Global Economic Prospects report: Sharp, Long-lasting Slowdown to Hit Developing Countries Hard

 

 

2023 global growth to slow to 1.7% from 3% expected six months ago

WASHINGTON, Jan. 10, 2023 — Global growth is slowing sharply in the face of elevated inflation, higher interest rates, reduced investment, and disruptions caused by Russia’s invasion of Ukraine, according to the World Bank’s latest Global Economic Prospects report.

Given fragile economic conditions, any new adverse development—such as higher-than-expected inflation, abrupt rises in interest rates to contain it, a resurgence of the COVID-19 pandemic, or escalating geopolitical tensions—could push the global economy into recession. This would mark the first time in more than 80 years that two global recessions have occurred within the same decade.

The global economy is projected to grow by 1.7% in 2023 and 2.7% in 2024. The sharp downturn in growth is expected to be widespread, with forecasts in 2023 revised down for 95% of advanced economies and nearly 70% of emerging market and developing economies.

Over the next two years, per-capita income growth in emerging market and developing economies is projected to average 2.8%—a full percentage point lower than the 2010-2019 average. In Sub-Saharan Africa—which accounts for about 60% of the world’s extreme poor—growth in per capita income over 2023-24 is expected to average just 1.2%, a rate that could cause poverty rates to rise, not fall.

“The crisis facing development is intensifying as the global growth outlook deteriorates,” said World Bank Group President David Malpass. “Emerging and developing countries are facing a multi-year period of slow growth driven by heavy debt burdens and weak investment as global capital is absorbed by advanced economies faced with extremely high government debt levels and rising interest rates. Weakness in growth and business investment will compound the already-devastating reversals in education, health, poverty, and infrastructure and the increasing demands from climate change.”

Growth in advanced economies is projected to slow from 2.5% in 2022 to 0.5% in 2023. Over the past two decades, slowdowns of this scale have foreshadowed a global recession. In the United States, growth is forecast to fall to 0.5% in 2023—1.9 percentage points below previous forecasts and the weakest performance outside of official recessions since 1970. In 2023, euro-area growth is expected at zero percent—a downward revision of 1.9 percentage points. In China, growth is projected at 4.3% in 2023—0.9 percentage point below previous forecasts.

Excluding China, growth in emerging market and developing economies is expected to decelerate from 3.8% in 2022 to 2.7% in 2023, reflecting significantly weaker external demand compounded by high inflation, currency depreciation, tighter financing conditions, and other domestic headwinds.

By the end of 2024, GDP levels in emerging and developing economies will be roughly 6% below levels expected before the pandemic. Although global inflation is expected to moderate, it will remain above pre-pandemic levels.

The report offers the first comprehensive assessment of the medium-term outlook for investment growth in emerging market and developing economies. Over the 2022-2024 period, gross investment in these economies is likely to grow by about 3.5% on average—less than half the rate that prevailed in the previous two decades. The report lays out a menu of options for policy makers to accelerate investment growth.

“Subdued investment is a serious concern because it is associated with weak productivity and trade and dampens overall economic prospects. Without strong and sustained investment growth, it is simply impossible to make meaningful progress in achieving broader development and climate-related goals,” said Ayhan Kose, Director of the World Bank’s Prospects Group. “National policies to boost investment growth need to be tailored to country circumstances but they always start with establishing sound fiscal and monetary policy frameworks and undertaking comprehensive reforms in the investment climate.”

The report also sheds light on the dilemma of 37 small states—countries with a population of 1.5 million or less. These states suffered a sharper COVID-19 recession and a much weaker rebound than other economies, partly because of prolonged disruptions to tourism. In 2020, economic output in small states fell by more than 11%— seven times the decline in other emerging and developing economies. The report finds that small states often experience disaster-related losses that average roughly 5% of GDP per year. This creates severe obstacles to economic development.

Policymakers in small states can improve long-term growth prospects by bolstering resilience to climate change, fostering effective economic diversification, and improving government efficiency. The report calls upon the global community to assist small states by maintaining the flow of official assistance to support climate-change adaptation and help restore debt sustainability. 

Download Global Economic Prospects here.

Regional Outlooks:

East Asia and Pacific: Growth is expected to increase to 4.3% in 2023 and to 4.9% in 2024. For more, see regional overview.

Europe and Central Asia:  Growth is expected to slow to 0.1% in 2023 before increasing to 2.8% in 2024. For more, see regional overview.

Latin America and the Caribbean: Growth is projected to slow to 1.3% in 2023 before recovering to 2.4% in 2024. For more, see regional overview.

