THE WORLD ECONOMY stumbled in 2015 amid weak aggregate falling demand, falling commodity prices and increasing financial market volatility in major economies.
The world gross product is projected to grow by a mere 2.4 per cent, marking a downward revision from 2.8 per cent forecast in the World Economic Situation and Prospects. The growth rates of gross fixed capital formation and aggregate demand continue to remain subdued.
The world economy is projected to grown by 2.9 per cent in 2016 and 3.2 per cent in 2017, supported by generally less restrictive fiscal and still accommodative monetary stances worldwide.
The anticipated timing and pace of normalisation of the United States monetary policy stance is expected to reduce policy uncertainties, while preventing excessive volatility in exchange rates and asset prices. While the normalisation will eventually lead to higher borrowing costs, rising interest rates should encourage firms to front-load investments in the short run.
The improvement in global growth is also predicated on easing of downward pressures on commodity prices, which should encourage new investments and lift growth, particularly in commodity dependent economies.
Since the onset of the global financial crisis, developing countries generated much of the global output growth. China, in particular, became the locomotive of global growth, contributing nearly one third of world output growth during 2011-2012. As the largest trading nation, China sustained the global growth momentum during the post-crisis period, maintaining strong demand for commodities and boosting export growth in the rest of the world.
With a much anticipated slowdown in China and persistently weak economic performances in other large developing and transition economies – notably Brazil and the Russian Federation – the developed economies are expected to contribute more to global growth in the near term, provided they manage to mitigate deflationary risks and stimulate investment and aggregate demand.
On the other hand, bottoming-out of the commodity price decline, which will contribute to reducing volatility in capital flows and exchange rates, will help reduce macroeconomic uncertainties and stimulate growth in a number of developing and emerging economies, including in the least developed countries. Developing countries are expected to grow by 4.3 per cent and 4.8 per cent in 2016 and 2017, respectively.
Global growth prospects face considerable headwinds in the near term, amid a macroeconomic environment of falling inflation and weak employment generation. Five major headwinds – both cyclical and structural – will continue to shape the near-term outlook of the global economy as well as its long-term prospects: persistent macroeconomic uncertainties and volatility; low commodity prices and declining trade flows; rising volatility in exchange rates and capital flows; stagnant investment and diminishing productivity growth; and continued disconnect between finance and real sector activities.
Developing economies in general would need to find new sources of growth domestically or regionally to escape the potential downward spiral emanating from commodity price and exchange-rate-related shocks.
This would require governments to pursue comprehensive structural transformation and industrial policies that would mobilise domestic savings and investment, improve institutions and corporate governance and reduce transaction costs and increase competitiveness.
Sustained and sustainable improvement in labour productivity would allow many developing countries to create more decent jobs, increase the labour share of income and reduce income inequality both within and between countries. (UN)