Activity in emerging markets (EMs) is forecast to slow for the fifth consecutive year while the recovery in advanced economies is projected to pick up slightly. EMs have been the engine of growth in the global economy in recent years growing at an average annual rate of 5.3 percent between 2010-14. They were responsible for more than 80 percent of global growth which averaged 3.6 percent a year over that period.
Citing the International Monetary Fund’s (IMF) recently published World Economic Outlook QNB noted that the Fund expects global growth to fall to 3.1 percent in 2015down from 3.4 percent in 2014. “This is the slowest expansion in the world economy since the Great Recession of2009” QNB said in its weekly ‘economic commentary’ yesterday.
However EMs appear to be at the heart of the third wave of the fallout from the global financial crisis. The first wave was the US housing and financial crisis in 2008-9. This was followed by the sovereign debt crisis in the euro area in 2011-12. And now EMs are in the midst of a crisis sparked by the prospect of US monetary policy normalisation and the rebalancing of the Chinese economy from investments and exports towards consumption and services.
EMs are facing a number of headwinds. First there are long-term structural drags on growth as the economic rebalancing in China leads to slower growth. The slowdown is impacting external demand particularly in emerging Asia where a number of economies are heavily dependent on China for exports. Weak Chinese demand has depressed prices of a number of commodities negatively impacting commodity-exporting economies which are predominantly EMs. Second there are cyclical drags on growth mainly related to high debt levels and tightening financial conditions. Expectations of higher US interest rates have led to capital flight weaker currencies and higher interest rates within EMs. Meanwhile a stronger dollar has increased the value of EM foreign-currency debt making it more burdensome to service. Finally deleveraging is leading to slower credit growth and further dragging on GDP.
Going forward the structural factors dragging on growth are likely to persist. China’s rebalancing and working through its large debt overhang will continue into the medium term. As low commodity prices are related to the strength of China’s economy these may also take time to recover. But cyclical drags on growth which are mainly financial may be less persistent. Financial markets may have already partially adjusted to higher expected US interest rates so drags from capital flight and weaker exchange rates should start easing by 2017. Therefore the IMF expects EM GDP growth to recover from 4.0 percent in 2015to 4.5 percent in 2016 and 4.9 percent in 2017.
Meanwhile advanced economies grew by 1.8 percent in 2014 a relatively slow rate but still above their potential growth which has been weakened by declining and aging population and slower productivity growth.
The IMF expects advanced economies to continue growing at an above-trend rate. Real GDP growth is expected to pick up from 1.8 percent in 2014 to 2.0 percent in 2015 and then 2.2 percent in 2016 as most of the cyclical tailwinds are projected to persist despite the expected normalisation of monetary policy in the UK and the US.
Overall the recovery in advanced economies is not strong enough to compensate for the slowdown in EMs. As a result global growth is expected to remain below its pre-crisis levels for the foreseeable future. The risks remain tilted to the downside largely concentrated in EMs and in particular China.
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