The World’s Economy in 2020: Cautious Optimism:

Fragile. Handle With Care”. It was on this very tentative note that the World Bank launched its latest 334-page Global Economic Prospects (GEP) Report at a briefing for members of the UK Foreign Press Association on 8th January at London’s Millbank Tower. On the positive side, it anticipates world economic growth of 2.5% this year, up from 2.4% in 2019 and that this could be even stronger if trade tensions diminish – but if, on the contrary, they escalate, this could result in sharp downturns in major economies and financial disarray in emerging & developing ones (EMDEs).

As the Report emphasises, the USA and China together account for nearly 40% of global GDP and nearly a quarter of global trade. Hence, renewed dislocation in economic ties between them would not only damage them but the rest of the world as well. On 29th December, the Guardian assessed the possibility of two alternative scenarios. The “benign view”, it declared, is that global growth will start to improve and that Donald Trump will initiate his re-election campaign by announcing a trade deal with China. However, if the financial markets conclude instead that the trade war between Washington and Beijing is going to be long and bitter, the world “could be heading for economic, financial and environmental crises”.

The Guardian’s financial editor, Larry Elliott, furthermore noted on 9th January that the World Bank is particularly alarmed about what it considers to be excessive borrowing and debt accumulation by developing economies, which historically “tends to have an unhappy ending” and that a modest improvement in global activity will also depend on a better year for countries such as Argentina, Mexico and Turkey. China’s own vulnerability to its high and rising private debt “may lead to an extended period of subdued growth in the absence of deep structural reforms”, while any imposition by the USA of tariffs on automobiles and parts imports is likely to provoke retaliation from the countries affected. They could respond by establishing their own trade barriers and hence the entire global multilateral trading system “could be put at risk”.

Meanwhile, activity in the Euro area, observes the World Bank, has “deteriorated significantly”. The German industrial sector has struggled with falling demand from Asia and disruption to car production. The uncertainty regarding Brexit has also produced adverse repercussions. Euro area growth is expected to slow to 1% this year but recover modestly to around 1.3% in 2021 /22, depending on how the Brexit process unfolds and if there is no further intensification in trade restrictions.

So what impact will all this have on Latin America? According to the World Bank, growth in the LAC (Latin American and Caribbean) region will rise from an estimated 0.8% in 2019 to 1.8% in 2020 and 2.4% in 2021. In Brazil, it will increase to 2% due to more robust investor confidence and a gradual relaxation of lending and labour market conditions but Argentina’s economy “is anticipated to shrink to a more modest 1.3% as private consumption and investment recede more gradually”. In Central America, growth is expected to stabilize at 3% thanks to the easing of credit conditions in Costa Rica and relief from setbacks to construction projects in Panama. The World Bank seems assured that Chile will recover from the social unrest of late 2019, achieving 2.5% in 2020 and 3% in 2021.

For Colombia, it envisages favourable financing conditions which will support broader domestic demand and the more rapid implementation of planned infrastructure projects. These combined factors “ will support an upsurge in growth to 3.6% in 2020 and around 3.9% in 2021”. “Focus Economics” (FE) agrees that the “robust momentum” in Colombia will be sustained this year due to “lower corporate taxes and fiscal exemptions as well as healthy private consumption underpinned by softening inflation”.

Political uncertainty ahead of the 2021 elections in Ecuador will keep it at 0.5%, whereas in Bolivia – despite prevailing social tensions, dwindling foreign exchange reserves and a difficult external environment for hydrocarbon exports – it will be poised at around 3.2%. FE forecasts that Peru’s GDP will expand to 3.2% this year as a result of improving consumer confidence, but shares the World Bank’s opinion that the outlook for Venezuela “remains gloomy”, that its economy will contract by 8.4% in 2020, though could improve by 0.7% in 2021 if a political solution emerges. Indeed, the World Bank stresses that, due to lack of data, their GEP doesn’t include growth forecasts for Venezuela, focusing instead on the potential ramifications for neighbouring countries.

The main concern for the LAC region, the World Bank points out, is a further worsening of US-China trading relations: “This risk is particularly acute for countries highly reliant on China as an export destination (Brazil, Chile, Peru and Uruguay)”, though this might be partially alleviated by the trade agreement (yet to be ratified) signed between Mercosur (Brazil, Argentina, Paraguay and Uruguay) and the European Union in June 2019. Likewise, sluggish US growth could be a hindrance for Mexico and other countries dependent on the United States.

Filed under: Politics | Posted on January 14th, 2020 by Colin D Gordon

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