Amid lower commodity prices, large capital outflows and increased financial market volatility, growth in developing and transition economies has slowed to its weakest pace since the global financial crisis of 2008/2009. Given the much anticipated slowdown in China and persistently weak economic performances in other large emerging economies, notably the Russian Federation and Brazil, the pivot of global growth is partially shifting again towards developed economies.
● Five headwinds for global economy
According to the report, the world economy is projected to grow by 2.9% in 2016 and 3.2% in 2017, supported by generally less restrictive fiscal and still accommodative monetary policy stances worldwide. The anticipated timing and pace of normalization of the US monetary policy stance is expected to reduce policy uncertainties and support a moderate pickup in investments and growth, while preventing excessive volatility in financial markets and ensuring an orderly adjustment in asset prices. The improvement is also predicated on the stabilization of commodity prices and no further escalation in geo-political conflicts during the forecast period.
The WESP report identifies five major headwinds for the global economy: 1. Persistent macroeconomic uncertainties; 2. low commodity prices and diminished trade flows; 3. Rising volatility in exchange rates and capital flows; 4. stagnant investment and productivity growth; and 5. continued disconnect between finance and real sector activities.
The weakness in growth is also adversely impacting labour markets in many developing and transition economies. Unemployment is on the rise, especially in South America, or remains stubbornly high, such as in South Africa. At the same time, job insecurity is often becoming more entrenched amid a shift from salaried work to self-employment. With persistent output gaps, modest wage growth and lower commodity prices, global inflation is at its lowest level since 2009. Deflation risks in developed economies have diminished, but not disappeared, particularly in Japan and the euro area.
Growth in developed economies will gain some momentum in 2016, surpassing the 2 per cent mark for the first time since 2010, the report notes. Economic growth in developing and transition economies is expected to bottom out and gradually recover, but the external environment will continue to be challenging and growth will remain well below its potential.
● Shift of growth to developed economies
While developing countries, and China in particular, have been the locomotive of global growth since the financial crisis, the pivot of global growth has shifted over the past year towards the developed economies, particularly the United States of America. Economic growth in developed economies as a whole accelerated from 1.7% 2014 to an estimated 1.9% in 2015, and growth is expected to strengthen further to 2.2% in 2016.
Average growth in developing and transition economies, by contrast, slowed in 2015 to its weakest pace since the global financial crisis. The slowdown in China and deep recessions in Brazil and the Russian Federation, in particular, have had significant regional spill-over effects, through trade, remittances and the global demand for major commodities. The economic slowdown in developing and transition economies is expected to bottom out and growth will gradually recover in the coming two years, but the external environment will continue to be challenging and growth will remain well below its potential.
Average growth in developing countries is projected to pick up from an estimated 3.8% in 2015 to 4.3% in 2016 and 4.8% in 2017. In the economies in transition, economic output contracted by 2.8% in 2015 and is forecast to expand by only 0.8% in 2016 and 1.9% in 2017. Economic activity in the least developed countries (LDCs) was also adversely impacted by lower commodity prices and, in some cases, by military conflicts, natural disasters and adverse weather conditions. Average gross domestic product (GDP) growth for this group of countries is expected to recover from 4.5% in 2015 to 5.6% growth in 2016, but achieving the Sustainable Development Goal target of at least 7% GDP growth per annum in LDCs is unlikely to be achieved in the near term.
● Build-up of debt in many emerging economies
In developed economies, central banks played a critical role in supporting growth in the post-crisis period, which led to an unprecedented level of monetary accommodation in recent years. Amid gradually improving economic conditions, the United States Federal Reserve has clearly signalled its intention to begin withdrawing monetary stimulus from the economy, after seven years of near-zero interest rates, and in fact it took the first step. Uncertainty persists regarding both the anticipated path of interest-rate increases and the reaction of global financial markets and the real economy to the move, contributing to heightened volatility in commodity, currency, bond and stock markets in recent months.
Significant levels of net capital outflows have already occurred in many developing economies in anticipation of the move, and there is a risk that these withdrawals could increase further, drying up liquidity. However, it is expected that financial market volatility will dissipate during the forecast period, with commodity prices stabilizing and policy uncertainty diminished with the onset of monetary policy normalization in the United States.
●Economic growth and financial stability
The report indicates that the challenges for policymakers around the globe are likely to intensify in the short run in view of the weaknesses in the world economy and difficult trade-offs in the areas of monetary, fiscal and exchange rate policies. The report underscores that monetary authorities would need to make concerted efforts to reduce uncertainty and financial volatility, striking a delicate balance between their economic growth and financial stability objectives. “The expected timing and pace of normalization of the US monetary policy will help reduce some policy uncertainties and provide impetus to revive investment,” Hamid Rashid, Chief of the UN’s Global Economic Monitoring Unit says on the occasion of presenting the report.
Given the massive build-up of private debt in many emerging economies, policymakers would need to fine-tune their policy mix – more active fiscal policies, macro-prudential instruments, targeted labour market policies, among others – amid volatile global financial conditions.
The report highlights that monetary policies did most of the heavy-lifting since the global crisis to support growth but the time has come for fiscal policies to play a greater role. Well-designed and targeted labour market strategies are needed to complement fiscal policies to re-invigorate productivity, employment generation and output growth.
● Environmental sustainability and poverty reduction
The report also shares some positive recent trends in environmental sustainability. Global energy-related carbon emissions experienced no growth in 2014 for the first time in 20 years, with the exception of 2009 when the global economy contracted. This suggests the possibility that the world might start to see some de-linking between economic growth and carbon emission growth.
At the same time, the report warns that the broad slowdown in economic growth in many developing economies could restrain progress in poverty reduction in the near term and derail long-term sustainable development. To avert such a scenario and stimulate inclusive growth, more effective policy coordination – at the national, regional and global level – is needed. Further progress in poverty reduction could come from policy interventions that also address inequality, such as investment in education, health and infrastructure, and stronger social safety nets.
● More policy coordination needed
Stimulating inclusive growth in the near term, and fostering long-term sustainable development, requires more effective policy coordination to ensure that the financial sector facilitates and stimulates long-term and productive investment, breaking the vicious cycle of weak aggregate demand, under-investment, low productivity and low growth performance of the global economy. Rather than relying almost exclusively on monetary policy, policymakers would need to pro-actively use fiscal policies to revive investment and growth. Well-designed and targeted labour market strategies can complement fiscal policies to re-invigorate productivity, employment generation and output growth. This will be crucial for achieving the 2030 Sustainable Development Goals.
* UN: World Economic Situation and Prospects 2016, United Nations: New York 2015 (The full report will be released in January 2016. Available at: http://www.un.org/en/development/desa/policy/wesp/index.shtml
Posted: 23 Dec 2015
Recommended citation: WDEV summary (2015) 'Global economy faces major headwinds in 2016', World Economy & Development In Brief, Issue 3-4/Jul-Dec, Luxembourg (www.wdev.eu)