Figures released at the launch of the World Economic Outlook 2015 last week suggest a sluggish global economy with “moderate and uneven” growth. Global growth has been pegged at 3.5 percent, a rather moderate increase from last year’s 3.4 percent. This, economic experts say is the result of growth in advanced economies and contractions in emerging ones.
Beyond these broad outcomes and analyses lie a few factors that may have motivated this uninspiring economic performance. These factors were identified by Olivier Blanchard, Economic Counsellor and Director of the Research Department at the International Monetary Fund (IMF).
Effect of past financial crises: Interestingly, the scars from the 2008 financial crises and the euro crisis are still visible today. The effects are seen in weaker banks and swollen debt portfolios today. This has necessitated a reduction in spending by financial institutions, consequently leading to slower growth rates in many regions.
Reduced Potential Growth: Potential growth defines the way an economy grows, that is if the factors of production are fully employed. In advanced economies, potential growth started declining from the early 2000s, due to diminishing returns. This was compounded by the financial crisis in 2008.
Ironically, emerging markets – predicted to register impressive growth rates over the coming years – are showing an even striking reduction than their advanced counterparts. Parts of Africa, the world’s major growth frontier for the last half-decade, has seen growth blighted by the recent Ebola epidemic, Terrorism, and shrunken oil revenue coffers.
Exchange Rate Movements: While the dollar continues to rise, the yen, euro and naira have witnessed significant depreciations owing to different monetary policies and exogenous shocks from global issues such as slump in oil prices.
When put in context, all four macroeconomic factors have varying effects on different countries and explain why some regions are experiencing a net gain while others see a net loss. Overall, the global economy has grown, but by so little that it becomes worrisome.
By Emmanuel Iruobe