According to the recently published World Economic Outlook April 2016 (WEO), the “global recovery continues, but at an ever-slowing and increasingly fragile pace”. In recent months there has been renewed global market volatility, slowdown in developed economies, continuing headwinds for emerging market economies and lower-income countries.
The Ritesh Anand Column
Commodity exporters remain especially vulnerable as global growth falters. This time last year, I wrote about the implications of slowing global growth for Africa. Zimbabwe remains especially vulnerable given its dependence on commodities and agriculture.
According to the report, “the baseline projection for global growth in 2016 is a modest 3,2%, broadly in line with last year and a 0,2 percentage point downward revision relative to the January 2016 WEO update. The recovery is projected to strengthen in 2017 and beyond, driven primarily by emerging market and developing economies, as conditions in stressed economies start gradually to normalise. Uncertainty has increased, however, and risks of weaker growth scenarios are becoming more tangible. The fragile conjuncture increases the urgency of a broad-based policy response to raise growth and manage vulnerabilities”.
What are the risks? The primary economic risk is a return of financial turmoil itself, impairing confidence and demand in a self-confirming negative feedback loop. Despite the recent recovery in asset prices, financial conditions in the United States, Europe and Japan have been tightening since mid-2014. The situation is a lot worse in emerging and low-income countries.
Increased net capital outflows from emerging markets could lead to further depreciation of their currencies, eventually triggering adverse balance sheet effects. As illustrated in the chart, net capital flows to emerging market economies as a whole fell markedly in 2015. The slowdown in fact began soon after 2010 and has affected all regions regardless of their sizes: it was not restricted to China, Russia, or the Brics (Brazil, Russia, India, China and South Africa) alone. Such a prolonged slowdown is not unprecedented: the 2010–2015 slowdown was broadly comparable in magnitude and length to major slowdowns in the 1980s and late 1990s.
Unlike in the past, the 2010-2015 slowdown was not associated with the high incidence of external crises. This time, both declining gross inflows and stronger gross outflows (relative to GDP) have contributed to the net slowdown in 2010–2015, driven primarily by diminished growth prospects Structural and domestic policy factors strongly determine the extent to which different countries were affected.
One major source of resilience for most emerging markets during the 2010–2015 slowdown was greater international financial integration in the form of higher foreign assets (including international reserves) and more external debt in domestic currency, reducing the effects of lower capital flows on country risk.
This is not true for many African countries, including Zambia, Ghana, Kenya, Angola and Nigeria that issued euro bonds over the last five years. Over US$18 billion has been raised in sovereign debt by African countries over the last five years. Repaying this debt will become increasingly more difficult as growth falters.
Zimbabwe suffers from a significant debt overhang exceeding US$9 billion making it virtually impossible to raise any fresh debt until it has settled its outstanding arrears with international financial institutions (IFIs). While government is confident that it will settle the arrears this year, I remain somewhat sceptical.
China, now the world’s largest economy on a purchasing-power-parity basis, is navigating a momentous but complex transition toward more sustainable growth based on consumption and services. Ultimately, that process will benefit both China and the world. Given China’s important role in global trade, however, bumps along the way could have substantial spillover effects, especially on emerging market and developing economies.
Another threat is that persistent slow growth has devastating effects that themselves reduce potential output and with it, consumption and investment. Consecutive downgrades of future economic prospects carry the risk of a world economy that reaches stalling speed and falls into widespread secular stagnation.
Adding to this list are several pressures with origins in political, geopolitical or natural developments. Fear of terrorism also plays a role. The result could be a turn toward more nationalistic policies, including protectionist ones.
Emerging market and especially low-income commodity exporters (including Zimbabwe) will struggle to restore growth until they have diversified their export bases, a process that will take time. While in principle terms-of-trade losses by commodity exporters should translate into symmetric gains for importers, in practice the negative effects on producers seem to have dominated so far.
The situation is not without precedent. In his classic 1973 book The World in Depression: 1929–1939, Charles P Kindleberger noted a similar dynamic in the commodity price deflation of the 1920s: “The view taken here is that symmetry may obtain in the scholar’s study, but that it is hard to find in the real world … the consuming countries might ultimately have realised that their real incomes had increased and permitted them to expand spending. Meanwhile, the primary producers cannot wait.” Commodity importers with policy interest rates currently near zero will face an additional offset to the positive income effect of lower commodity prices.
A diminished economic outlook burdened with larger downside risks raises the premium on intensifying and extending sound policies that safeguard near-term growth and boost potential output. Monetary policy must remain accommodative, but cannot bear the entire burden of responding to current challenges; it must be supported by other policies that directly boost supply and demand. The current diminished outlook and associated downside possibilities require swift and decisive action. National policy makers need to recognise the risks they jointly face and act together to avert another economic and financial crisis. The result would be stronger growth as well as insurance against a derailed recovery. Africa remains especially vulnerable given its dependence on commodities.