The FINANCIAL -- Global economic growth was 2.3 percent last year and is expected to
remain the same this year, according to the World Bank ’s report Global
Although financial markets are calmer than they were last year, this is not reflected in growth. “The risk of another financial crisis in Europe seems much weaker compared to last year but it could happen,” Andrew Burns, Manager of the Global Macroeconomic Trends Team at World Bank and lead author of the report, told The FINANCIAL. “Georgia is doing relatively well compared to other developing countries. Its growth this year is estimated to be six percent which is almost twice more than the whole region. That is a very positive story. The issue now is to keep up such development.”
“You can keep markets calm for one or two years, but if this is not backed up with real growth you could get another round of financial risks coming in,” he added.
Q. As you said, Georgia is developing quite well. How can the country maintain this trend?
A. The environment is quite difficult for developing countries generally. But our forecast for Georgia and other countries in the region is very positive. We predict a little bit stronger growth for the next year. Of course, growth depends on global development and what happens globally and in the eurozone, but on the other hand, much is dependent on the domestic environment. I’d advise Georgia to focus on the supply side. We emphasize that developing countries need to focus on the development of education and other things that pay back in a longer period but are essential for sustainable growth. Georgia needs to avoid quick fixes. That can only give the country a short-term boost.
GDP growth for Georgia is forecast to be 5.1 percent in 2013, 5.4 percent in 2014, and 5.6 percent in 2015.
Q. In your opinion, which countries will experience the most difficulties in 2013?
A. Every country is having difficulties of some sort this year. It is pretty clear that countries in Europe including Greece, Spain, and Portugal are continuing to struggle. Growth there will be very slow with many negative sides. We predict overall improvement of the situation in the eurozone but still growth will be very negative.
Q. Could you tell us in detail how the situation will develop in the eurozone this year?
A. Four years after the onset of the global financial crisis, the world economy continues to struggle. Developing economies are still the main driver of global growth, but their output has slowed. To regain pre-crisis growth rates, developing countries must once again emphasize internal productivity-enhancing policies. While headwinds from restructuring and fiscal consolidation will persist in high-income countries, these should become less intense allowing for a slow acceleration in growth over the next several years. Still the real-side recovery is weak and business-sector confidence is low.
Among high-income countries, investment and industrial activity in the United States was unusually weak during Q3 despite strength in housing and consumer demand - seemingly due to uncertainty over the stance of fiscal policy in the run up to November’s elections and the end-of-2012 fiscal cliff. If no credible medium-term plan for fiscal consolidation is found soon and debt-ceiling legislation is unchanged or only short-term extensions provided for, the economy could be subjected to a series of mini-crises, which could have potentially strong negative consequences for confidence, and even the credit rating of the US.
In Japan, the economy appears to be contracting - in part because of political tension with China over the sovereignty of islands in the region and the expiration of automobile purchase incentives. Activity in Europe ceased to contract at alarming rates in Q3, but the economy appears to have weakened again in Q4 - perhaps reflecting weak demand for capital goods from the United States and Japan.
Overall, the global economic environment remains fragile and prone to further disappointment, although the balance of risks is now less skewed to the downside than it has been in recent years. Global growth is expected to come in at a relatively weak 2.3 percent and 2.4 percent in 2012 and 2013, respectively, and gradually strengthen to 3.1 percent and 3.3 percent in 2014 and 2015.
Improved financial conditions, a relaxation of monetary policy and somewhat stronger high income country growth is projected to gradually raise developing-country growth to 5.5 percent in 2013, 5.7 percent in 2014 and 5.8 percent in 2015 - roughly in line with these countries’ underlying potential.
For high-income countries, fiscal consolidation, high unemployment and very weak consumer and business confidence will continue to weigh on activity in 2013, when GDP is projected once again to expand a mediocre 1.3 percent. Growth should, however, begin firming during the course of 2013, and expand by 2 percent in 2014 and 2.3 percent in 2015. In the euro area, growth is now projected to only return to positive territory in 2014, with GDP expected to contract by 0.1 percent in 2013, before edging up to 0.9 percent in 2014 and 1.4 percent in 2015.
In what is likely to remain a difficult external environment, characterized by slow and potentially volatile high-income country growth over the next several years, strong growth in developing countries is not guaranteed. To grow rapidly, developing countries will need to maintain the reform momentum that underpinned the acceleration of growth during the 1990s and 2000s. In the absence of additional efforts to raise productivity through structural reforms, investment in human capital, and improved governance and investment conditions, developing country growth may well slow.
The longer-term structural reform agenda should also include efforts to improve food security, especially in the more vulnerable of developing economies. This would involve increasing local productivity, improving local storage and transportation infrastructure, to reduce spoilage and enable improved access to foreign markets, both in good times and bad.
Remittances are an important source of both foreign currency and domestic incomes for several countries in the developing Europe and Central Asia region. They represent more than 20 percent of GDP in the Kyrgyz Republic and Moldova and about 45 percent in Tajikistan. Ongoing economic problems in high income European countries have led to a jump in unemployment rates skewed against migrant workers, with migrant unemployment rising faster than native-born unemployment in France, Greece, Italy and Spain causing some migrants from the European Union with free mobility such as Romania to return home. Overall, remittance inflows have declined significantly in Serbia, Albania, and Romania. In contrast, remittance flows from Russia, which account for 30 percent of the inflows to the region, benefited from high oil prices. As a result, total inflows to Armenia, Georgia, the Kyrgyz Republic, Moldova and Tajikistan are estimated to have grown in 2012. Flows are expected to reach USD 58 billion by 2015.
Q. What is your forecast in terms of inflation in 2013 in Georgia and globally?
A. Moderate inflation rates or rates within the central bank targets in Georgia with countries including China, Indonesia, Chile, Colombia, Armenia, Kenya, Mozambique, Uganda and Morocco provide some space for policy easing through policy rate and reserve requirement cuts and liquidity injections to support growth if external shocks materialize. In spite of recent downtick in food and fuel prices, inflation remains high in India and close or above the targeted rates in Brazil, Mexico, Russia and Turkey in the context of weakening growth. This implies less policy space to boost domestic demand to support growth if external conditions were to deteriorate. Space for countercyclical policies is further limited by high fiscal deficit in India.