5.1 percent in each of 2015 and 2016, supported by net foreign direct investment (FDI) flows in the resource sectors, public investment in infrastructure, and improved agricultural production.

The strengthening recovery in high-income countries bodes well for export demand and investment flows, although weaker commodity prices and slower growth in emerging markets will moderate growth of FDI flows to the region to $32.5 billion in 2014, from $31.9 billion in 2013. Nevertheless, this would support growth in many countries. Besides FDI, the continued focus on expanding public infrastructure to ease supply bottlenecks is expected to provide further impetus to growth in the region. The inflation outlook is expected to remain favorable across the region, although prices will trend higher due to higher food prices in some countries or pass-through from currency depreciations in others, particularly Ghana and South Africa.

At the sub-regional level, growth is expected to be strong in East Africa, increasingly supported by FDI flows into offshore natural gas resource in Tanzania, the onset of oil production in Uganda and Kenya, and agriculture in Ethiopia. Tight monetary policy combined with labor strikes and weak electricity supply will keep growth subdued in South Africa. In Angola, after a slowdown in 2013, growth is expected to pick up moderately in 2014, supported by improved oil production and infrastructure investment. Growth is projected to remain robust in Nigeria, which became the region's largest economy following the rebasing of its GDP, supported by the continued expansion of non-oil sectors.

Regional growth is expected to strengthen steadily from 1.9 percent in 2014, to 2.9 percent in 2015 and 3.5 percent in 2016 in Latin America and the Caribbean. The recovery that is taking hold in advanced countries will increasingly support regional exports, as well as increased tourism receipts and remittances to the region. In addition, depreciated local currencies in much of the region may help countries gain market share as global trade growth accelerates.

Capital flows are expected to slow initially as monetary tightening in the United States continues but are expected to resume their growth in 2015/16. These flows will fuel domestic demand, especially fixed investment across the region. This coupled with the continued robust investment growth along the Pacific coast of South America, will lift regional growth in the medium term. On the other hand, the slowdown in China and the extended decline in commodity prices will weigh on exports, export revenues and also investment to keep growth around potential. Overall, with largely closed output gaps and limited excess capacity, there is little scope for sustained accelerations in growth without generating macroeconomic imbalances.

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First Published: Jun 12 2014 | 5:37 PM IST

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