Middle East and North Africa: Growth is expected to slow to 3.5% in 2023 and 2.7% in 2024. For more, see regional overview.

South Asia: Growth is projected to slow to 5.5% in 2023 before picking up to 5.8% in 2024. For more, see regional overview.

Sub-Saharan Africa: Growth is expected to be at 3.6% in 2023 and rise to 3.9% in 2024. For more, see regional overview.

 

Website: https://www.worldbank.org/en/publication/global-economic-prospects

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Southeast Asia, too, is losing patience with King Dollar’s clout

Southeast Asia, like much of the rest of the world, is losing patience with King Dollar. The westernization of the world’s reserve curr...

 

Southeast Asia, too, is losing patience with King Dollar’s clout

Southeast Asia, like much of the rest of the world, is losing patience with King Dollar.

The westernization of the world’s reserve currency, as through sanctions on those deemed bad actors — such as Russia for its war in Ukraine — has pushed even the typically diplomatic Southeast Asians to warn the US of the consequences.

In a conference in Singapore on Tuesday (Jan 10), multiple former officials spoke about de-dollarisation efforts underway and what economies in the region should be doing to mitigate the risks of a still-strong dollar that’s weakened local currencies and become a tool of economic statecraft.

“The US dollar is a hex on all of us,” George Yeo, former foreign minister of Singapore, said at the conference hosted by the ISEAS-Yusof Ishak Institute. “If you weaponise the international financial system, alternatives will grow to replace it” and the US dollar will lose its advantage. 

While few expect to see the end of King Dollar’s global sovereign status anytime soon, Yeo urged that the risk of it happening be taken more seriously.

“When this will happen, no one knows, but financial markets must watch it very closely,” said Yeo, who is a visiting scholar at the National University of Singapore’s Lee Kuan Yew School of Public Policy.

After gaining 6.2% in 2022, the US dollar is down 0.67% in the first several days of this year, through the end of Tuesday, according to the Bloomberg Dollar Spot Index.

Yeo noted that in times of crisis, the US dollar rises further — as with levies on Russia that have left Russian banks estranged from a network that facilitates tens of millions of transactions every day, forcing them to lean on their own, much smaller version instead. That’s put more pressure on third-party countries, too, which have to unduly rely on US dollar use.

Following on Yeo’s remarks later in the conference, former Indonesian trade minister Thomas Lembong applauded Southeast Asia's central banks that already have developed direct digital payments systems with local currencies, and encouraged officials to find more ways to avoid leaning too hard on the greenback.

“I have believed for a very long time that reserve currency diversification is absolutely critical,” said Lembong, who’s also a co-founder and managing partner at Quvat Management Pte Ltd. Supplementing US dollar use in transactions with use of the euro, renminbi, and the yen, among others, would lead to more stable liquidity, and ultimately more stable economic growth, he said.

The 10 Asean countries are just too disparate to establish a common currency as with the euro bloc. But Lembong said he was “deeply passionate” on this subject of the US dollar as a global reserve currency.

The direct digital payments systems — which have boosted local currency settlement between Malaysia, Indonesia, Singapore and Thailand — are “another great outlet for our financial infrastructure”, he said.- Bloomberg

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Covid19 - USA is a basket case

 

https://www.worldometers.info/coronavirus/country/us/

 

 https://www.worldometers.info/coronavirus/country/china/

China has kept the Covid virus away from its people for 3 years with a stringent lockdown. The Chinese people could move around inside China free from the virus, like living in a cocoon. While the Americans were suffering from more than 100m infections, probably double that as the numbers are unreliable knowing congenital American liars, and more than 1m deaths, again could be higher, China only had a couple of hundred thousand infections and about 5,000 deaths.

The Americans were envious and angry that their mismanagement and quarrelsome domestic politics have turned them into an international basket case, a nation with the most infection and most deaths while the Chinese were saved from this pandemic. So they went all out to smear the Chinese lockdown as violation of human rights. According to American so called human rights, freedom to do as everyone pleases is more important than protecting lives. The Chinese human rights chose to protect and save the lives of their people. China thus was repeatedly attacked by the Americans and demanding that the lockdown be removed to let the Chinese people move around freely like the Americans and infecting everyone like the Americans. If China would to listen to the Americans, the infection in China could be more than 300m or 400m and death could be several millions.

China avoided this disaster. The Chinese people were saved.

After 3 years of mutation, the virus has reached a stage as scientifically expected, to be be less virulent and less deadly. It is gradually turning into the common flu. Infections could be high but no longer as deadly as the beginning. China now decided to loosen the control measures which should make the Americans happy as that was what they were demaning. But no, the Americans are angry again, politicising the issue by raising barriers of entry to basket USA. 

