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Global Economic Prospects January 2016: Regional integration and spillovers

Derek H. C. Chen's picture
A key risk to global growth in 2016 is that a number of emerging markets slow simultaneously. Following a decade of deepening integration among emerging markets and developing countries, weakness in a few major emerging markets could spread to set back activity across the emerging market and developing country world. The January 2016 Global Economic Prospects report examines regional integration and the possibility of spillovers from growth shocks at the global and regional level.

East Asia and the Pacific. Countries in the region are deeply integrated with the global economy and with each other. China has become the largest trading partner and source of foreign direct investment for countries of the region, and Japan is also an important source of investment for many countries. A growth slowdown in China—for example, a 1 percentage point growth decline—could result in sizeable spillovers—0.3-1.2 percentage point growth declines over two years—to a number of countries in the region. In contrast, a slowdown in Japan would primarily, and to a lesser degree than a slowdown in China, affect a few countries in the region. Slowdowns in major advanced economies outside the region could also have sizeable spillovers, especially to some of the most open economies in the region.

Europe and Central Asia. The region is highly open to trade and financial flows and as such is vulnerable to spillovers from advanced economies and emerging markets. In the region’s eastern part, Russia is a prominent source of within-region trade and remittance flows. A growth slowdown in Russia could set back growth in the Caucasus, Southeastern Europe, and Central Asia by 0.3-1.2 percentage point. In contrast, ripple effects from a deceleration in Turkey, the second largest emerging market economy in the region, would be limited to a few neighboring countries.  The presence of several large commodity exporting economies in the region makes it vulnerable to commodity price fluctuations.

Latin America and the Caribbean: Despite a large presence of foreign investment, the region is less open than other emerging and developing regions to global trade and finance. Despite numerous regional trade agreements, interconnectedness is limited. Spillovers from growth slowdowns in Brazil would be limited mostly to its South American neighbors, amounting to 0.2-0.6 percentage point growth slowdowns in Argentina, Ecuador, Paraguay, and Peru two years following a 1 percentage point growth decline in Brazil.

Middle East and North Africa. Most of the external trade and financial ties of countries in the region are with countries outside the region. Linkages within the region are modest. As a result, within-region spillovers from the largest developing countries in the region – the Arab Republic of Egypt or Iran – are modest. Ripple effects from a growth slowdown from a large neighboring developing economy – Turkey – would be modest as well. However, spillovers from major advanced countries are sizeable. Spillover effects from countries of the Gulf Cooperation Council could be also be sizeable.
South Asia. Integration with the global economy is low and connections within the region are limited. Even though this has reduced exposure to global shocks, poor business environments and policies that have held back competitiveness limit the potential for South Asia to fully benefit from strengthening demand in the United States and the Euro Area.

Sub-Saharan Africa. Regional integration has expanded over the past decade. Though still low, intra-regional trade makes up a growing share of the region’s trade. Financing flows across borders in Sub-Saharan Africa have also increased. However, any growth shocks to Nigeria or South Africa, the region’s largest economies, would have negligible effects on other countries in Sub-Saharan Africa. In contrast, a 1 percentage point decline in growth in the rest of the world could reduce growth in Sub-Saharan Africa by about 2 percentage points, on average.

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