1 Tehmina Khan World Bank May 6, 2014 Global Outlook Update Tightening conditions; narrowing options

Key messages 1.Global economy accelerating led by high-income economies 2.Global trade volumes will rebound buoyed by high-income demand, but USD value of trade will be relatively muted 3.Developing country growth to pick up slowly due to headwinds and capacity constraints 4.Developing-countries have not done enough to restore macroeconomic buffers following the crisis 5.Better outcomes requires further structural reform Risks include: – Fallout from situation in the Ukraine – Financial tightening risks – Possible contagion from middle-income countries 2

Latest data suggests continued strengthening in high income countries Q1

Main messages High-income economies are reviving Developing regions may be slowing, partly in response to Ukraine Trade volumes will rebound buoyed by high-income demand, but USD value of trade will be relatively muted Developing-countries have not done enough to restore macroeconomic buffers following the crisis Better outcomes requires further structural reform Risks include: – Fallout from situation in the Ukraine – Financial tightening risks – Possible contagion from middle-income countries 4

5 Developing countries Short-term cycle is strengthening Financial turmoil has eased, borrowing costs are up, but remain low Forecast is for modest pickup in growth Growth has been disappointing in some regions

6 Growth firming or solid in most developing countries

Business confidence suggests growth will slow in second quarter Balance of respondents (>50 implies expansion, <50 decline) Source: World Bank, Markit, National authorities. 7

Financial turmoil has abated, impacts have been limited Most developing countries not affected by turmoil Capital flows have recovered Developing country yields have returned to fall levels, and are actually 55 basis points lower than before the crisis Markets remain volatile, in part because rising rates will change portfolio decisions Vulnerabilities have declined but remain 8 Gross capital flows, billions USD

Current accounts deficits have narrowed in many of the countries hardest hit during the summer turmoil Current account balance (% of GDP) Source: World Bank, Haver. 9

Outlook Projected pick up in growth to be led by high- income countries Developing-country growth in line with underlying potential Regional growth shows strengthening or stability going forward Slower growth in middle-income countries may reflect weaker than thought potential 10

A gradual pick up in growth, led by high-income countries Percent annual GDP growth Source: World Bank. 11

12 Contribution of high-income countries to global trade growth will more than double Source: World Bank.

13 Baseline: tighter conditions will reduce flows to developing countries by around of 0.6 % of GDP Source: World Bank. Estimated decline in capital inflows in the baseline, relative to no policy change:

USD price of internationally traded commodities, index 2010=100 Price declines2011y/y Metals Food Energy Falling commodity or stable commodity prices imply value of trade is growing less quickly 14 Source: World Bank.

15 USD value of trade growing much less quickly than in 2000s Growth of USD and volume of international trade Source: World Bank. Average growth rate nominal USD trade : 15.9%

Risks Financial conditions will be tighter over the next five years, implying weaker financial flows, higher capital costs and potential banking-sector stress in economies with rapid expansions in credit over past 5 years Developing countries remain vulnerable: little progress has been made to strengthen developing-country buffers depleted in post-crisis period or push forward with structural reform Financial turmoil in a large middle-income country could induce contagion – China risks remain – high-short-term and foreign denominated debt in Turkey Situation in Ukraine would likely have minor consequences unless global confidence is shaken 16

17 Ukraine situation WBG Russia 2014 forecast downgraded 0.9 pp. to 1.3 could be -1.8% in low case scenario Ukraine forecast downgraded to -5.0 percent Rest of world impact likely small unless sanctions intensify or conflict escalates Impacts on global food markets likely marginal Potentially serious impacts on Europe and Russia if there is a disruption in oil and or natural gas supply / demand

18 Downside risks threaten capital flows, risk aversion and GDP GDP, percentage point deviation from baseline, overshooting scenario Source: World Bank

Tensions between financial stability and growth restructuring in China Restructuring is occurring Growth has slowed sharply (est % in Q1) Unit labor costs are rising Financial-sector regulations are tightening All 3 imply reduced profitability / liquidity Authorities can respond Have responded with fiscal stimulus of c. 2.5% of GDP but mainly through credit vehicles More than 80% of credit issued by state controlled or owned entities 19

Developing country resilience needs to be built up Countries should be engaged in modest fiscal consolidation Monetary policy has tightened but remains loose Relatively elevated current account deficits imply significant financing needs Metal price declines have put additional pressures on exporters 20

Both structural and actual fiscal deficits much higher than in 2007 Percent of GDP 21 # of countries Change in debt -GDP ratio ( ), ppts of GDP Partly as a result, developing country debt to GDP ratios have been rising

With limited slack in most regions, inflation has been trending up

23 Despite recent rate hikes, real interest rates are low in many developing countries Percent, percentage points Source: World Bank, Datastream, IMF.

Current account balances of both developing oil importers and exporters have deteriorated Source: World Bank. Current account balance, % of GDP 24

25 Concluding remarks Strengthening recovery in high-income world is supporting developing country growth Positive effects partly offset by tighter financial conditions and supply side constraints Trade volume growth will recover, but the USD value of trade will grow much less quickly than during pre-crisis period Economic risks have declined and are more balances, but geopolitical risks are elevated Developing countries need to do more to build up buffers, and need to reinvigorate structural reforms

26 Andrew Burns World Bank April, Global Outlook Update Tightening conditions; narrowing options

Extra Slides 27

Except China and Russia stock markets have recovered Index, January =100 Source: World Bank, Datastream. 28

Earlier rapid increase in credit increases the risk of banking-sector crises Change in net bank credits, (% of GDP) Level of banking-sector net credits in 2012, % of GDP Source: World Bank, IMF. 29

30 Inflation is above target in several economies Source: World Bank, Datastream, National sources. Inflation, policy rate, %

31 Combined Russia and Ukraine are large grain exporters Wheat Russia and Ukraine account for 11 and 5% of global exports But only 0.7 and 0.2% of global production Markets are well supplied Maize Ukraine accounts for 14% of global exports, but only 1 percent of global production Markets are well supplied

32 Russia is #1 world producer of crude oil and a key source of natural gas for the European Union Crude oil World’s largest oil producer (> 10mb/d – 13% of world production) Exports 7.1 mb/d (4.3 crude, 2.8 refined product) – c. 5 mb/d to OECD countries (c. 4 mb/d to Europe) Natural Gas 30% of European natural gas sourced from Russia – Half of this transits Ukraine, although about 2/3 of this could be re-routed if disrupted by Ukraine. Germany, Italy, Poland, Hungary and Southern Europe are highly dependent on Russian natural gas Dependencies A 2.7mb/d disruption to Russian exports could push non-Russian prices up 30% 2.7 mb/d represents about 2.5% of Russian GDP and 7% of government revenue A 30% price hike would cost Euro Union about 0.9% of GDP GDP disruptions would likely be higher because of binding supply constraints in natural gas dependent sectors

Output to accelerate, but outturns have disappointed Source: World Bank. 33 GDP, % annual growth

34 Even a muted acceleration increases significantly the role of US Change in GDP, trillions of current USD