A Ride in Rough Waters

• Author: Raju Huidrom, M. Ayhan Kose, and Franziska L. Ohnsorge

A Ride in Rough Waters Finance & Development, September 2016, Vol. 53, No. 3

Raju Huidrom, M. Ayhan Kose, and Franziska L. Ohnsorge

Emerging markets buoyed the world after the global financial crisis, but are now in a major slowdown

Emerging market economies were once conferred darling status. And seemingly rightly so. In the two decades after the mid-1980s, emerging markets, with their record-high growth, transformed the global economic landscape. Their resilience during the global financial crisis provided a much-needed anchor for the world economy. Emerging markets bounced back from the crisis when the majority of advanced economies went through historic recessions.

This striking story, however, has taken a somewhat different turn of late. Since 2010, growth in emerging market economies has slowed and, at 3.8 percent in 2015, is below its long-term average (see Chart 1). The current slowdown in emerging market economies is unusually synchronous and protracted and is comparable to earlier episodes of global turmoil. In particular, the current slowdown affects some of the largest emerging markets—the diverse group of countries dubbed BRICS (Brazil, Russia, India, China, and South Africa)—with India the notable exception. The slowdown reflects easing growth in China, persistent weakness in South Africa, and steep recessions in Russia since 2014 and in Brazil since 2015.

External and domestic as well as cyclical and structural factors have contributed to the slowdown in emerging markets. The growth slowdown, which began in 2011, was initially driven by external factors, such as weak world trade, low commodity prices, and tightening financial conditions. But since 2014 domestic factors—including a steady slowdown in productivity growth, bouts of policy uncertainty, and tighter government budgets that have made it difficult to stimulate economic activity—have become increasingly important. Decelerating potential growth—that is, the speed at which an economy could grow—accounts, on average, for one-third of the slowdown in emerging market growth since 2010. Much of the decline resulted from a slowdown in productivity growth, which, in part, reflects an aging population.

Widespread effectsThe slowdown in major emerging markets could significantly hurt the rest of the world. An important reason is their size—these economies now account for a sizable share of global output and growth. During 2010–14, even though their economies were slowing, the BRICS accounted for about 40 percent of global growth, up from about 10 percent during the 1990s. They now represent more than one-fifth of global economic output—as much as the United States and more than the euro area. In 2000, they were responsible for about a tenth of global activity. China is by far the largest emerging market, twice as large as the other BRICS economies combined and two-thirds the size of the other emerging markets combined.

The rising importance of the BRICS in the global economy is also reflected in their increased participation in...