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Global economic prospects: sluggish emerging market activity to weigh on global growth in 2016

Carlos Arteta's picture

Global economic growth is projected to pick up modestly in 2016 to 2.9 percent after a disappointing 2015, the January 2016 Global Economic Prospects report says.  Growth slowed last year to a 2.4 percent rate, 0.4 percentage points below earlier projections, amid falling commodity prices and weak flows of trade and capital.

Growth is expected to edge up this year as advanced economies grow more solidly, commodity prices stabilize, China continues to gradually rebalance its economy and global financial conditions remain benign despite rising United States interest rates.  Even so, the forecast is lower than projections of six months ago, principally due to the simultaneous slowdown in major emerging market economies.
 

The picture of a modest acceleration is subject to a number of downside risks. These include the possibility of a disorderly growth slowdown in a number of major emerging markets and a tumultuous financial market reaction to higher borrowing costs. A sustained decline in the largest emerging market economies would cause important ripple effects, hurting growth in other emerging and developing economies. In addition, a further substantial leg down in commodity prices could set back growth in commodity exporters. Political uncertainty and an escalation of conflict in parts of the world could also deal blows to global growth.
 
There are some bright spots in the global economy. India grew at a robust 7.3 percent and is expected to accelerate to 7.8 percent in 2016. Commodity-importing countries in East Asia and South Asia are expected to register solid growth, helped by cheap oil. A lifting of economic sanctions on the Islamic Republic of Iran would push up regional growth in the Middle East.
 
However, developing-country growth slowed to a post-crisis low of a 4.3 percent pace in 2015, and the widespread weakness across emerging and developing economies is a source of concern for the global economy. The simultaneous growth deceleration in the major emerging markets, which have long been mainstays of the global economy and weathered the 2007-2008 financial crisis well, is a particular worry. Growth in China is projected to slow to 6.7 percent in 2016 and South Africa is expected to grow at a tepid 1. 4 percent. Brazil and Russia are forecast to continue to contract.
 
The loss of growth momentum further poses a threat to hard-won achievements in poverty reduction. More than 40 percent of the world’s poor live in the developing countries where growth slowed last year.
 
In the current environment, developing countries can brace for possible shocks by building resilience to financial market turmoil and risks to growth.

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