Coping with policy normalization in high-income countries, January 2014

“The report describes a global economy that is at a turning point. For the first time in five years, there are indications that a self-sustaining recovery has begun among high-income countries – suggesting  that they may now join developing countries as a second engine of growth in the global economy.  The stronger growth in high-income countries reflects progress in both private- and public-sector healing in the wake of the financial crisis. In particular, the drag from fiscal consolidation and policy uncertainty is expected to ease sharply in the United States and in high-income Europe. The stronger growth in rich countries is expected to boost demand for the exports of developing countries and contribute to a modest acceleration in their growth. Overall, global trade growth which has been particularly weak is expected to strengthen over next few years reaching about 5.1 percent by 2016. The counterpart to the strengthening and normalization of output in high-income countries will be a normalization of policy – including a gradual withdrawal of quantitative easing policies. Despite the turmoil that was associated with the speculation about the beginning of the taper during the spring and summer of 2013, the impact thus far of the actual announcement and initial implementation of the taper has been very smooth. The Global Economic Prospects describes a baseline scenario where this gradual process is assumed to continue, resulting in a modest reduction in capital flows to developing countries from 4.6 percent of their GDP in 2013 to around 4.0 percent in 2016. Whatever drag this implies for developing country growth is more than offset by the additional export demand due to stronger high-income country growth.”