A concern highlighted in the latest Global Interim Economic Outlook, March 2017 is the growth slowdown in the large emerging market economies (EMEs). With the six BRIICS alone now accounting for 30% of world GDP (at PPP rates) and 15% of global equity markets, a slowdown in EMEs has larger effects on the global economy than in the past, via trade and financial cross-border linkages.
Indeed, a sharp slowdown in domestic demand in EMEs, possibly brought about by both tighter financial conditions as US Treasury yields rise and a slowdown in trend growth, would have noticeable trade spillover effects. Global macro-model simulations suggest that a one-year, 2 percentage point decline in domestic demand growth in all non-OECD countries apart from China (where growth is holding up) could lower OECD GDP growth by around 0.4 percentage points in the first year (see first figure below).
The simulation points to considerable cross-country differences. The US economy would be relatively sheltered compared to Japan and China, reflecting their stronger trade linkages with other non-OECD economies, both in gross and in value-added terms (see second figure below).
Trade linkages to EMEs also appear important for commodity producers and countries strongly linked in global value chains. Countries with both sizeable trade exposures and large current account deficits, such as Turkey and South Africa, are particularly vulnerable to a sharp slowing in external demand. A further effect would come via lower commodity prices, which would hurt commodity exporters, including Australia and Chile and also non-OECD countries such as Brazil, Russia and South Africa, while giving some support to commodity importers.
Financial linkages will raise the global impact of a growth slowdown in the EMEs still further. An orderly but widespread slowdown would reduce asset values and lower earnings from investments in the EMEs. Exposures via these channels appear non-negligible; in 2010 over one-third of the profits of majority-owned foreign affiliates of US parent companies came from affiliates in non-OECD economies. Also, banking sector exposures to EMEs have risen since the crisis and are sizeable in several OECD countries (see figure below). Thus large spillovers via financial channels remain possible if an orderly slowdown in EMEs’ growth were to turn into a systemic event through financial vulnerabilities in some EMEs.
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OECD (2013), OECD Economic Outlook, Vol. 2013/2, OECD Publishing.