July 29, 2014

Spillovers from a Potential Reversal of Fortune in Emerging Markets

From their high point before the crisis, emerging market economies are slowing down on a broad basis. This report explores what defines the slowdown and the diversity of relevant spillovers that may arise for advanced economies, other emerging market economies, and low-income countries. The defining features of the slowdown have been its gradual, protracted, and synchronized nature. Against a backdrop of weaker potential growth and productivity performance, the slowdown may be structural to an important degree. Growth spillovers from emerging economies can be noticeable for the global economy. Spillovers transmit mostly through trade linkages, but they also can have sizable effects through financial linkages, including through banks. Given the major role of emerging market economies in commodity markets, lower growth in those economies would likely lead to lower commodity prices—which act as a stabilizer at the global level, but with distributional implications through the terms of trade at the country level. Moreover, localized spillovers originating from large emerging market economies can be significant, with the channels of transmission depending on neighborhood-specific linkages. Risks and spillovers from slowing emerging economies will depend on the extent to which structural factors are at play and whether policy efforts can improve growth.