When the loosening was first announced, many countries announced that they would not increase monitoring measures as they know that this was unnecessary. When China opens up, the Chinese would be exposed and infected by all the virus mutations from the rest of the world, especially from basket case America. When the Chinese visit these countries, visit basket America, the worse would be bringing back the same virus that these countries spread to them, and the same virus that these countries are living with. No big deal. 

But the Americans spread another lie, that the Chinese would bring in new mutations. What a joke. And silly American cronies and stooge countries also parroted this new anti China narrative as expected. Within a couple of weeks, all the American cronies and stooges, those that found no need to add new measures to check on Chinese visitors changed their position, under the coercion of the Americans of course. They have yet to say that they were coerced by the Chinese like they used to say in the past. When the Americans were the ones that were twisting their arms to make them do the American bidding, they would turn around to accuse the Chinese for doing it. These are they typical response from American cronies and stooges.

So, the world's number one basket Covid country is raising barriers to keep the world's lowest infected country, China, to stop the Chinese to visit them. What a joke! And the best part, all the retail business of these countries, especially those that are hoping for the high spending Chinese to bring in the tourist dollars, would be kept hanging up dry. The same scenario is repeating like forbidding the oil hungry Europeans from buying cheap Russia oil and gas, forbidding American chip manufacturers from selling their chips to the biggest buyer, China, left them all hungry and broke.

China should please the Americans and their cronies and stooges by banning their people from visiting these silly countries and basket America. There are many friendly countries and interesting places to go to and spend their cash.

What else can be more silly than a basket country like America, pretending to be afraid of being infected by Chinese coming out from a clean cocoon, afraid to be infected by the Chinese when the whole Ameican population is already infected?

Keep living with your lies and delusion, basket case America. The Covid virus is in your blood, inside every American due to your freedom to travel, for the virus as well. 

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📢Disclaimer:📢 This video and description contain affiliate links, which means we may receive a commission if you click on one of the product links. Thank you for your support of this channel! This is opinion only: For the viewer or reader: Do not consider this video a substitute for professional medical advice, diagnosis, or treatment. We strongly urge you to contact your physician with any questions regarding your medical condition. If you have an emergency, call 911 immediately or see your physician. Do not allow this information to let you disregard your professional's medical advice or delay seeking information from this content. Do not rely on information provided by this general education video. 

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Interest and inflation rates, how high is high?

 

CLICK TO ENLARGE

AS we welcome 2023, one of the central themes this year will be how high will interest rates rise after the relentless pursuit taken by global central banks in fighting inflation with persistent and measured rate hikes in 2022.

As can be seen from Chart 1, from the 75 basis points (bps) hike by the Bank of Thailand to the 425 bps hike by the US Federal Reserve (Fed), the year 2022 has certainly been a busy year for central banks.

Central banks had no choice but to raise rates to fend off inflationary pressure that has been persistent throughout the year, although there have been some signs of easing lately.

Not to be left behind, even the Bank of Japan, while not lifting key benchmark rate, allowed its 10-year Japanese government bonds to move 50 bps from its 0% target, instead of 25 bps earlier.

It is a move that is seen recognising that inflation is finally biting the Japanese too.

 

CLICK TO ENLARGE

 Chart 2 shows that based on November 2022 statistics, the depositors are at the losing end as the 12-month deposit rate was 132 bps lower than the monthly inflation print of 4%.

Can inflation be tamed?

Reading inflationary pressures and forecasting where it is going is not an easy task especially when inflation prints itself is a combination of many factors and not just commodity prices and supply chain disruption that has been the core issues among central banks the past year. Although the global economic momentum has eased, global aggregate demand is still rising and much higher than it was before the pandemic.

Hence, there has been not only a persistent rise in consumer demand but one that is not matched by consistent supply provided in the marketplace, resulting in a hike in aggregate prices.

In theory, inflation is tamed by using monetary tightening measures as it is believed that by raising interest rates, consumers and businesses will be impacted by higher borrowing costs, resulting in lower consumption as well as a slower pace of investments, which in turn will reduce aggregate demand.

Nevertheless, rate hikes have also other consequential impacts on the economy in the form of a weaker or a stronger currency, depending on the relative increase in domestic rates vis-à-vis the comparative increase in other corresponding currencies.

For example, for the United States, the relentless increase by the Fed has caused a significant rally in the US Dollar Index, which rose to a high of US$114 (RM501) last year, up almost 20%, before easing to close the year at US$103 (RM454), down 9.3% from its peak, but still higher by more than 8%.

