New approach needed as productivity threats continue – World Bank

The World Bank has warned that the ongoing economic shocks will require nations to adopt a new approach to drive future productivity growth.

The warning came as the bank revised its forecast for economic growth for the emerging market and developing economies (EMDEs) of the Europe and Central Asia region raising the level to 2.4% for 2023.

In a briefing it said the  pickup in growth reflects improved forecasts for war-hit Ukraine and for Central Asia, as well as consumer resiliency in Türkiye and better-than-expected growth in Russia because of a surge in government spending on the military and social transfers. Excluding Russia and Ukraine, regional output is expected to grow by 3% in 2023. Nevertheless, growth remains weak relative to the long-term pre-pandemic averages. Overall, growth in half of the Europe and Central Asia countries is expected to be slower or little changed in 2023 than in 2022.

The bank said during 2024-25, growth is expected at 2.6% a year, amid a weak expansion in the European Union (EU) – the region’s largest trading partner – high inflation, tighter financial conditions, and spillovers from Russia’s invasion of Ukraine.

“Overlapping shocks from Russia’s invasion of Ukraine, a cost-of-living crisis, and climate risks are creating formidable challenges in Europe and Central Asia,” said Antonella Bassani, World Bank vice president for the Europe and Central Asia region. “A new approach will be necessary for countries to revive productivity growth, achieve better economic and social outcomes, improve resilience, and accelerate efforts to decarbonize the economy.”

She warned downside risks cloud the outlook for the EMDEs in Europe and Central Asia. High inflation may persist amid heightened volatility in global commodity markets and a surge in energy prices. Global financial markets may become more volatile and restrictive due to tightening financing conditions. Global growth for 2020-2024 is weaker than during any five-year period since 1990 and may weaken further.

“Fiscal deficits are broadly unchanged this year despite earlier plans by governments to implement fiscal consolidation after large increases in spending over the last several years due to COVID and the cost-of-living-crisis,” explained Ivailo Izvorski, World Bank chief economist for Europe and Central Asia region. “The rising cost of population aging, higher interest payments, the needed investment for climate mitigation and adaptation, and managing other overlapping crises will keep up the pressure on government budgets.”

Ukraine’s economy is likely to grow by 3.5% this year after a contraction of 29.1% in 2022, the year when Russia invaded the country, thanks to more stable electricity supply, increased government spending, ongoing donor support, a better harvest, and the rerouting of some exports through the country’s western borders.

Türkiye is set to grow by 4.2% this year, reflecting reduced policy uncertainty and resilient consumer demand. However, growth is likely to slow to an average of 3.5% in 2024 and 2025 as domestic demand cools in the face of rising interest rates and gradual fiscal consolidation. In Russia, surging government spending and resilient consumption are likely to result in growth of 1.6% in 2023, weakening to 1.3% in 2024 and 0.9% in 2025 due to capacity constraints and slowing consumer demand.

There was less positive news for economies in the Middle East and North Africa (MENA) with bank saying it expected to see sharp falls this year. The region’s gross domestic product (GDP) is forecast to plummet to 1.9% in 2023 from 6% in 2022, due to oil production cuts amidst subdued oil prices, tight global financial conditions, and high inflation.

Improvements in livelihoods is best shown by changes in per capita income. By this measure, growth across the region is forecast to decrease from 4.3% in 2022 to 0.4% in 2023. By the end of 2023, only 8 of 15 MENA economies will have returned to pre-pandemic real GDP per capita levels.

“If the region grows slowly, how will the 300 million young people who will be knocking at the door of the labour market by 2050 find jobs with dignity?” said Ferid Belhaj, World Bank vice president for the MENA region. “Without proper policy reforms, we could inadvertently worsen the enduring structural challenges faced by MENA’s labour markets as far as the eye can see. The time for reform is now.”

While the World Bank has not yet completed a full assessment of the economic impact of the recent natural disasters in Libya and Morocco, it forecasts that the macroeconomic effects could be modest as the potential disruptions are likely to be short-lived. Yet, empirical evidence on the effect of disasters in developing countries suggests a reduction in growth at the onset and an increase in indebtedness in the medium-term to finance the reconstruction. GDP growth tends to bounce back quickly after such events.

“In times of economic downturn, governments face a trade-off between more unemployment and lower real wages,” said Roberta Gatti, World Bank chief economist for the MENA region. “While neither outcome is desirable, the policy implications are clear: flexible real wages coupled with well-targeted cash transfers is the superior approach to reduce the long-term economic costs on the families in MENA borne by macroeconomic shocks.”