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Hans Timmer January 2010. Crisis, finance and growth. The acute phase of the crisis is over, but with a muted recovery it will take several years to undo the damage - PowerPoint PPT Presentation
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Development Prospects Group
Hans Timmer
January 2010
Development Prospects GroupCrisis, finance and growth
• The acute phase of the crisis is over, but with a muted recovery it will take several years to undo the damage
• In the medium run higher capital costs will reverse the process of capital deepening, lower potential output, and slow growth
• Developing countries may overcome the medium-term impacts by strengthening their domestic financial markets
Development Prospects GroupSpreads appear to have stabilized at
about 150 basis points higher than during the boom period
Source: JP Morgan.
0
200
400
600
800
1000
1200Corporate Bonds CEMB...
Emerging market bond spreads in bps
Development Prospects GroupBank-lending was very weak most of
the yearSyndicated bank loans
Source: DataStream, World Bank, Global Economic Prospects 2010: Crisis, finance, and growth
010,00020,00030,00040,00050,00060,00070,00080,000 Private
Public corporates and Sovereign
$ billions
Development Prospects GroupPrivate capital flows are unlikely to
recover to the pre-crisis levels for some timeNet private capital flows to developing countries
Source: DataStream, World Bank, Global Economic Prospects 2010: Crisis, finance, and growth
0200400600800
100012001400
012345678910
of which LIC countriesPrivate capital flows
$ billions percent
2010
Development Prospects Group
Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09-40
-30
-20
-10
0
10
20
WorldOECDDeveloping
Rebound in industrial production growth is easing
Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth
Industrial production growth, 3m/3m, saar
Development Prospects GroupFor much of the world industrial
production has yet to recover pre-crisis levels
Industrial production, index, January 2008=100
Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth
80
85
90
95
100
105
High-incomeDeveloping excl China
Development Prospects GroupRebound in trade led by East Asia
Quarterly import volumes, seasonally adjusted, annualized percentage change
Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growthJan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09
-80
-40
0
40
80
120High incomeEast Asia & PacificDev ex China
Development Prospects GroupContinued financial-sector
restructuring, implies a weak recoveryReal GDP growth rates in percent
Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth
-4-202468
10
WorldHigh-incomeDeveloping countries
Development Prospects GroupRegional growth
-10
-5
0
5
10
15
WorldEast Asia & PacificEurope & Central AsiaLatin America & Caribbean
Development Prospects GroupDespite stronger growth, output
will remain depressed for a long timeOutput gap, percent difference between actual and potential GDP
-6
-4
-2
0
2
4
Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth
Development Prospects GroupCrisis has cut four-year growth rates by two
or more percentage points in every regionfour year, average growth rate
Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth
Japan Euro zone
Europe & Cen-
tral Asia
USA Latin Amer-ica & Car-ibbea
n
Sub-Saha-ran
Africa
Middle-East & North Africa
South Asia
East Asia & Pacific
-2
0
2
4
6
8
102004-07 2008-11
Development Prospects GroupCrisis will have serious poverty
impacts• Increase in the global count of
extremely poor of 64 million in 2010
• Possible 35-50,000 additional children in Africa may have died of malnutrition in 2009
• Unless aid is upped, program spending will have to fall even as need climbs
Development Prospects GroupBoom period conditions will be
reversed• Growth acceleration in developing
countries was due to improved fundamentals (60%) and increased global liquidity (40%)
• As a result of the crisis capital costs will rise, capital deepening will be reversed and growth of production potential will slow
Development Prospects Group
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
0123456789
Developing countries
High-income countries
The boom did not reflect unusually strong demand from high-income countries
GDP growth
Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth
Development Prospects GroupSince the early 2000s, credit
expansion has grown more than twice as fast as nominal GDP
Source: Bank of International Settlements, World Bankk
1990
0001991
0001992
0001993
0001994
0001995
0001996
0001997
0001998
0001999
0002000
0002001
0002002
0002003
0002004
0002005
0002006
0002007
0002008
0100200300400500600700
Global Banking As-sets
World nominal GDP
Index, June 1990=100
Development Prospects GroupLiquid capital markets prompted
surge in developing country finance and investmentChange in selected financial variables (2000-07)
Cost of capital (basis points) -400
(% of GDP)Capital inflows 5.0Stock market capitalization 78.6Private credit by deposits money banks
5.5
Investment 5.5Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth
Development Prospects GroupDeveloping country potential output
growth was boosted by low borrowing costs
2
4
6
8Potential outputwithout capital deepening
Percent growth in potential output
Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth
Development Prospects GroupImpact on potential output of a return to
normal pricing of risk and higher base rates
Transition impact on growth of potential
Long-term impact on level of potential output
Base rates at boom-period levels, spreads at October 2009 levels -0.2 -3.4Base rates at boom-period levels, spreads at “normal” levels
-0.4 -5.2
Base rates at 100 basis points higher than boom-period levels, spreads at October 2009 levels
-0.7 -8.0
Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth
Development Prospects GroupHigh costs in domestic banking
sectors, because of poor regulation and a lack of competition
Net int
erest
rate m
argin
Reven
ues t
o asse
ts
Opeatr
ing co
sts/Asse
ts
Non-in
terest
expe
nses/
assets
Profit
margin
01234
Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth
Index, high-income countries = 1
Development Prospects GroupImpact of improved fundamentals on long-term
growth prospects may counteract impact of crisisGrowth of potential output; deviation from baseline; in
percentage points
2009-15 2016-50
-0.5-0.4-0.3-0.2-0.1
00.10.20.30.40.5 Post-crisis Improving fundamentals
Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth
Development Prospects GroupConcluding remarks
• Recovery too weak to undo damage done in 2009
• Going forward process of capital deepening will be reversed
• There remains enormous scope for policy to help improve performance
Development Prospects Group
For more information visit:
www.worldbank.org/gep2010
www.worldbank.org/globaloutlook
http://blogs.worldbank.org/prospects
