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World Bank Expects Continued Slowdown in Emerging Markets

Emerging markets have had a tough go at growth in recent years and the ongoing slowdown could lead to an even longer period of sluggish performance.

Weak international trade, slowing capital flows and slumping commodity prices are some of the challenges emerging markets have faced, and political uncertainty and bouts of blunted productivity have only served to compound the problems, The World Bank said in a new research report, “Slowdown in Emerging Markets: Rough Patch of Prolonged Weakness?

“After enjoying years of enviable economic performance, emerging markets are coming under strain, with a marked divergence in growth among them,” World Bank chief economist and SVP Kaushik Basu, said. “As some of these economies slow down, the goal of eradicating extreme poverty will become harder as it burrows in and becomes more concentrated in regions most affected by conflict.”

For two decades starting in the early 1980s, emerging markets saw a period of expansion and between 2010 and 2014, those markets accounted for roughly 60 percent of global growth, the World Bank report noted.

But since 2010, emerging market growth has faltered, dipping from 7.6% in 2010 to 4.5% last year, and this year that number is expected to fall to less than 4 percent.

“The emerging market economies of today are surely not the crisis-prone countries of the 1980s or 1990s,” said Ayhan Kose, director of the World Bank’s development prospects group and co-author of the report. “However, given the persistent factors that have driven the slowdown so far, and the significant global risks going forward, emerging markets will want to adopt policies to promote growth as quickly as possible.”

Brazil, Russia, India, China and South Africa account for roughly two-thirds of emerging market GDP, and Mexico, Indonesia, Malaysia and Turkey account for another one-eighth. All regions, save South Asia, have been affected by the moderation, but Latin America and the Caribbean have suffered considerably. By this year, China, Russia and South Africa had all seen three straight years of deceleration.

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The World Bank likened the current conditions for emerging markets to previous periods of global turmoil. By 2014, the report said, the number of emerging markets slowing for three consecutive years reached levels similar to the global financial crisis of 2008-09.

Investments and exports have been hit particularly hard, seeing cutbacks to less than half of their 2003-08 levels.

“Repeated forecast downgrades and high-frequency indicators suggest that the slowdown might not be simply a pause, but the beginning of an era of weak growth for EM [emerging markets],” the report noted.

Slowdowns in these markets pose three major risks: the slow growth could combine with bouts of global financial market volatility and lead to sudden halts, or reverse capital flows, to emerging markets; a persistent slowdown in emerging markets could derail a fragile global recovery; and weak emerging market growth would make it more challenging to reduce poverty and improve standards of living.

According to World Bank, structural reforms will be a vital aspect of countering slow growth.

“Structural reforms will be key to kick-start growth in emerging markets,” Franziska Ohnsorge, World Bank global macroeconomic trends team manager and co-author of the report, said. “Particular emphasis should be given to improvements in governance, which can lift growth considerably.”