Description:
Growth in emerging market economies (EMEs) is set to durably slow from the rates observed over 2010-12 as cyclical effects fade, potential growth declines and external financing conditions tighten. Large negative current account balances make some EMEs vulnerable to sudden reversals in capital flows while exceptionally rapid credit expansions, as those observed in Brazil, China, Poland and Turkey over the past years, may have raised financial risk. This paper assesses recent developments and vulnerabilities in EMEs and uses macroeconometric model simulations to provide quantitative estimates of spillovers to highincome countries. The results suggest that for each slowdown of 2 percentage points in EMEs, highincome countries’ growth could be around ⅔ percentage points lower on average, with around ½ percentage point accounted for by trade. Experience with past EME crises suggests that this could be exacerbated by effects from exchange rates and by financial market turbulence. OECD countries which would be hit hardest include Belgium, Japan and the Netherlands, reflecting mainly strong trade linkages with EMEs.