The Economy

World Bank Warns ‘Perfect Storm’ May Be Brewing

The Bank's sobering assessment for 2016 nevertheless calls for only a modest growth slowdown in China.
Matthew HellerJanuary 8, 2016

The current slowdown in four of the five largest emerging economies could combine with turmoil in the financial markets to create a “perfect storm” for the global economy, the World Bank has warned.

Launching its annual Global Economic Prospects report, the bank said growth had slowed to 2.4% in 2015, from 2.6% in 2014, but a stronger performance in developed countries should lead to 2.9% growth this year.

That pickup in growth, however, could be in jeopardy because of a synchronous slowdown in the economies of Brazil, Russia, South Africa, and China, which, with India, form the so-called Brics economies, the report said.

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“Downside risks dominate and have become increasingly centered on emerging and developing countries,” it said.

Noting the U.S. Federal Reserve’s decision last month to hike interest rates for the first time since the financial crisis, the bank said this tightening cycle would likely have “only a modest impact on emerging and frontier markets.”

But in the event that growth in the Brics economies fell one percentage point short of expectations, the bank said this would knock eight-tenths of a point off growth in other emerging markets and reduce growth in the global economy by 0.4%.

“Spillovers could be considerably larger if the Brics growth slowdown were combined with financial market stress,” the report warned. “If, in 2016, Brics growth slows further, by as much as the average growth disappointment over 2010-14, growth in other emerging markets could fall short of expectations by about one percentage point and global growth by [seven-tenths of a] point.”

The Bank is predicting that recessions in Brazil and Russia will bottom out in 2016, that China will experience only a modest growth slowdown from 6.9% to 6.7%, and that India will continue to expand at a robust pace.

Growth challenges in China and other emerging markets are expected to force the International Monetary Fund to downgrade its global economic forecast for 2016 when the fund posts its latest outlook this month.

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