Weak capital outflows, global trade and commodities markets may weigh heavily on world economic growth, which some economists expect to reach 3.6% this year, slightly higher than in 2015.
Although some emerging markets may see resurgence and advanced economies’ modest recovery, the world economy still faces a slowdown due to several risk factors. These include a sharp slump in emerging economies and a possible spill over from growth shocks in the Brics countries, which could be sizeable not only for other emerging markets but also for the global economy as a whole.
Brics is the acronym for an association of five major emerging national economies- Brazil, Russia, India, China and South Africa.
On top of that is the rising global concerns on terrorism, which unfortunately are not limited to any specific country or region now.
IMF managing director Christine Lagarde recently said she expected the global economic growth to be disappointing this year even as the outlook for the medium-term has deteriorated.
She said the prospect of rising interest rates in the US and an economic slowdown in China were feeding uncertainty and a higher risk of economic vulnerability worldwide.
The US Federal Reserve hiked interest rates for the first time in nearly a decade in December last year and made clear that was a tentative beginning to a “gradual” tightening cycle.
While countries other than highly developed economies were generally better prepared for higher interest rates than previously, Lagarde was concerned about their ability to absorb shocks.
Added to that, growth in global trade has slowed considerably and a decline in raw material prices was posing problems for economies reliant on commodities, while many countries still had weak financial sectors as the financial risks increase in emerging markets, she said.
A global economic report says a 1% decline in Brics growth could lead to an almost 2% decline in emerging and frontier markets.
Stressing the importance of effective monetary policies as well as the challenges related to monetary policies, fiscal policies and structural policies, the report also emphasises the need for emerging economies in particular to “invest, innovate and improve” institutions.
For the Arab region, three factors seem to dominate the economic outlook - oil prices, impact of regional conflicts, and political and social transitions in countries that experienced the Arab Spring.
For oil exporting countries in the region, except for Qatar and Kuwait, 2015 will have ended with budget deficits due to plunging price of oil, which has been cut more than half since June 2014.
Such deficits have also started to trickle down and impact non-oil economic activities. Although the IMF predicts that oil prices will rise slowly, they are likely to remain relatively low until at least 2020.
Therefore, these countries need to prepare for a multi-year adjustment that will require reduced spending and increased taxation.
Clearly, mid-term global economic prospects have become bleak as low productivity, ageing populations and the effects of the global financial crisis are dampening overall growth.
As Lagarde put it, “global growth will be disappointing and uneven in 2016.”