THE developing world is catching up with advanced economies, but no longer as quickly as they would like. That has spooked investors. The slump in commodity prices and fears of an increase in interest rates in America led to 2015 being the first year since 1988 in which there will be a net capital ouflow from emerging markets.
The IMF’s new World Economic Outlook, published yesterday, offers little comfort. Some of the IMF’s headline projections seem relatively chirpy. Despite deepening recessions in Brazil and Russia, the BRICS economies as a whole are still growing at a decent speed of 4.8% this year, and growth is projected to rise to nearly 6.0% in 2020. Last month Citi warned that a global recession led by an emerging-market slowdown is on the way; the IMF are positively bullish by contrast. In 2016 the IMF expects China to steam ahead at 6.3% growth, and India at a whopping 7.5%.
But the IMF has been accused of over-optimism in the past, and they themselves admit that there are some big risks. One they highlight is the risk of a slowdown in emerging markets, coupled with investor panic. The IMF’s charts (see below) suggest what might happen in this scenario. A four percentage-point drop in investment would slash growth in the BRICS economies (Brazil, Russia, India, China, and South Africa) from 6% to 4% by 2020. The IMF expects that the effects would spill over to the advanced economies, cutting growth by the end of the decade from 1.9% to 1.6%.
If investors yank their capital from emerging markets along with the slow-down, then, as shown in the chart by the difference between the orange and red lines, the IMF thinks that in the very short run everyone would suffer even more. In other words, an emerging market slowdown will be uncomfortable; if financial-market panic about the slowdown increases, things will be much worse.
Source: The Economist