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Will the Global Economy Ever Escape the “Low-Growth Trap?”
By admin June 14, 2016

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The World Bank recently revealed its updated 2016 Global Growth Forecast. The 2016 global growth rate is forecast to reach 2.4 percent, which is 0.5 percent lower than the 2.9 percent pace projected in January. There are four key factors contributing to this move: sluggish growth in advanced economies, stubbornly low commodity prices, weak global trade and diminishing capital flows.

Sluggish growth in advanced economies remain largely uninterrupted, with the World Bank projecting growth to reach 1.7 percent, already downgraded from the original 2.2 percent pace reported in January. Although advanced economies showed improvements in labor markets and benefits from lower energy prices, it is still expected to have lower growth rate than the previous year. Most advance economies are still under their post-crisis recovery, with the pace of recovery markedly seen as uneven. To make matters only worse, these economies continue to suffer from declining productivity growth and aging population. These economies are also quite vulnerable to domestic and external shocks because of rising public debt and monetary policy rates, which reduce the effectiveness of counter-cyclical policies.

Because of exceeded supplies, weakening global demand, a strong U.S. dollar and some unwinding geopolitical risks, prices for oil and other key commodities are steadily decreasing, which creates huge disruption to commodity-exporting emerging market and developing economies. This also jeopardizes global poverty reduction since emerging markets include more than half of the world’s poor.

Another consequence to deceasing growth is the knock-on-effect it has with trade. Today, weak global goods trade is caused by declining commodity prices, China’s shift towards a slower and more sustainable growth path, and soft activity in advance economies. In turn lower commodity prices have led depreciating currencies in commodity exporter, which contributed to even lower imports, as we have recently seen in the case of Brazil and Russia. The transition of China’s development path also led to decreased imports demand in China. To top things off, global goods trade has also significantly been reduced due to weakened industrial activity and capital expenditure in advance economies.

Liquidity conditions in global financial markets, including major advanced economies, remain fragile, and leave markets prone to sudden reversals (World Bank 2015a). Recovery in portfolio and capital flows is still elusive in the absence of improving economic fundamentals. The environment pervading low commodity prices has negatively impacted mining and exploration investments and also increases the credit risks for many emerging market borrowers – just take South Africa as an example.

The World Bank concludes that, in an environment of weak growth and eroding policy buffers, structural reforms have become even more urgent.

For Information:

Global Outlook

The Great Plunge in Oil Prices: Cause, Consequences, and Policy Responses

Slowdown in Emerging Markets: Rough Patch or Prolonged Weakness?

Subdued Demand, Diminished Prospects

Global Economic Forecast 2016-2017

 


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