Emerging Markets; Economic Theory & Research; Currencies and Exchange Rates; Debt Markets; Economic Conditions and Volatility
The World Region
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Summary: The global economy appears to be transitioning toward a period of more stable, but slower growth. Global gross domestic product (GDP), which slowed in mid-2012, is recovering, and a modest acceleration in quarterly GDP is expected during the course of 2013. That progress will be masked in the annual data, however, with whole-year growth for 2013 projected at 2.2 percent, a touch slower than in 2012. The strengthening of quarterly growth will show up in whole-year global GDP growth of 3.0 percent for 2014 and 3.3 percent in 2015. Financial conditions in high-income countries have improved and risks are down, but growth remains subdued, especially in Europe. Growth is firming in developing countries, but conditions vary widely across economies. Most developing countries have recovered from the crisis, so room for additional acceleration is limited. Although acute risks in high-income countries are down, more modest downside risks linger as these economies continue to adjust. Importantly, downside risks are now balanced by the possibility of stronger growth should confidence improve more quickly than anticipated in the baseline. Once high-income countries begin to pursue quantitative easing less actively or begin to unwind long-term positions, interest rates are likely to rise. Higher interest rates will increase debt-servicing costs, and can increase default rates on existing loans. In the longer term, higher interest rates will raise the cost of capital in developing countries and can be expected to reduce the level of investment that firms wish to maintain. As investment rates adjust to these higher capital costs, developing-country investment spending and growth can be expected to decline by as much as 0.6 percentage points per annum after three years.
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