Developing countries risk leading the world into a new financial crisis, as slowing trade, stalled growth and capital outflows from emerging markets trigger a spiral of deflation and debt, according to a UN body.

The report from the UN Conference on Trade and Development (Unctad) follows recent data showing that demand for EM exports has hit a post-crisis low this year, with US imports from China falling sharply.

Richard Kozul-Wright, Unctad’s director for globalisation and development strategies, said the world economy was slowing because developed countries had failed to find a path out of recession thanks to “a very one-sided policy mix” that relied on monetary easing without fiscal support for growth.

In turn, growth in emerging markets since the crisis had relied on capital flows fuelled by quantitative easing at western central banks. The Unctad report warned about an explosion of corporate debt in emerging economies, which it said exceeded $25tn, based on figures from the Bank for International Settlements.

It said investors had taken $185bn from developing economies in the first quarter of 2016 and, although there had been a respite in the second quarter, “there remains a risk of deflationary spirals in which capital flight, currency devaluations and collapsing asset prices would stymie growth and shrink government revenues, and cause heightened anxiety about the vulnerability of debt positions”.

“Once QE really comes to an end and interest rates rise, the third phase of the global financial crisis will come from emerging markets,” Mr Kozul-Wright said.

The two previous phases were the initial subprime crisis of 2008-09 and the eurozone debt crisis of 2011-12.

Unctad data, based on balance of payments data from the International Monetary Fund and national central banks, show a reversal of capital flows to 45 developing countries after the US Federal Reserve ended its QE programme in October 2014 (see chart).

However, QE programmes have continued at other central banks and flows to parts of the developing world remain positive, although overshadowed by the size of outflows from China.

Mr Kozul-Wright pointed to two structural problems in the growth funded by such flows.

First, much of the resulting investment had gone into cyclical and rent-based sectors that failed to deliver lasting productivity gains, such as oil and gas, mining, utilities and real estate.

Second, companies in emerging markets were beginning to emulate the behaviour of many companies in developed markets, where profits have been used in share buybacks and dividend payments rather than in productive investment.

The Unctad report adds that, where investment has led to increased productivity, the gains have often been used to raise profits or lower prices to gain a competitive edge, rather than to raise wages. By transferring gains overseas through lower prices, it argues, such behaviour weakens a virtuous circle of productivity gains, domestic demand and investment, while adding to deflationary pressures.

Unctad expects growth in global trade this year to be about the same or less than the 1.5 per cent it recorded last year, down from about 3 per cent in 2012 and 2013 and about 2.4 per cent in 2014.

It expects growth in world economic output to be about 2.3 per cent, its slowest since 2013, with developed economies growing 1.6 per cent and developing ones about 3.8 per cent — the slowest rate of growth in the developing world since 2009 (see table).

“One reason that global growth is slowing is that growth in developing countries is slowing dramatically,” Mr Kozul-Wright said.

World output growth, annual percentage change
2008 2009 2010 2011 2012 2013 2014 2015 2016*
World 1.5 -2.1 4.1 2.8 2.2 2.2 2.5 2.5 2.3
Developed countries 0.1 -3.6 2.6 1.5 1.1 1.1 1.7 2.0 1.6
SE Europe and CIS 5.4 -6.6 4.7 4.6 3.3 2.0 0.9 -2.8 0.0
Developing countries 5.2 2.4 7.8 5.9 4.8 4.6 4.4 3.9 3.8
Source: Unctad *estimate

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