The past decade has been characterized by fragile growth, high investor uncertainty and periodic spikes in global financial market volatility. As crisis-related fragilities and the adverse effects of other recent shocks gradually subside, the world economy has strengthened. Towards the end of 2016, global economic activity began to see a modest pickup, which extended into 2017.
World industrial production has accelerated, in tandem with a recovery in global trade that has been predominantly driven by stronger demand in East Asia. Confidence and economic sentiment indicators have also generally strengthened, especially in developed economies. Investment conditions have improved, amid stable financial markets, strong credit growth, and a more solid macroeconomic outlook.
In 2017, global economic growth is estimated to have reached 3.0 per cent when calculated at market exchange rates, or 3.6 per cent when adjusted for purchasing power parities1 — the highest growth rate since 2011 (figure I.1). Currently, all major developed economies are experiencing a synchronized upturn in growth. Compared to the previous year, growth strengthened in almost two thirds of countries worldwide in 2017.
At the global level, world gross product (WGP) is forecast to expand at a steady pace of 3.0 per cent in 2018 and 2019 (table I.1).2 Developing economies remain the main drivers of global growth. In 2017, East and South Asia accounted for nearly half of global growth, as both regions continue to expand at a rapid pace. The Chinese economy alone contributed about one-third of global growth during the year.
However, stronger economic activity has not been shared evenly across countries and regions, with many parts of the world yet to regain a healthy rate of growth. Moreover, the longer-term potential of the global economy continues to bear a scar from the extended
period of weak investment and low productivity growth that followed the global financial crisis. Widespread weakness in wage growth, high levels of debt and elevated levels of policy uncertainty continue to restrain a firmer and more broad-based rebound in aggregate demand. At the same time, a number of short-term risks, as well as a buildup of longer-term financial vulnerabilities, could derail the recent upturn in global economic growth.
The recent acceleration in WGP growth, from a post-crisis low of 2.4 per cent in 2016, stems predominantly from firmer growth in several developed economies (figure I.2). Cyclical improvements in Argentina, Brazil, Nigeria and the Russian Federation, as these economies emerge from recession, also explain roughly a third of the rise in the rate of global growth in 2017.
The composition of global demand has shifted more towards investment over the last year. Gross fixed capital formation accounted for roughly 60 per cent of the acceleration in global economic activity in 2017 (figure I.3). This improvement, however, is relative to a very low starting point, following two years of exceptionally weak investment growth, and a prolonged period of lacklustre global investment activity. Business investment contracted in a number of large economies in 2016, including Argentina, Australia, Brazil, Canada,
the Russian Federation, South Africa, the United Kingdom of Great Britain and Northern Ireland and the United States of America. While investment is no longer a drag on global growth, the recovery remains moderate and contained to a relatively narrow set of countries. A more entrenched recovery in investment growth is likely to be held back by elevated levels of uncertainty over future trade policy arrangements, the impact of balance sheet adjustments in major central banks, as well as high debt and a build-up of longer-term financial fragilities. Further details on prospects for investment and its links to productivity over the medium-term are discussed in the next section of this chapter.
Recent economic gains have not been evenly distributed across countries and regions. East and South Asia remain the world’s most dynamic regions, benefiting from robust domestic demand and supportive macroeconomic policies. In contrast, economic conditions remain challenging for many commodity-exporting countries, underscoring the vulnerability to commodity boom and bust cycles in countries that are over-reliant on a narrow range of natural resources. Prospects in Africa, Western Asia and parts of South America remain heavily dependent on commodity prices (figure I.4).
Following the sharp global commodity price realignments of 2014–2016, commodity prices have not exhibited a common trend in 2017, but have been driven by sector-specific developments. As such, the economic performance of commodity exporters has diverged, with countries such as Chile starting to benefit from the upturn in copper prices, while the drop in cocoa prices has led to a deterioration in economic prospects in Côte d’Ivoire. For the most part, currency pressures associated with the steep price adjustments have eased, allowing some scope for policy easing in a number of countries. The moderate recovery in the price of oil from the lows seen in early 2016 has brought some respite to oil-exporting countries. However, given that oil prices stand at roughly half their average level in 2011– 2014, growth prospects of the oil exporters will remain subdued over the forecast horizon, reinforcing the need for economic diversification.