Global Growth Forecast Causes Concern

The World Bank has reduced its forecast for global growth for a third year in a row due to weakness in the developing world. Global markets hit a rough patch in the beginning of 2016 due to weak Chinese data, the fall of currencies in emerging-markets, decreased stock prices, and an increase in the value of the U.S. dollar. The World Bank’s forecast involved three optimistic assumptions for global growth, being that commodity prices will stabilize and that the Chinese government will able to manage the transition away from rapid and unsustainable growth. The other assumption that was made in the forecast was that the interest-rate hike by the United States Federal Reserve wouldn’t damage the U.S. economy or have a negative impact in the global financial market.

Prospects in the largest emerging markets are decreasing and causing a bleaker outlook for the global economy, and the economic outlook varies between regions and countries. For example, Latin America has been forecasted to grow by 0.1 percent due to falling commodity production, and Brazil has been forecasted to shrink by 2.5 percent after shrinking 3.7 percent in 2015. Countries in sub-Saharan Africa are expected to grow by 4.2 percent; however, the World Bank expects there to disparities in economic growth among various countries in Africa. The Russian economy has been negatively affected by international sanctions and low oil prices and is expected to decrease an additional 0.7 percent after a 3.8 percent shrink in 2015. Iran is forecasted to grow by 5.8 percent this year due to having economic sanctions removed after reaching a nuclear deal, and oil importing countries in South Asia stand to benefit from lower energy prices.

Several large economies, such as China and Brazil, are slowing or shrinking in their economic growth, which has negatively impacted trading partners. Unlike during the financial crisis, currently, developing economies have less capacity in their budgets and monetary policy to fuel economic growth. Emerging markets have faced increased amounts of debt owed, and the amount continues to grow due to rising borrowing costs and a stronger U.S. dollar. Current economic conditions have revealed a key weakness in developing economies that are reliant on exports and cheap debt to increase economic growth. A major challenge that some emerging market countries face is the need to boost their capacity to grow and encourage investment for future economic growth by increasing productivity to increase competitiveness.

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