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Economy & Trade

World Bank Slightly Downgrades Global Economic Prospects for 2016

Workers stitch Hanes tee-shirts at a factory in the CODEVI free trade zone in Ouanaminthe, Haiti. Credit: Jude Stanley Roy/IPS

UNITED NATIONS, Jun 7 2016 (IPS) - Global economic growth prospects for 2016 have been downgraded to 2.4 percent, in contrast to the initial 2.9 percent rate expected in January 2016, according to a World Bank report released here Wednesday.

Slowed growth in advanced economies, along with protracted lower commodity prices, weak global trade and reduced capital flows have contributed to flat progress for the global economy, according to the annual Global Economic Prospects report.

Speaking at the UN Headquarters, Ayhan Kose, World Bank Director of the Development Economic Prospects Group, said:

“(Commodity-exporting) emerging markets and developing economies account for about half of this downward forecast revision,” as they have struggled to adapt to lower prices for oil and other key commodities, along with a challenging external environment that make it hard for these economies to generate growth.

Growth disappointment for emerging and developing countries has extended in 2016, with an aggregate growth rate projected at 3.5 percent, just above the post-crisis low reached in 2015, remarked Kose.

However, the report highlights a distinct divergence between commodity-exporting and commodity-importing emerging markets and developing economies.

On the one hand, commodity-exporting emerging markets are meant to grow only by 0.4 percent – substantially below the 1.6 percent rate forecast in January 2016 – remarked Kose.

On the other, commodity-importing emerging markets are projected to grow by 5.8 percent in 2016, as they benefit from lower commodity prices and the modest recovery of the advanced economies – which are projected to grow by 1.7 percent this year.

World Bank Chief Economist and Senior Vice President, Kaushik Basu said:

“As advanced economies struggle to gain traction, most economies in South and East Asia are growing solidly, as are commodity-importing emerging economies around the world.”

Among the major emerging market economies, data from the World Bank forecast China to reach a 6.7 percent rate, a slight decline compared to the 6.9 percent growth of last year.

India’s growth is projected to stay stable at 7.6 percent, followed by South Africa’s 0.6 percent rate. Brazil and Russia will stay in deeper recessions than forecast in January 2016.

Nevertheless, there are many other risks that the global economy is facing, highlighted Kose.

In addition to a slowed recovery in advanced economies, continued lower commodity prices and reduced investments, there are a sharp economic deceleration in major emerging economies, geopolitical risks, and limited fiscal and monetary policy, which are also affecting global prosperity.

“Eroding confidence in policy effectiveness could also set back global growth and trigger financial market turbulence, with significant consequences for emerging and developing economies. (Also) rising private sector indebtedness has become a significant source of vulnerability in some emerging and developing countries,” added the World Bank Director of the Development Economic Prospect Group.

In many emerging market economies, Kose told IPS, space for fiscal policy remain quite limited, especially in those commodity-exporting markets, where fiscal revenues have declined.

“In commodity-importing emerging and developing economies, even though lower commodity prices have reduced fiscal and external vulnerability and inflation, scope for expanding fiscal policy stay limited, as it requires a careful balance between expenditures and revenues contributing to economic activity”, he reiterated.

In terms of monetary policies, the divergence between commodity-exporters and importers persist.

Commodity-exporting markets, which are affected by inflation, are pushed to adopt contractionary monetary policies to increase interest rates to stabilise prices and the exchange rate. Whereas, some commodity-importing markets were able to reduce policy interest rates to support economic growth.

China, for instance – said Kose – is the largest emerging market economy which has the potential to generate significant spillovers to other emerging market economies, especially commodity-exporting market. Despite the country’s current economic slowdown, the government is steering the economy in order to avoid major economic shocks.

“China has the the necessary fiscal and monetary policy room to mitigate the risks it confronts domestically, as well as externally. Chinese policy makers did the right thing to undertake certain measures, in order to stabilise (economic) activity, as we expect the slowdown to continue” said Kose.

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