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Storm Clouds Are Brewing for the Global Economy

The outlook for the global economy in 2019 has darkened.
International trade and investment have softened. Trade tensions remain elevated. Several large emerging markets underwent substantial financial pressures last year.
Against this challenging backdrop, growth in emerging market and developing economies is expected to remain flat in 2019. The pickup in economies that rely heavily on commodity exports is likely to be much slower than hoped for. Growth in many other economies is anticipated to decelerate.
In addition, risks are growing that growth could be even weaker than anticipated, the World Bank’s January 2019 Global Economic Prospects reports.
Advanced-economy central banks will continue to remove the accommodative policies that supported the protracted recovery from the global financial crisis ten years ago. Also, simmering trade disputes could escalate. Higher debt levels have made some economies, particularly poorer countries, more vulnerable to rising global interest rates, shifts in investor sentiment, or exchange rate fluctuations.
In addition, more frequent weather events raise the possibility of large swings in food prices, which could deepen poverty. Because equitable growth is essential to alleviating poverty and increasing shared prosperity, emerging market and developing economies need to face this challenging economic climate by taking steps to sustain economic momentum, readying themselves for turbulence, and foster long-term growth. Rebuilding budget and central bank buffers; nurturing human capital; promoting trade integration; and addressing the challenges posed by sometimes large informal sectors, are important ways to do this.
“At the beginning of 2018 the global economy was firing on all cylinders, but it lost speed during the year and the ride could get even bumpier in the year ahead,” said World Bank Chief Executive Officer Kristalina Georgieva. “As economic and financial headwinds intensify for emerging and developing countries, the world’s progress in reducing extreme poverty could be jeopardized. To keep the momentum, countries need to invest in people, foster inclusive growth, and build resilient societies."
The World Bank produces the GEP twice a year, in January and June, as part of its in-depth analysis of key global macroeconomic developments and their impact on member countries. Promoting equitable and sustainable economic growth is central the World Bank’s goals of ending extreme poverty and boosting shared prosperity. The GEP provides invaluable intelligence in support of achieving these aims and is a trusted resource for clients, stakeholders, civil organizations and researchers.
Burdened by debt
Addressing high levels of debt looms as an increasingly important concern.
In recent years, many low-income countries have gained access to new sources of finance, including private sources and creditors outside the Paris Club of major creditor countries. This has allowed countries to fund important development needs. However, it has also contributed to growing public debt.
Government debt levels among low-income countries have risen from debt-to-GDP ratios of 30 percent to 50 percent over the last four years. Low income countries are using an increasing proportion of government revenues to make interest payments. Such debt service pressures will only grow further if borrowing costs rise as expected in coming years.
Under these circumstances, were financing conditions to tighten abruptly, countries could experience sudden capital outflows and struggle to refinance debts.
Ideally, public debt should be sustainable and serviced under a wide range of circumstances at reasonable costs. By increasing the effectiveness of resource mobilization, public spending, as well as strengthening debt management and transparency, low-income countries can reduce the possibility of costly debt stress, support financial sector development, and reduce macroeconomic volatility.
About one-third of GDP in emerging market and developing economies comes from the informal sector, and about 70 percent of employment in these economies is informal. In some countries in Sub-Saharan Africa, informal employment accounts for more than 90 percent of employment and informal sector produces as much as 62 percent of GDP. The livelihoods of the poor often depend on informal activity.
The informal sector thrives in certain environments: high prevalence of informality is associated with economic under-development, high levels of taxation and heavy-handed regulation, and corruption and bureaucratic inefficiency. Yet, while sometimes offering advantages in terms of flexibility and employment, a large informal sector is often associated with lower productivity, reduced tax revenues, and greater poverty and inequality.
Informal firms are one-quarter as productive as companies in the formal sector. In fact, firms in the formal sector that face informal competition are only three-quarters as productive as those that do not, new World Bank research shows. Workers in the formal economy earn on average 19 percent more than those in the informal economy. Countries with the largest informal sectors have government revenues that are 5 to 10 percentage points of GDP lower than those with the lowest levels of informality.
Policymakers can design comprehensive development strategies that, as a collateral benefit, reduce informality. In addition, they must take care to avoid unintentionally moving workers to the informal sector.
The right policy mix would balance reforms such as improving tax administration, making the labor market more flexible, and strengthening regulatory enforcement with improved provision of pubic goods and services alongside more robust social security systems.
Low and stable inflation is associated with greater output and employment stability, higher growth and better development results. In contrast, high inflation erodes growth by sapping investor confidence and undermining incentives to save. Some notable exceptions notwithstanding, emerging market and developing economies have achieved the remarkable feat of lowering inflation from the double digits in the 1970s to about 3.5 percent in 2018.
However, the maintenance of low inflation is not guaranteed, and a number of factors may conspire to push inflation higher in coming years. A decade after the global financial crisis, many economies are operating at or close to full employment. The pace of global economic integration could slow or be reversed. Hard-won central bank independence and transparency could erode in the face of pressures to finance government. Mounting debt could weaken commitment to strong fiscal and monetary regimes.
If global inflationary pressures rise, policymakers can protect their constituents by redoubling their support for central bank independence, building fiscal frameworks to ensure debt sustainability and maintaining adequate buffers to ride out economic downturns.  
As the global economic outlook darkens, the imperative of sustaining economic momentum will require making the most out of growth opportunities, avoiding pitfalls, and building buffers against possible shocks. Lessons from the past about debt, faith in public institutions, food security, and price stability can offer guidance in an increasingly challenging environment. 

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