World not out of the woods

There is good reason to worry about many countries' economies

When economists focus on growth they can lose track of countries' accumulating vulnerabilities. We have thus looked for excesses such as the pace of growth and its components, asset markets and credit expansion while studying imbalances in current accounts, budget balances, government debt and structural factors that may hamper longer-term growth potential.

Countries feeling the second-round effects of lower commodity prices are near the top of our list of concerns. In many, growth remains weak, but interest rates are being raised because of high inflation partly resulting from currency weakness. Often, lower commodity revenues prevent fiscal measures. In most cases, the fundamental backdrop remains challenging.

High risk countries include Brazil, Russia, Saudi Arabia, Colombia, South Africa, Nigeria and Turkey.

Lower oil prices have hurt Colombia's exports, industry and government finances and the central bank has raised rates aggressively in response to the weaker peso. We have cut our growth forecasts and raised our inflation predictions – an uncomfortable mix.

South Africa's falling currency is filtering into broader inflationary pressures, forcing a rise in interest rates and widening the current-account deficit to 5.1 per cent GDP. Extremely weak 2016 growth and aggressive tightening to fight inflation could tip the economy into recession.

Nigeria suffers the same malaise as most oil exporters and its current-account deficit is now 3.5 per cent of GDP. With currency reserves falling, the central bank has raised interest rates and may devalue the naira this year.

Although Turkey is a commodity importer, many of the same issues have affected its growth. The lira remains weak and underlying inflation high. A large current-account deficit and a combination of unpredictable policy and political uncertainty raise concerns over growth.

Medium risk countries include Chile, Mexico and Malaysia.

Lower copper prices have hit Chile and weaker government revenues, exports and currency mean we've lowered our growth forecasts significantly.

Until recently, Mexico was an emerging-world star but currency weakness has resulted in raised rates and government spending cuts that, alongside weak domestic investment, cause concern for growth. And while most Asian countries are growing well, Malaysia's oil exposure, weaker ringgit and thin currency reserves make it an exception.

Meanwhile some developed-world countries show signs of overheating with high credit growth, rising house prices and, in many cases, low inflation and authorities unwilling or unable to act. Sweden and Canada are high risk; the UK, Norway, Australia, New Zealand and Hong Kong are medium risk.

Canada's household borrowing is rising faster than incomes, house prices are very high and residential investment is a record share of GDP. Swedish house prices have risen 25 per cent in two years, household debt is among the highest in the world and GDP growth far exceeds trend at 4.5 per cent.

However, it's not all bad news. Indonesia's economy appears to be over the worst. A government infrastructure push allows optimism on growth while currency reserves and the exchange rate have stabilised.

And Argentina's new administration has agreed payments to hold-out creditors, raised electricity tariffs, removed export taxes and increased interest rates. This makes us more optimistic for the mid-term although rising inflation and contracting GDP are significant near-term risks.

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