The Global Economic Outlook: An Uneven Recovery?

1. The Global Economic Outlook:An Uneven Recovery? Carlos A. Primo Braga Special 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.

2. “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)

3. 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

4. Commodity prices have stabilized or are falling Sources: Datastream and World Bank DEC Prospects Group

6. 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.

7. 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 Deviations of 2011 real GDP from the 2007 level

8. BUT…

9. The Outlook According to the IMF WEO Real GDP Growth Projections (percent change from a year earlier) Source: IMF, World Economic Outlook.

10. Forecasts have been downgraded further since September Projected growth Source: World Bank DEC Prospects Group

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

12. Contagion has increased sovereign credit default swap rates worldwide Change in 5-year sovereign credit-default swap, basis points (as of Oct.31st)* High-income countries Developing countries * Change since the beginning of July. Sources: Bloomberg and World Bank DEC Prospects Group

13. European banking-sector counterparty-risk concerns persist despite pledge to recapitalize Interbank overnight spreads, basis points United States (LIBOR-OIS spread) Europe (EURIBOR-EONIA spread) (Latest reading, 88.1) Sources: Datastream and World Bank DEC Prospects Group Sources: Datastream and World Bank DEC Prospects Group

14. 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

15. 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

16. 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

17. The “elephant” in the room

18. 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

19. The trade channel: MENA, ECA and SSA have the closest ties to high-spread European economies Percent of merchandise exports destined to Europe 9.5 16.3 7.3 6.2 4.2 4.8

20. Arab spring events have affected investment, economic activity and labor markets Industrial production (% change, 3m/3m, seasonally adjusted annualized rates) Source: World Bank based on data from Datastream Tourist arrivals (% change over same period last year) Unemployment rates (%) Source: UNWTO. Source: Government statistics.

21. Growth and unemployment Growth accelerated in response to reforms but not enough to address the key challenges facing the region (average, annual growth rates in %) The MENA region has the highest youth unemployment rate in the world (%) MENA has the lowest participation rate, and also among women (% of working age population) The young population has been soaring in MENA

22. 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.

23. ECA: job losses remain a big concern • ECA: Unemployment increased significantly during the crisis; 1 in 8 are unemployed • Youth unemployment is a concern; 3 in 10 young adults are unemployed Unemployment rates (percent, latest available) Youth unemployment rates in select ECA countries (percent, Q1 2011) • Source: Employment Monitor-- http://go.worldbank.org/B8MMAI31I0

24. SSA: A more inclusive and sustained growth Equatorial Guinea Angola Chad Sudan Nigeria Cameroon Congo, Rep. Gabon 30% Oilcountries • Thanks to cfrom the crisis Average GDP growth rates 1998-2008 Liberia Mozambique Sierra Leone Rwanda Sao Tome and Princ. Ethiopia Tanzania Cape Verde Mali Burkina Faso Botswana Ghana The Gambia Mauritius Namibia Senegal Niger Benin Zambia Madagascar Sub Saharan Africa GDP growth Growth 4% or higher 40% Percentage of total African population GDP Growth - SSA Kenya Malawi South Africa Guinea Lesotho Swaziland Seychelles Burundi Congo, Dem. Rep. Comoros CAR Togo Côte d’Ivoire Eritrea Guinea-Bissau Zimbabwe Growth less than 4% 30% -5.0 0.0 5.0 10.0 15.0 20.0 25.0

25. Growth performance in SSA GDP growth in Sub-Saharan Africa by country groups Source: World Development Indicators, World Bank.

26. Africa’s infrastructure deficit Infrastructure deficit (billion dollars/year) Total gap $93 Current expenditures$45 Potential efficiency gains $17 ________________________ Funding gap $31

27. 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)

28. 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.