In its annual flagship report, Global Economic Prospects, The World Bank said that BRICS nations — Brazil, Russia, India, China, and South Africa — could all face problems simultaneously which could have spillover effects for the rest of the world economy and jeopardize any chance of a pick-up in economic growth this year.
The bank cut its 2016 global growth forecast to 2.9 percent, from a previous estimate in June for 3.3 percent growth.
Global growth was clocked at 2.4 percent last year, which was less than the World Bank’s 2.8 percent forecast in June and slower than 2.6 percent growth in 2014.
The bank predicts that recessions in Brazil and Russia will bottom out in 2016 and will return to growth of over 1 percent in 2017.
Overall the BRICS are forecasted to expand 4.6 percent in 2016, from an estimated growth of 3.9 percent in 2015. The bank expects BRICS growth to pick up to 5.3 percent in 2017.
The bank estimated that growth in developing countries reached a post-crisis low of 4.3 percent in 2015, down from 4.9 percent in 2014, and cautioned that 2016 could be another difficult year.
“Downside risks dominate and have become increasingly centered on emerging and developing countries,” the report said.
In a development unmatched since the 1980s, most of the largest emerging market economies were slowing at the same time, the report said. Sharp declines in commodity prices, subdued global trade, weaker capital flows and currency pressures had combined last year to create a “particularly challenging external environment for commodity exporters”, where most of the growth slowdown had occurred.
The simultaneous slowing of four of the largest emerging markets—Brazil, Russia, China, and South Africa—poses the risk of spillover effects for the rest of the world economy. Global ripples from China’s slowdown are expected to be greatest but weak growth in Russia sets back activity in other countries in the region. Disappointing growth again in the largest emerging markets, if combined with new financial stress, could sharply reduce global growth in 2016.
In the event that growth in the BRICS economies fell one percentage point short of expectations, the bank said that this would knock 0.8 points off growth in other emerging markets and reduce growth in the global economy by 0.4 percent.
But the bank also highlighted the risks of what it called a perfect storm. “Spillovers could be considerably larger if the BRICS growth slowdown were combined with financial market stress.”
“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 0.7 percentage points.”
“If such a BRICS growth decline scenario were to be combined with financial sector turbulence, emerging market growth could slow by an additional 0.5 percentage points and global growth by an additional 0.4 percentage points.”
The report added that the impact from such a slowdown would be heightened by severe financial market stress similar to what was triggered in 2013 after the U.S. Federal Reserve announced that it was considering reducing stimulus that it was then providing to the US economy.
“There are considerable risks around the monetary policy tightening cycle in the United States. A sudden readjustment of expectations about the future trajectory of U.S. interest rates could combine with domestic fragilities and policy uncertainties in some developing countries to generate financial stress and increase the risk of damaging sudden stops in capital flows. The short-run costs of sudden stops can be substantial and are generally associated with sharp contractions in output and investment.”