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World Bank forecasts darker skies for global economy

media Trade tensions between the United States and China are among the World Bank's concerns for the global economy. REUTERS/Al Drago

The World Bank is warning that storm clouds lie ahead for the world's economy - blaming "increasing risks" for a drop in its latest global growth forecast.

These include trade tensions between China and the US, which are already hurting the global economy, as well as financial pressures being felt by emerging economies.

In its Global Economic Prospects 2019 report, released on Tuesday, the World Bank said global growth is expected to slow to 2.9 percent this year and 2.8 percent in 2020. Nearly all of the world's regions were downgraded - and policymakers are being urged to take notice.

Expressions such as "darkening skies" paint a bleak picture, but the report's lead author, Franziska Ohnsorge, told RFI the outlook still represents solid growth. The sky is darkening, she says, because of the risks surrounding this latest forecast. Financial market dislocation (when stressful conditions prevent markets from pricing assets correctly) and an escalation of trade tensions are the two most urgent concerns.

Interview: Franziska Ohnsorge, lead author of the World Bank Global Economic Prospects 2019 report 09/01/2019 - by Amanda Morrow Listen

"Last year US-China tariffs accounted for only 2.5 percent of global growth strain. However our concern is that these tensions are happening between the world's two largest economies," Ohnsorge said. "Together the US and China account for 20 percent of global trade and 40 percent of global output, so if those two economies slow, then that's something that will reverberate around the global economy."

To paint a clearer worldwide picture, advanced economies - the US, the eurozone and Japan - can expect 2 percent growth this year, lowering to 1.6 percent in 2020. Emerging markets and developing economies (EMDEs) naturally grow at a much faster rate, but the predictions for them have also taken a shaving - down to 4.2 percent for this year and 4.5 percent for 2020.

(If you want to crunch the numbers, earlier predictions were 2.2 and 1.7 respectively for advanced economies and 4.5 and 4.7 for EDMEs.)

Financial strain for emerging markets, developing economies

Of course, it's not just persistent policy uncertainties that are darkening the clouds. Rising borrowing costs are weighing down the outlook for EMDEs - and, even if growth rates look healthy, problems may be brewing beneath the surface.

Ohnsorge says "convergence" (an economic term also known as the "catch-up effect") is a matter for concern. "This is because 4.5 percent growth looks OK until you consider per capita growth," she says. "There are three regions where - even at those rates - per capita growth is somewhere around zero and 1 percent. Those are Latin America and the Caribbean, the Middle East and Africa, and sub-Saharan Africa. Per capita growth in the order of 1 percent is not enough to lift a large number of people out of poverty."

To add fuel to the fire, it appears that not all EMDEs are created equal. Some of these countries are extremely vulnerable because they've had to get outside financial help, increasing what's known as a "downside risk" - the risk of a return being less than expected. A risk that, in itself, sometimes can't be measured. Last year the entire EMDE "universe", as Ohnsorge calls it, struggled with rising borrowing costs and interest rate increases.

While this meant tightening financial conditions for the average EMDE, the impact was most urgently felt by those most vulnerable. "And if you split EMDEs into those with current account deficits - who have to finance more - and separate them from those who don't have to finance because they have account surpluses, you see that the depreciation in the account deficit countries is about three times the depreciation in those with account surpluses," she said.

Informal sector driving poverty, inequality

The World Bank also draws attention to the unregulated informal economy, or grey economy in which workers - cleaners, drivers, couriers to name a few - are not protected by the state. Not only does the informal sector promote poverty and inequality, it also creates weak business climates and low productivity. Tackling this is very country-specific and fraught with challenges, says Ohnsorge, while at the same time adding that it's absolutely necessary because targeting the informal sector will have the collateral benefit of improving governance and reducing corruption.

"In the average country, the reason that workers in the informal sector receive lower wages - on average by 19 percent - is because that's the type of worker that is informally employed: low-skilled, young, inexperienced. How do you address that? It's not a simple matter of enforcing policy. This is a matter of education, training and investment in human capital. That's a big challenge.

"In some countries, firms in the informal sector on average yield one quarter the productivity of firms in the formal sector, but if you just made them formal they would not survive. To tackle informality you have a much deeper problem. You need to give them access to finance, facilitate access to markets, you have to give them access to input, so you are back to development policy."

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