Global Economic Prospects: Spillovers amid Weak Growth (Jan 2016)

The World Bank recently published its Global Economic Prospects report on Jan 2016:

Global growth again fell short of expectations in 2015. Growth is projected to edge up in 2016-18 but the forecast is subject to substantial downside risks. In addition to discussing global and regional economic developments and outlook, this edition of the Global Economic Prospects also includes analysis of key challenges and opportunities currently confronting emerging and developing countries: spillovers from a slowdown in major emerging markets; the potential macroeconomic implications of the Trans-Pacific Partnership; and the links between exchange rate regimes and capital controls in emerging and developing countries. It also includes a study on vulnerabilities accumulating between commodity discovery and production in low-income countries.

Global Outlook: Disappointments, Risks, and Spillovers. Global growth again fell short of expectations in 2015, decelerating to 2.4 percent from 2.6 percent in 2014 (Chapter 1). The disappointing performance mainly reflected a continued growth deceleration in emerging and developing economies amid post-crisis lows in commodity prices, weaker capital flows and subdued global trade. Global growth is projected to edge up in the coming years, but at a slower pace than envisioned in June 2015, reaching 2.9 percent in 2016 and 3.1 percent in 2017-18. This pickup is predicated on continued gains in major high-income countries, a gradual tightening of financing conditions, a stabilization of commodity prices, and a gradual rebalancing in China. The forecast is subject to substantial downside risks, including a disorderly slowdown in major emerging market economies, financial market turmoil arising from sudden shifts in borrowing costs amid deteriorating fundamentals, lingering vulnerabilities in some countries, and heightened geopolitical tensions. Weakening growth and sharply lower commodity prices have narrowed the room for policy makers to respond, especially in commodity-exporting countries, should risks materialize.

Who Catches a Cold When Emerging Markets Sneeze? Given the size and global economic integration of the largest emerging markets— Brazil, the Russian Federation, India, China, and South Africa (BRICS)—the simultaneous slowdown underway in all but one of them could have significant spillovers to the rest of the world (Chapter 3). Specifically, a 1 percentage point decline in growth in BRICS is associated with a reduction in growth over the following two years by 0.8 percentage points in other emerging markets, 1.5 percentage points in frontier markets, and 0.4 percentage points in the global economy. Spillovers could be considerably larger if the growth slowdown in BRICS were combined with financial market turbulence.

Within-Region Spillovers. Within-region spillovers from BRICS and other major emerging markets are discussed in Boxes 2.1-2.6 of Chapter 2. Since most BRICS are the largest and most integrated economies in their respective regions, they tend to generate larger spillovers than other major emerging markets. Strong within-region trade and remittance links are reflected in sizeable spillovers in Europe and Central Asia from a growth decline in Russia, and in East Asia and Pacific from a growth decline in China (Boxes 2.1 and 2.2). In other regions, measured within-region spillovers are typically small (Boxes 2.3-2.6), partly reflecting the lesser openness of major regional emerging markets or the prevalence of integration with major advanced economies. Many emerging market and developing countries are still most susceptible to growth spillovers from major advanced markets.

Potential Macroeconomic Implications of the Trans-Pacific Partnership. On October 4, 12 Pacific Rim countries concluded negotiations on the Trans-Pacific Partnership. The first essay in Chapter 4 shows that, if ratified by all, the agreement could raise GDP in member countries by an average of 1.1 percent by 2030. It could also increase member countries’ trade by 11 percent by 2030. A common regulatory approach could buoy trade provided it is not associated with excessively restrictive requirements on rules of origin and standards. As long as regulatory reforms benefit non-members, the detrimental effects of the agreement due to trade diversion and preference erosion on non-members would be limited.

Peg and Control? The Links between Exchange Rate Regimes and Capital Account Policies. As emerging and developing countries prepare to shield themselves from risks to the global outlook, they need to consider policy responses to adjust to external shocks. Among these, some countries might rely on exchange rate flexibility as a buffer, some might aim to minimize currency fluctuations, and some might consider measures to limit capital flows as they seek to keep some degree of monetary policy control. The second essay in Chapter 4 explores how emerging markets and developing countries manage these competing pressures. The results suggest that developing countries with fixed exchange rate regimes appear to be more likely to have capital flow restrictions. This effect is particularly pronounced for lower- income countries.

From Commodity Discovery to Production: Vulnerabilities and Policies in Low-Income Countries. Major natural resource discoveries have transformed growth prospects for many low- income countries (LICs), though the sharp post- crisis downturn in commodity prices may delay development of these discoveries into production. During the pre-production period, macroeconomic vulnerabilities in these economies may rise as a result of large-scale investment needs. This heightens the importance of reducing lead times between discovery and production. The Special Focus finds that such lead times can be shortened by several years through improvements in business environments that benefit resource and non-resource sectors alike. Separately, while growth in LICs eased in 2015, it continued to be robust at about 5 percent, sustained by investment (both public and private, including in mining) and rising farm output. For 2016-17, strengthening import demand in advanced economies should help support activity in these countries.

 

The full report can be download here.

The above executive summary is quoted from Global Economic Prospects Jan 2016 report from The World Bank.

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