Global Slowdown: Will Emerging Economies Continue to Drive Global Growth?

Per the IMF,

Growth in emerging market and developing economies accelerated in the mid-2000s, leading to talk of their decoupling from advanced economies. Emerging market and developing economies were not spared during the global downturn; most experienced negative growth in 2009. But many have recovered and are growing at or above precrisis rates, despite continued weakness in advanced economies. As a result, they now account for almost all global growth.

Red – Emerging Market and Developing Economies

Blue – Advanced Economies

The IMF concludes in Resilience in Emerging Market and Developing Economies: Will It Last?

The results of this chapter confirm that emerging market and developing economies are now more resilient than in previous decades. This is not a recent phenomenon—their performance was already noticeably better in the 1990s than during the previous two decades, even with severe downturns such as the Tequila, Asian, and Russian crises. But the recent decade has really been exceptional—for the first time, emerging market and developing economies have performed better than advanced economies as measured by time spent in expansion. The chapter’s findings on the explanations for these gains in resilience lend support to an optimistic view that they are not temporary. These economies are doing better now both because the frequency of shocks has fallen and because policymaking has improved. This improvement is evident not only in emerging markets, but also in low-income countries, including countries that are benefiting from the HIPC Initiative.

The caveat, of course, is that the relative calm of the past two years could well be temporary. There is a significant risk that advanced economies could experience another downturn, as continuing sovereign and banking tensions in Europe and the so-called fiscal cliff in the United States threaten to put the brakes on growth. Terms-of-trade busts in emerging market and developing economies could rise if commodity prices drop. Further spikes in global uncertainty are possible, and sudden stops could emerge once again if greater risk aversion leads to capital outflows. Domestic vulnerabilities could also emerge— strong credit growth in some emerging market and developing economies, which likely supported domestic demand, may raise concerns about financial stability.

Should the external environment worsen again, emerging market and developing economies will likely end up recoupling with advanced economies, much as they did during the Great Recession. And even in the absence of an external shock, homegrown shocks could pull down growth further in some key emerging economies. To guard against such risks, these economies will need to rebuild their buffers to ensure that they have adequate policy space. In response to the global downturn, policy space was rightly used to support activity. These economies will be more resilient to new shocks if recent improvements in their policy frameworks—including greater exchange rate flexibility and more countercyclical macroeconomic policies—are maintained, while policy buffers are being rebuilt.