The growing influence of the Group of Twenty’s large emerging markets on the global economy necessitates a deeper understanding of the channels through which economic shocks can propagate.
As growth prospects weaken in China and other large emerging markets, policymakers must recognize the increased interconnectedness of these economies with global markets.
Over the past two decades, growth spillovers from domestic shocks in G20 emerging markets have risen, now comparable to those from advanced economies.
Our analysis, detailed in the April 2024 World Economic Outlook, reveals that spillovers from China have the largest impact, explaining as much variation in emerging-market output as those from the United States.
Other G20 emerging markets, such as India, Brazil, Russia, and Mexico, also play a significant role in their neighbors’ economic performance.
Simulations using a multi-country multi-sector trade model suggest that a decline in productivity in G20 emerging markets can lower global output three times more than in 2000.
The increasing integration of these markets into global value chains means that developments in G20 emerging markets can significantly impact businesses abroad.
Positive growth surprises in G20 emerging markets can boost revenue growth for foreign firms in sectors like electrical equipment and machinery.
However, faster growth can also lead to increased competition, particularly in sectors highly dependent on foreign suppliers.
Our modeling analysis finds that most sectors will shrink in response to a broad-based decline in productivity, especially in Asia.
Yet, spillovers are not uniform, and a decline concentrated in sectors integrated into global value chains can lead to expansion in manufacturing sectors like textiles, metals, and electronics.
Employment adjustments also occur, with positive productivity shocks leading to job losses due to increased competition.
Spillovers propagating through global value chains can generate complementarities and job opportunities.
G20 emerging markets, especially China, have become a significant source of global spillovers.
Negative spillovers from a growth slowdown could risk the downward path in inflation for advanced economies and put growth and income convergence at risk in other emerging markets.
However, a growth acceleration in G20 emerging markets could generate positive global spillovers, boosting world growth by half a percentage point.
While the reallocation of activity and jobs due to spillovers can be costly, it also creates opportunities.
Structural reforms and inclusive policies can help mitigate harmful distributional impacts and facilitate efficient reallocation of labor.
