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Global economic growth has been below the expectations of members of the Task Force, with most agencies revising growth projection downward. The IMF has described growth as subdued, UNCTAD has described the global economy as fragile, and the UN Secretariat has described the global economy as trapped in a prolonged period of slow growth. Growth of emerging market and developing economies picked up modestly in the first half of 2016, but the growth rates have been varied.
Trade and commodity prices
Dwindling world trade growth is both a contributing factor and a symptom of the global economic slowdown. World trade volumes expanded by just 1.2 per cent in 2016, the third-lowest rate in the past 30 years. Cyclical factors — such as the composition of global demand and heightened uncertainty — continue to restrain global trade growth, while the impact of a number of structural shifts that favoured the rapid expansion of global trade in the 1990s and 2000s have started to wane, coupled with slower progress in trade liberalisation. The ratio of world trade growth to world gross product growth has declined significantly since the 1990s.
The commodity cycle is in its second year of a sharp downturn, and the commodity price index is well below the level it was at when the financial crisis hit. While commodity prices have largely stabilised or even seen some small increases in the second half of 2016, policies in commodity-dependent countries have been slow to adjust to the difficult economic conditions.
In 2016, average global inflation remained low but edged up slightly compared to 2015, which saw the lowest level registered since the global financial crisis in 2008. Inflation in the developed economies remained below 1 per cent, reflecting the impact of the drop in global energy prices, persistently weak wage growth and the generally high level of economic slack. As global growth remains sluggish, the prospect of an extended shortfall in private demand leading to a prolonged period of lower growth and low inflation becomes ever more tangible, particularly in some advanced economies where balance sheets remain impaired. Nonetheless, some developing economies – mostly commodity exporters –have seen a rise in inflationary pressures, largely reflecting currency depreciations, and in some cases food price spikes related to El Nino.
The largest movements across the currencies of advanced economies in 2016 were the depreciation of the UK pound following Brexit and the appreciation of the Japanese yen. Across emerging market currencies, the Chinese renminbi continued to depreciate gradually, while the currencies of commodity exporters—including the Brazilian real, the Russian ruble, and the South African rand—have generally appreciated, reflecting some recovery in commodity prices. In the longer term the 2016 movements reflect small rebounds from the real effective exchange rate depreciations seen in Africa and transition economies since 2012. Asian real effective exchange rates have seen depreciations from their peaks at the time of the Asian financial crisis in the late 1990s, with a sharp movement in 2009 not yet being fully reversed.
Net capital flows for developing countries turned negative in the second quarter of 2014, and amounted to -$656 billion in 2015 and -$185 billion in the first quarter of 2016. Amid a slower-than-expected pace of interest rate rises in the United States and a further expansion of unconventional monetary policy measures in other developed economies, international financial markets were relatively stable for the most part in 2016, after the tumultuous January sell-off. Capital inflows by foreigners into emerging market economies have recovered after the sharp downturn in the second half of 2015 and a weak start to 2016. However, certain large emerging market economies have continued to experience net capital outflows and loss in foreign exchange reserves, driving the overall trend. The surge in capital flows to developing and emerging economies between 2010 and the first quarter of 2014 took place in the context of monetary expansion in some major economies, led by the asset purchasing programmes (or quantitative easing policy) of some developed countries. The resulting surge of privately created global liquidity lifted one potential constraint on growth, but it added to pro-cyclicality and increased risks of the international monetary system.