World Economic Outlook, April 2017: Gaining Momentum?

World Economic Outlook, April 2017

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Global economic activity is picking up with a cyclical recovery in investment, manufacturing, and trade.
World growth projections:
- 2016: 3.1 percent
- 2017: 3.5 percent
- 2018: 3.6 percent
Upside developments cited:
- Stronger activity
- Expectations of more robust global demand
- Reduced deflationary pressures
- Optimistic financial markets
Downside and structural challenges emphasized:
- Structural impediments to a stronger recovery (e.g., low productivity growth, high income inequality)
- Balance of risks remains tilted to the downside, especially over the medium term
- Rising pressures for inward-looking policies in advanced economies that could threaten global economic integration and the cooperative global economic order

Recent developments:
- Buoyant financial markets
- Cyclical recovery in manufacturing and trade
Forecast restated:
- World growth: 3.1 percent in 2016; 3.5 percent in 2017; 3.6 percent in 2018
Risks:
- Balance of risks tilted to the downside, particularly medium-term
- Persistent structural problems could increase protectionist pressures
Policy priorities and themes:
- Economic policies needed to stave off downside risks and secure recovery
- Need for credible strategies in both advanced economies and emerging market and developing economies
- Renewed multilateral effort recommended to tackle common challenges in an integrated global economy
Notable analytical boxes and scenarios in Chapter 1:
- Scenario Box 1. Permanent U.S. Fiscal Expansions
- Box 1.1. Conflict, Growth, and Migration
- Box 1.2. Tackling Measurement Challenges of Irish Economic Activity
- Special Feature on Commodity Market Developments and Forecasts, focusing on technology and unconventional sources in the global oil market

EMDE role in the global economy:
- Now account for more than 75 percent of global growth in output and consumption
- Share is almost double that of two decades earlier
Importance of external conditions:
- Terms of trade, external demand, and external financial conditions are increasingly influential determinants of medium-term growth as EMDEs integrate globally
Catch-up prospects and fragility:
- Considerable income gaps vis-à-vis advanced economies suggest room for catch-up and relatively strong potential medium-term growth
- Catch-up growth is episodic — exhibits accelerations and reversals over time
Prospective external environment:
- The global economy may face a less supportive external environment going forward compared with long stretches of the post-2000 period
Policy and structural prescriptions to maximize growth given weaker external impulse:
- Strengthen institutional frameworks
- Protect trade integration
- Permit exchange rate flexibility
- Contain vulnerabilities from high current account deficits and external borrowing, as well as large public debt
Chapter 2 analytical structure (high-level):
- EMDE growth performance over time
- How external conditions influence growth episodes
- Role of policies and structural attributes in mediating external impacts
- Assessment of current environment implications for EMDE growth prospects

Core finding:
- A downward trend in the labor share of income since the early 1990s, with heterogeneous evolution across countries, industries, and worker skill groups
Main drivers identified:
- In advanced economies:
- Technological progress, reflected in a steep decline in the relative price of investment goods, and exposure to routine-based occupations explain about half the overall decline
- Larger negative impact on earnings of middle-skilled workers
- In emerging markets:
- Global integration forces, especially expansion of global value chains, predominantly explain labor share evolution by raising overall capital intensity in production
Analytical approach and evidence:
- Newly assembled data for a large sample of advanced and emerging market and developing economies
- Empirical decompositions, sectoral and skill-level analyses, and robustness checks
Policy implications highlighted:
- Understanding sectoral and skill heterogeneity is important for designing policies to address distributional consequences and labor-market adjustments
Supporting materials and boxes:
- Box 3.1. Technological Progress and Labor Shares: A Historical Overview
- Box 3.2. The Elasticity of Substitution between Capital and Labor: Concept and Estimation
- Box 3.3. Routine Tasks, Automation, and Economic Dislocation around the World
- Box 3.4. Adjustments to the Labor Share of Income

Source: World Economic Outlook, April 2017: Gaining Momentum?