The ongoing conflict in the Middle East has created a sense of uncertainty regarding growth forecasts in the region. However, according to the latest Global Economic Prospects report from the World Bank Group (WBG), assuming the conflict does not escalate further, it is expected that the Middle East and North Africa (MENA) region will experience a pickup in growth, reaching 3.5 percent in both 2024 and 2025. These forecasts have been revised upward compared to previous expectations in June, reflecting stronger-than-anticipated growth among oil exporters, supported by a rebound in oil activity.
Specifically, growth in the Gulf Cooperation Council (GCC) countries is projected to rise to 3.6 percent in 2024 and further to 3.8 percent in 2025.
According to the paper, the World Bank has projected that the United Arab Emirates (UAE) will experience real GDP growth of 3.4 percent in 2023. This growth is expected to continue, with an increase to 3.7 percent in 2024 and further to 3.8 percent in 2025.
Saudi Arabia, in particular, is expected to see a rebound in growth due to an expansion in the country’s oil output and exports, despite the extension of voluntary oil production cuts into the current year. Among other oil exporters, the relaxation of production cuts in early 2024 is anticipated to contribute to faster growth in Algeria and Iraq, driven by an increase in oil production.
Furthermore, Qatar’s economy is expected to grow by 2.5 percent in the current year and further to 3.1 percent in the next year. Oman’s economy is estimated to grow by 2.7 percent in 2024 and 2.9 percent in 2025.
For oil-importing countries, growth is expected to slightly increase to 3.2 percent in the current year and further to 3.7 percent in 2025. Some countries, such as Djibouti, Morocco, and Tunisia, are likely to experience rising growth. However, countries in closer proximity to the conflict are expected to be more adversely affected. In Egypt, the conflict is likely to worsen the existing inflation problem, hinder private sector activity, and intensify pressures on external accounts due to reduced tourism revenues and remittances. Similarly, the tourism sector in Jordan will be adversely affected by the conflict.
The economic outlook for the West Bank and Gaza remains highly uncertain, with a projected contraction of 6 percent in 2024 following a 3.7 percent contraction in 2023. The massive destruction of fixed assets in Gaza will significantly impact economic activity. Additionally, the ongoing conflict will worsen the already challenging economic conditions in the West Bank. However, if the conflict situation de-escalates, the reconstruction efforts are expected to contribute to a rebound in growth, reaching 5.4 percent in 2025.
Deceleration of global growth
According to the paper, the global economy is on track to have the slowest half-decade of GDP growth in 30 years by the end of 2024, as the world approaches the midpoint of a transformative decade for development. While the risk of a global recession has diminished compared to a year ago, thanks to the strength of the U.S. economy, increasing geopolitical tensions pose new short-term challenges for the global economy, the report said. Additionally, the medium-term prospects have worsened for many developing economies due to slowing growth in major economies, sluggish global trade, and extremely tight financial conditions. Global trade growth in 2024 is projected to be only half of the average growth rate in the decade prior to the pandemic.
Furthermore, developing economies, especially those with poor credit ratings, are likely to face high borrowing costs as global interest rates remain at their highest levels in four decades when adjusted for inflation.
Read more: The global economy in 2024: Déjà vu or breakthrough?
The paper forecasts that global growth will continue to decelerate for the third consecutive year, dropping from 2.6 percent in the previous year to 2.4 percent in 2024. This represents a decline of nearly three-quarters of a percentage point below the average growth rate of the 2010s. Developing economies are expected to grow by only 3.9 percent, which is more than one percentage point below the average growth rate of the previous decade. Low-income countries, following a disappointing performance last year, are projected to achieve a growth rate of 5.5 percent, which is weaker than previously anticipated.
By the end of 2024, approximately one out of every four developing countries and around 40 percent of low-income countries will still have a lower standard of living than they did before the onset of the COVID-19 pandemic in 2019. In advanced economies, growth is also expected to decelerate, slowing to 1.2 percent this year from 1.5 percent in 2023.
Clear way forward
“Without a major course correction, the 2020s will go down as a decade of wasted opportunity,” said Indermit Gill, the World Bank Group’s chief economist and Senior vice president. “Near-term growth will remain weak, leaving many developing countries—especially the poorest—stuck in a trap: with paralyzing levels of debt and tenuous access to food for nearly one out of every three people. That would obstruct progress on many global priorities. Opportunities still exist to turn the tide. This report offers a clear way forward: it spells out the transformation that can be achieved if governments act now to accelerate investment and strengthen fiscal policy frameworks.”
Need for increased investment
To tackle climate change and achieve other key global development goals by 2030, developing countries will need to deliver a formidable increase in investment—about $2.4 trillion per year. Without a comprehensive policy package, prospects for such an increase are not bright. Per capita investment growth in developing economies between 2023 and 2024 is expected to average only 3.7 percent, just over half the rate of the previous two decades.
The report offers the first global analysis of what it will take to generate a sustained investment boom, drawing from the experience of 35 advanced economies and 69 developing economies over the past 70 years. It finds that developing economies often reap an economic windfall when they accelerate per capita investment growth to at least 4 percent and sustain it for six years or more: the pace of convergence with advanced-economy income levels speeds up, the poverty rate declines more swiftly, and productivity growth quadruples. Other benefits also materialize during these booms: among other things, inflation falls, fiscal and external positions improve, and people’s access to the internet expands rapidly.
Transformative power of investment booms
“Investment booms have the potential to transform developing economies and help them speed up the energy transition and achieve a wide variety of development objectives,” said Ayhan Kose, World Bank’s deputy chief economist and director of the Prospects Group. “To spark such booms, developing economies need to implement comprehensive policy packages to improve fiscal and monetary frameworks, expand cross-border trade and financial flows, improve the investment climate, and strengthen the quality of institutions. That is hard work, but many developing economies have been able to do it before. Doing it again will help mitigate the projected slowdown in potential growth in the rest of this decade.”
Challenges for developing countries
The latest Global Economic Prospects report also highlights the necessary steps for two-thirds of developing countries, particularly commodity exporters, to avoid the detrimental boom-and-bust cycles. The report reveals that governments in these countries often implement fiscal policies that exacerbate these cycles. For instance, when commodity prices increase and stimulate 1 percentage point of growth, governments tend to increase spending in a manner that further boosts growth by an additional 0.2 percentage point. In general, during prosperous periods, fiscal policies tend to overstimulate the economy, while during downturns, they worsen the economic slump. This phenomenon, known as “procyclicality,” is 30 percent more pronounced in commodity-exporting developing economies compared to other developing economies. Moreover, fiscal policies in these economies tend to be 40 percent more volatile than in other developing economies.
Improving per capita GDP growth
The instability resulting from higher procyclicality and fiscal policy volatility has a chronic negative impact on the growth prospects of commodity-exporting developing economies. However, this drag can be mitigated by implementing a fiscal framework that promotes disciplined government spending, adopting flexible exchange-rate regimes, and avoiding restrictions on the movement of international capital. On average, these policy measures could help commodity exporters in developing economies increase their per capita GDP growth by up to 1 percentage point every four or five years. Additionally, countries can derive benefits by establishing sovereign-wealth funds and other rainy-day funds that can be swiftly deployed during emergencies.
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