On Wednesday January 10, 2018, The World Bank released its annual report on the global economy entitled Global Economics Prospects. Thanks to broad-based improvement in growth around the world, the report predicts that for the first time since 2008 the world economy will be operating at its potential.
Overall, the world’s economy grew 3% in 2017, the World Bank said, up from the June estimate of 2.7%, and a considerable strengthening from the 2.4% growth that was logged in 2016. The World Bank forecasts that growth will pick up a bit more in 2018, rising to 3.1%.
Naturally, global economic performance reflects economic cycles. At this juncture, some countries, notably some commodity exporters, are operating below potential. Meanwhile, the most advanced economies appear to be performing at what the World Bank characterizes as “above potential”, meaning above that which is sustainable in the long-run.
“Above potential” status is marked by an excess of demand that is likely to lead to inflationary pressures, an increase in asset prices and pressure on central banks to raise interest rates.
“Slack in the rest of the world forces firms to keep costs at a certain level,” said Ayhan Kose, the director of the World Bank’s Development Economic Prospects Group. “In 2018, that is disappearing.” However, with the output gap only recently and narrowly closed, and uncertainty around that estimate, Mr. Kose cautions that the inflationary pressures could remain modest in 2018.
Indeed, the World Bank points out that robust economic growth is not a given, for a variety of reasons. These include aging demographics in the most developed countries, slowing productivity growth and less investment than in the past.
And, if these factors are not enough to arrest growth, no tree grows to the sky. Economic growth will naturally lead to inflation and tightening of interest rates that will work to cool the economy.
The World Bank’s report is even-handed enough to allow mainstream media outlets to spin it in a variety of directions.
- “Global economy set for decade of gloom as World Bank predicts recovery will fizzle out,” (UK Telegraph);
- “World Bank issues warnings on interest rates and inflation,” (UK Guardian); and
- “The Global Economy’s Output Gap Has Closed” (The Wall St. Journal.)
The World Bank is a multilateral non-governmental organization charged with, among other things, reducing poverty, particularly in countries badly situated to help themselves. The Global Economics Prospect report wisely points out that a period of prosperity is an ideal time for the developed world to implement structural reforms to raise long-term growth potential as widely as possible.
“This is no time for complacency,” said Jim Yong Kim, the World Bank’s president. “This is a great opportunity to invest in human and physical capital. If policymakers around the world focus on these key investments, they can increase their countries’ productivity, boost workforce participation, and move closer to the goals of ending extreme poverty and boosting shared prosperity.”