The last few months have witnessed a readjustment in the engines of world economic growth. The deterioration in the outlook for the main emerging countries has been offset by the improvement in developed countries. We now expect global growth to be around 3.2% in 2015 and to tend to improve in 2016, reaching 3.7%.

Crucial for this forecast to come about is an orderly slowdown in the emerging economies that does not bring about global financial instability, a scenario that seems improbable at present. It is true there are several threats hovering over the emerging world but, given their heterogeneous nature and the generally acceptable starting point of many of the countries in question, the emerging economies are unlikely to become immersed in a long phase of volatility.

The cycle of the emerging economies is changing direction due to three fundamental factors. First, the phase of low commodity prices and particularly oil, which is having a negative effect on several developing countries, some of them large like Russia and other small ones like Venezuela and Angola whose budgets and external accounts rely too heavily on oil-related revenue. Nevertheless the slump in oil prices is positive for net importers of crude oil, many of which belong to the emerging bloc such as China, India and Turkey, so the combined effect will not necessarily harm aggregate growth.

A second negative factor is related to the shift in direction of US monetary policy. The years of expanding liquidity in the US have led to a sharp rise in public and private debt in some emerging economies. The start of a contractionary cycle in US monetary policy threatens to cause capital outflows and undermine financial stability and growth, particularly in those countries where debt is in foreign currency. The risk is there but a detailed examination of the financial situation of the various economies affected shows that the potential sources of tension are localised. In fact, unlike previous episodes of tension in the emerging economies, many of them now have substantial financial buffers that help them face this new scenario with greater confidence.

Lastly we cannot ignore the internal situation of the emerging economies themselves. The capacity of some notable countries such as Brazil, Turkey and China to reform their growth models, which have been based on an unbalanced pattern, will be crucial. The success of these countries, and especially of the Asian giant, in correcting their macroeconomic imbalances will be decisive for world growth but it is vital not to lose sight of the fact that several are now in a solid and balanced economic situation. Particularly India and Mexico, the latter being expected to satisfactorily handle the economic slowdown in spite of suffering from the drop in oil prices, while other important emerging regions such as Central Europe are also looking solid with strong growth potential.

In conclusion, some large emerging economies will end the year in recession and this will have a negative effect on the world's economic growth. However, many developing countries are also tackling the slowdown with a lot of room to manoeuvre and, if China is capable of successfully piloting its economy towards a soft landing, there is no reason to think that the current slowdown in the emerging world will crucially affect the global economy.

Jordi Gual

Chief Economist

30 September 2015