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The global economy is increasingly shaped by the large emerging markets that are part of the Group of Twenty (G20). Over the past two decades, these economies have become much more integrated with international markets and are now generating significant "spillover" effects that impact the rest of the world, according to an International Monetary Fund (IMF) blog.

As growth prospects weaken in China and other major emerging markets, it is critical for policymakers - both in the G20 emerging economies and in countries that could be affected - to understand how a slowdown in these markets could propagate through the global economy, it says0.

According to IMF analysis, growth spillovers from domestic shocks in G20 emerging markets have increased substantially over the past 20 years and are now comparable to the spillover effects from advanced economies. The IMF examines how these shocks spread through trade to companies and industries in other countries.

The spillovers are largest from China, and now explain as much of the variation in emerging market output as shocks originating in the United States. However, other major G20 economies like India, Brazil, Russia, and Mexico also play an important role in the economic performance of their neighbours.

Simulations using a multi-country, multi-sector trade model suggest that a decline in productivity in G20 emerging markets could lower global output three times more than would have been the case in 2000. This reflects the growing integration of these economies into global value chains.

As G20 emerging markets have doubled their share of world trade and FDI, and now account for one-third of global GDP, developments in these countries can have a greater impact on businesses abroad. Positive growth surprises can boost revenue for foreign firms in sectors like electrical equipment and machinery that depend on demand from emerging markets. But faster growth can also mean emerging markets expand capacity downstream to compete directly with foreign producers, especially in labor-intensive sectors.

The IMF analysis finds that a broad-based decline in productivity in G20 emerging markets would shrink most sectors, especially in Asia. But spillovers are uneven - manufacturing sectors in the rest of the world like textiles, metals, and electronics may actually expand as firms take advantage of the decreased supply from emerging markets.

Employment is also affected, as positive shocks in G20 emerging markets can lead to job losses in the same sectors due to increased competition, while spillovers through global value chains tend to generate more job opportunities.

Given the growing influence of G20 emerging markets, negative spillovers from a growth slowdown could put advanced economies' progress on inflation at risk, and threaten growth and income convergence in other developing economies. A plausible acceleration in these economies, however, could provide a significant boost to global growth.

The reallocation of activity and jobs across firms and sectors due to emerging market spillovers can be disruptive, but also creates new opportunities. Policymakers should pursue structural reforms and inclusive policies to facilitate efficient labor market adjustments and mitigate harmful distributional impacts.

As global economic power continues to shift, effective multilateral cooperation and policy coordination remains crucial to manage spillovers and minimize risks of fragmentation, including by strengthening the global financial safety net.

*Research by Nicolas Fernandez-Arias, Alberto Musso, Carolina Osorio-Buitron, and Adina Popescu from the International Monetary Fund (IMF).