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Emerging markets expected to slow global growth in 2016

Latin America News
07 Jan 2016, 09:35 GMT+10

WASHINGTON - Anemic recovery in emerging markets is expected to weigh on global growth in 2016, according to the World Bank which has lowered its growth forecast for the year to 2.9 percent from earlier 3.3 percent projection in June, though higher than the 2.4 percent growth recorded in 2015.

The World Bank in its bi-annual Global Economic Prospects report released Wednesday pointed out that the deteriorating picture in emerging markets is a big reason for a fifth straight year of global growth falling below 3 percent.

In 2015, the growth at 2.4 percent was slower than the 2.8 percent projected in June and less than the 2.6 percent growth recorded in 2014 due to falling commodity prices, flagging trade and capital flows, and episodes of financial volatility sapped economic activity.

Firmer growth ahead will depend on continued momentum in high income countries, the stabilization of commodity prices, and China's gradual transition towards a more consumption and services-based growth model, stated the development bank in its January report.

Growth is projected to slow further in China, while Russia and Brazil are expected to remain in recession in 2016.

The World Bank has lowered outlook for China's growth in 2016 to 6.7 percent, from 7 percent in June, and a 6.5 percent increase is estimated for next year. Brazil's economy is projected to shrink 2.5 percent this year, while Russia's will contract 0.7 percent, the lender said.

"The global economy will need to adapt to a new period of more modest growth in large emerging markets, characterized by lower commodity prices and diminished flows of trade and capital," World Bank Senior Vice President and Chief Economist Kaushik Basu said in the report.

Nervousness about the world's largest economy was evident earlier this month when markets around the globe showed great nervousness with China's manufacturing data indicating lower than expected growth leading to a 7 percent market rout.

Developing economies are forecast to expand by 4.8 percent in 2016, less than expected earlier but up from a post-crisis low of 4.3 percent in 2015. The South Asia region, led by India, is projected to be a bright spot. The recently negotiated Trans-Pacific Partnership is expected to provide a fillip to trade.

"There is greater divergence in performance among emerging economies. Compared to six months ago, risks have increased, particularly those associated with the possibility of a disorderly slowdown in a major emerging economy," said Basu.

"A combination of fiscal and central bank policies can be helpful in mitigating these risks and supporting growth."

The multilateral bank fears that a faster-than-expected slowdown in large emerging economies could have global repercussions. Risks to the outlook could include financial stress around the US Federal Reserve tightening cycle and heightened geopolitical tensions.

A slower growth in most major emerging markets is a concern for achieving the sustainable development goals of poverty reduction and shared prosperity.

Spillovers from major emerging markets will constrain growth in developing countries and pose a threat to hard-won gains in raising people out of poverty, the report warns.

"More than 40 percent of the world's poor live in the developing countries where growth slowed in 2015," said World Bank Group President Jim Yong Kim.

"Developing countries should focus on building resilience to a weaker economic environment and shielding the most vulnerable. The benefits from reforms to governance and business conditions are potentially large and could help offset the effects of slow growth in larger economies."

The World Bank has trimmed its projection for US growth to 2.7 percent this year, down from 2.8 percent in June, citing the dampening effect on exports of the surging US dollar.

Loose monetary policy should continue to sustain "fragile" recoveries in Japan and the euro area, the bank said.

"Stronger growth in advanced markets will only partially offset the risks of continued weakness in major emerging markets," said World Bank Development Economic Prospects Group Director Ayhan Kose. "In addition, the risk of financial turmoil in a new era of higher borrowing costs remains."

The report noted that the benefits to consumers and business from lower oil prices have been "surprisingly muted." However, a stabilization of prices at low levels could "release pent-up demand," causing the global economy to grow faster than expected.

Still, global risks are tilted to the downside, according to the bank

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