The surge in the dollar made US imports cheaper from the rest of the world, in particular those from China, even cheaper, which allows the US retail prices at the store to be relatively lower than they used to be before the rally in the dollar.

In essence, while the surge in US interest rates has reduced disposable income due to higher borrowing costs, which in turn lowered consumer demand, it has also caused imported end product prices to be relatively cheaper than before, allowing aggregate prices to be lower as well.

This suggests that US consumer products are in for a double-whammy in terms of prices as aggregate demand has been reduced due to lower disposable income and at the same time for products that are imported, prices too have eased due to the strength of the greenback.

For an economist, this is good news as the intended outcome will likely be achieved in taming inflationary pressure due to persistent hikes in interest rates. A look at inflation prints from the peaks in 2022, both the core Consumer Price Index (CPI) and the Personal Consumption Expenditures index (PCE) have eased, falling by 67 bps and 62 bps from the highs and were last seen at 6% and 4.7% respectively.

Are we there yet?

After a 425 bps hike, the Fed’s message in the minutes of the Federal Open Market Committee (FOMC) released this week was an important one as it guided the market to expect higher rates going into 2023 but at the same time also signalled that the war against inflation is far from over and the Fed will continue to raise rates until it can achieve its targeted inflation print.

Compared with its September forecast of 4.6%, the Fed has now raised its median Fed Fund Rate (FFR) for 2023 to 5.1%, an increase of 50 bps while at the same time, the Fed also expects median FFR to drop by 100 bps each in 2024 and 2025 to 4.1% and 3.1% from earlier projected rate of 3.9% and 2.9% respectively.

Core PCE inflation, which is the Fed’s benchmark rate for inflationary pressure, is now expected to hit a median rate of 4.8% in 2022 before easing to 3.5% and 2.5% in 2023 and 2024 respectively.

By all means, the Fed is forecasting that inflation will be tamed in time to come. Hence, in all likelihood, we have seen the peak in inflationary pressure but perhaps we will be in for a higher US rate for longer before we see the Fed’s pivot.

Contrary to market expectations, the FOMC minutes this week revealed that the Fed is not expected to cut rates in 2023.

As for the market, based on Fed Fund Futures the Fed is expected to raise the FFR by 25 bps each over the next three meetings to reach 5.00% and 5.25%, followed by two rate cuts of 25 bps each in the second half of 2023, bringing the FFR back to 4.5% and 4.75% at the end of 2023.

Bank Negara to stand pat?

Compared to many central banks in the region or globally, Bank Negara move to raise the benchmark Overnight Policy Rate (OPR) by 100 bps last year is seen as rather muted.

Based on the year-to-date core CPI of 2.9% up to November 2022, the inflationary pressure experienced by Malaysia remained within Bank Negara’s forecast of between 2% and 3% for the year and going into 2023, core inflation prints will remain elevated at the beginning of the year but may ease later on, especially with the current government’s efforts in reducing the cost of living.

Given that scenario and the likelihood that the Fed and other regional central banks too are almost done raising rates, Bank Negara may stand pat and leave the OPR unchanged for 2023 at 2.75%. After all, a higher rate of between 25 bps to 50 bps as predicted by many broking firms will only result in higher borrowing costs for consumers and businesses, a move that will likely accelerate the pace of economic slowdown in 2023. By leaving the OPR unchanged, Bank Negara is signalling that it is done with raising rates and the current rate remains commodative and supportive of economic growth.

Positive real returns?

One of the arguments for higher interest rates is whether depositors are getting positive real returns, which is the difference between fixed deposit rates and inflation prints.

Chart 2 shows that based on November 2022 statistics, the depositors are at the losing end as the 12-month deposit rate was 132 bps lower than the monthly inflation print of 4%.

However, interestingly, as the market is anticipating rate hikes of 25 bps in the January 2023 Monetary Policy Committee meeting and another hike in March 2023, 12-month fixed deposit rates of many banks have passed the 3% mark and depositors could even easily enjoy rates up to 4% as promotional activities to attract fresh deposits have intensified over the past month. With that, depositors are already getting returns close to the headline monthly inflation prints.

In conclusion, while it makes sense for Bank Negara to stand pat and not raise rates in its first two meetings this year as widely expected, the market has already priced in the scenario that the central bank is ready to raise rates by 50 bps to take the benchmark OPR to 3.25%, the level last seen in March 2019, almost four years ago.

   Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.

Riding on higher rates

When the Overnight Policy Rate (OPR) increases, banks can charge higher interest rates on loans, which expands their margins. But, there are other beneficiaries of higher OPR, including fixed deposit holders.

 

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