Emerging markets face strong headwinds

Growth projections for emerging market and developing economies for 2016 and 2017 are cut by 0.2 per centage point from the original World Economic Outlook report released in October, to 4.3 per cent and 4.7 per cent, respectively. 

In 2015, they were estimated to show growth of 4 per cent, the lowest since the 2008–09 financial crisis. While still accounting for over 70 per cent of global growth, the economies showed a decline in growth rate for the fifth consecutive year.

Growth projections for Asean-5 are also revised down to 4.8 per cent for 2016 and 5.1 per cent for 2017. The region's 2015 growth was estimated at 4.7 per cent.

"Growth in China is expected to slow to 6.3 per cent in 2016 and 6.0 per cent in 2017, primarily reflecting weaker investment growth as the economy continues to rebalance. India and the rest of emerging Asia are generally projected to continue growing at a robust pace, although with some countries facing strong headwinds from China’s economic rebalancing and global manufacturing weakness," the IMF said.

Global growth is projected at 3.4 per cent in 2016 and 3.6 per cent in 2017, down by 0.2 percentage points from the October projections.

The IMF noted that these revisions reflect to a substantial degree of a weaker pickup in emerging economies than was forecast in October. In terms of the country composition, the revisions are largely accounted for by Brazil; the Middle East, where prospects are hurt by lower oil prices; and the United States, where growth momentum is now expected to hold steady rather than gather further steam. Prospects for global trade growth have also been marked down by more than 0.5 percentage point for 2016 and 2017, reflecting developments in China as well as distressed economies.

Downside risks are also particularly prominent for emerging market and developing economies, include the following:

- A sharper-than-expected slowdown along China’s needed transition to more balanced growth, with more international spillovers through trade, commodity prices, and confidence, with attendant effects on global financial markets and currency valuations.

- Adverse corporate balance sheet effects and funding challenges related to potential further dollar appreciation and tighter global financing conditions as the United States exits from extraordinarily accommodative monetary policy.

- A sudden rise in global risk aversion, regardless of the trigger, leading to sharp further depreciations and possible financial strains in vulnerable emerging market economies. Indeed, in an environment of higher risk aversion and market volatility, even idiosyncratic shocks in a relatively large emerging market or developing economy could generate broader contagion effects.

- An escalation of ongoing geopolitical tensions in a number of regions affecting confidence and disrupting global trade, financial, and tourism flows.

"In emerging market and developing economies, policy priorities are varied given the diversity in conditions. Policymakers need to manage vulnerabilities and rebuild resilience against potential shocks while lifting growth and ensuring continued convergence toward advanced economy income levels," it noted.