Emerging markets: Third wave of the global financial crisis

JEDDAH: Global growth is expected to remain below its pre-crisis (2008-2009) levels for the foreseeable future. The risks remain tilted to the downside, largely concentrated in Emerging Markets and, in particular, China, the QNB Group says in its latest economic commentary.
In its recently published World Economic Outlook, the International Monetary Fund (IMF) expects global growth to fall to 3.1 percent in 2015, down from 3.4 percent in 2014. This is the slowest expansion in the world economy since the Great Recession of 2009.
Activity in emerging markets (EMs) is forecast to slow for the fifth consecutive year, while the recovery in advanced economies is projected to pick up slightly. EMs have been the engine of growth in the global economy in recent years, growing at an average annual rate of 5.3 percent between 2010-14, said the QNB report.
They were responsible for more than 80 percent of global growth, which averaged 3.6 percent a year over that period.
However, EMs appear to be at the heart of the third wave of the fallout from the global financial crisis.
The first wave was the US housing and financial crisis in 2008-9.
This was followed by the sovereign debt crisis in the Euro Area in 2011-12. And now, EMs are in the midst of a crisis sparked by the prospect of US monetary policy normalization and the rebalancing of the Chinese economy from investments and exports toward consumption and services.
EMs are facing a number of headwinds. First, there are long-term structural drags on growth as the economic rebalancing in China leads to slower growth.
The slowdown is impacting external demand, particularly in emerging Asia where a number of economies are heavily dependent on China for exports.
Weak Chinese demand has depressed prices of a number of commodities, negatively impacting commodity-exporting economies, which are predominantly EMs.
Second, there are cyclical drags on growth, mainly related to high debt levels and tightening financial conditions.
Expectations of higher US interest rates have led to capital flight, weaker currencies and higher interest rates within EMs. Meanwhile, a stronger dollar has increased the value of EM foreign-currency debt, making it more burdensome to service. Finally, deleveraging is leading to slower credit growth and further dragging on GDP.
Going forward, the structural factors dragging on growth are likely to persist.
China’s rebalancing and working through its large debt overhang will continue into the medium term.
As low commodity prices are related to the strength of China’s economy, these may also take time to recover.
But cyclical drags on growth, which are mainly financial, may be less persistent.
Financial markets may have already partially adjusted to higher expected US interest rates, so drags from capital flight and weaker exchange rates should start easing by 2017.
Therefore, the IMF expects EM GDP growth to recover from 4.0 percent in 2015 to 4.5 percent in 2016 and 4.9 percent in 2017.
Meanwhile, advanced economies grew by 1.8 percent in 2014, a relatively slow rate but still above their potential growth, which has been weakened by declining and aging population and slower productivity growth.
Favourable cyclical factors have contributed to above-trend growth.
These include: fading fiscal drag; lower energy prices which have boosted household disposable income given that most of these countries are net energy importers; unprecedentedly easy monetary policy; and positive wealth effects from the recovery in the housing market in the US and the stock market in Japan.
Some regions, such as the Euro Area and Japan, have also benefited from a sharp depreciation in their currencies, which has helped boost their exports. Since May 2014, the euro and the yen have depreciated by 18.5 percent and 17.0 percent against the US dollar, respectively. Overall, these favorable cyclical dynamics led to falling unemployment rates in advanced economies.
Going forward, the IMF expects advanced economies to continue growing at an above-trend rate.
Real GDP growth is expected to pick up from 1.8 percent in 2014 to 2.0 percent in 2015 and then 2.2 percent in 2016, as most of the cyclical tailwinds are projected to persist despite the expected normalization of monetary policy in the UK and the US.
Overall, the recovery in advanced economies is not strong enough to compensate for the slowdown in EMs.
As a result, global growth is expected to remain below its pre-crisis levels for the foreseeable future. The risks remain tilted to the downside, largely concentrated in EMs and, in particular, China.