KUALA LUMPUR (Sept 20): The global economy appears to be moving into a new phase, in which output in advanced economies is firming, albeit probably not as strongly as desired, according to the World Bank managing director Sri Mulyani Indrawati.
Developing country growth appears to be slowing, including in the Asia-Pacific region, she said in her remarks at the APEC Finance Ministers’ Meeting in Bali, Indonesia on Sept 20.
Her remarks were published on the World Bank website today.
Sri Mulyani also said the decision by the US Federal Reserve to defer its tapering of quantitative easing was a positive move in the short-term for both developing and high-income economies.
“We know governments have now been given some breathing space.
“Clearly the risks and uncertainty about eventual tapering remain. But this is the time for policy makers to seize the moment and address domestic vulnerabilities and reduce external financing exposures,” she said.
On the economic outlook, Sri Mulyani said global GDP was projected to expand about 2.4% in 2013 and gradually strengthen to around 3.2% and 3.5% in 2014 and 2015, adding that APEC emerging markets and developing economies were expected to contribute almost 50% of future world growth.
She said that in advanced economies, growth was recovering on the back of accommodative policies, and that GDP growth had turned positive in Europe, strengthened in the US and remained robust in Japan.
She said this momentum was expected to continue into the second half of the year, despite fiscal consolidation, buoyed by a recovery in the housing market and employment growth.
Sri Mulyani said despite gradual adjustment to tighter financial conditions, growth in other developing countries is firming or holding steady, and that excluding China and India, developing country import volume growth rose by more than 5% in the second quarter.
“However, for many APEC economies, the balance of risk is once again on the upside,” she said.
She said that the cost of international bond financing for developing countries has increased by 88 basis points since May.
Sri Mulyani said that as QE policies are withdrawn, interest rates will likely rise further, which would increase debt-servicing costs and raise the cost of capital.
“On the positive side however, when tapering does happen it will signal further recovery in the US.
“Weaker exchange rates in developing countries will boost exports over time,” she said.
Sri Mulyani said that in countries that had already recovered from the crisis, macroeconomic policy stances may need to be adjusted to contain or prevent inflation, asset-price bubbles, and deteriorating current accounts.
This would also help restore depleted policy buffers, which may be needed in the future, she said.
She said the countries most vulnerable to swings in global capital flows could continue to strengthen their balance sheets, by reducing their reliance on short-term and foreign currency denominated debt.
“To sustain faster growth, developing countries will need to redouble efforts to reduce bottlenecks by improving their investment climate, investing in infrastructure, improving labor utilization and boosting productivity.
“In developing countries alone, financing needs have been estimated in the range of US$1 trillion to US$1.5 trillion per year,” she said.
Sri Mulyani said addressing these long-term investment needs will require significant progress in project selection, quality and implementation, coupled with mobilizing private financing and capital markets.
“This is why we at the World Bank have started looking into the creation of a Global Infrastructure Facility as a very practical way to leverage public and private resources.
“Challenges also arise from a changing pattern of competitiveness and comparative advantage as emerging economies increasingly penetrate global production and trade,” she said.
She said future growth in advanced economies would require supporting a recovery of demand as well as a reallocation of resources to new sources of growth – new products, new services, and new jobs, which can sustain good lifestyles.