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Publication(World Bank, Washington, DC, 2015-12) Didier, Tatiana ; Kose, M. Ayhan ; Ohnsorge, Franziska ; Ye, Lei SandyA synchronous growth slowdown has been underway in emerging markets (EM) since 2010. Growth in these countries is now markedly slower than, not just the pre‐crisis average, but also the long‐term average. As a group, EM growth eased from 7.6 percent in 2010 to 4.5 percent in 2014, and is projected to slow further to below 4 percent in 2015. This moderation has affected all regions (except South Asia) and is the most severe in Latin America and the Caribbean. The deceleration is highly synchronous across countries, especially among large EM. By 2015, China, Russia, and South Africa had all experienced three consecutive years of slower growth. The EM‐AE growth differential has narrowed to two percentage points in 2015, well below the 2003‐08 average of 4.8 percentage points and near the long‐term average differential of 1990‐2008. The recent slowdown in EM has been a source of a lively debate, as evident from the quotations at the beginning of this note. Some economists paint a bleak picture for the future of EM and argue that the impressive growth performance of EM prior to the crisis was driven by temporary commodity booms and rapid debt accumulation, and will not be sustained. Others emphasize that a wide range of cyclical and structural factors are driving the slowdown: weakening macroeconomic fundamentals after the crisis; prospective tightening in financial conditions; resurfacing of deep‐rooted governance problems in EM; and difficulty adjusting to disruptive technological changes. Still others highlight differences across EM and claim that some of them are in a better position to weather the slowdown and will likely register strong growth in the future. This policy research note seeks to help move the debate forward by examining the main features, drivers, and implications of the recent EM slowdown and provides a comprehensive analysis of available policy options to counteract it.
Publication(World Bank, Washington, DC, 2015-09-15) Arteta, Carlos ; Kose, M. Ayhan ; Ohnsorge, Franziska ; Stocker, MarcSince the global financial crisis, the exceptionally accommodative monetary policy stance of the U.S. Federal Reserve (Fed) has helped support activity, bolstered asset valuations, and reduced risk premia. In addition, it has been instrumental in boosting capital flows to emerging and frontier market economies (EFEs). As the U.S. economy improves, the Fed is expected to start raising policy interest rates in the near term (an event widely referred to as “liftoff”) and thus commence a tightening cycle for the first time in nearly a decade. The mid-2013 “taper tantrum” episode is a painful reminder that even a long-anticipated change in Fed policies can surprise markets in its specifics, and lead to significant financial market volatility and disruptive movements in capital flows to EFEs. Recent debates have focused on the potential impact of the liftoff on EFEs, but there are also significant risks associated with the pace of subsequent rate increases, which is currently expected to be very gradual, but could accelerate at a time when EFE policy buffers are eroding. This Policy Research Note presents a comprehensive analysis of the changes in global conditions since the taper tantrum, risks of disruptions during the upcoming Fed tightening cycle, potential implications for EFEs, and policy options.
Publication(World Bank, Washington, DC, 2015-03) Baffes, John ; Kose, M. Ayhan ; Ohnsorge, Franziska ; Stocker, MarcThis note combines and distills existing and new research to inform discussion on the topical policy issue of oil prices. Following four years of relative stability at around $105 per barrel (bbl), oil prices have declined sharply since June 2014 and are expected to remain low for a considerable period of time. The drop in prices likely marks the end of the commodity supercycle that began in the early 2000s. Since the past episodes of such sharp declines coincided with substantial fluctuations in activity and inflation, the causes and consequences of and policy responses to the recent plunge in oil prices have led to intensive debates. This paper addresses four questions at the center of these debates, with particular emphasis on emerging market and developing economies: 1) How does the recent decline in oil prices compare with previous episodes? 2) What are the causes of the sharp drop and what is the outlook for oil price? 3) What are the economic and financial consequences? 4) What are the main policy implications? The decline in oil prices will lead to significant real income shifts from oil exporters to oil importers, likely resulting in a net positive effect for global activity over the medium term. However, several factors could counteract the global growth and inflation implications of the lower oil prices. These include weak global demand and limited scope for additional monetary policy easing in many countries. The disinflationary implications of falling oil prices may be muted by sharp adjustments in currencies and effects of taxes, subsidies, and regulations on prices. Regarding fiscal policy, the loss in oil revenues for exporters will strain public finances, while savings among oil importers could help rebuild fiscal space. Lower oil prices also present a window of opportunity to implement structural reforms. These include, in particular, comprehensive and lasting reforms of fuel subsidies, as well as energy taxes more broadly.