IMF warns on worst global growth since financial crisis in 2009
The International Monetary Fund warned on Tuesday that global growth is projected to decline from 3.4% in 2014 to 3.1% in 2015, and rise to 3.6% in 2016, reflecting in 2015 a further slowdown in emerging markets, partially offset by a modest pickup in activity in advanced economies — particularly in the Euro Area. This pickup, supported by the decline in oil prices and accommodative monetary policy, will modestly narrow output gaps.
The fund said that after a strong rebound to almost 7½% after the global financial crisis, real GDP growth in emerging market and developing economies decreased from about 6.3% in 2011 to 4.6% in 2014. In 2015, it is projected to decline further to 4%. With this decline, growth for the entire group in 2014 was about 1%age point be below the average growth recorded during 1995–2007.
The IMF says the pickup in advanced economies is tempered by lower growth in commodity exporters — particularly Canada and Norway — and in Asia outside of Japan (in particular, Korea and Taiwan). Unemployment is declining, but underlying productivity growth remains weak, including in the United States, where the recovery is more entrenched. "This heightens concern about the medium-term outlook. Some pickup in growth is expected in 2016 (especially in North America), but medium-term prospects remain subdued, reflecting a combination of lower investment, unfavorable demographics, and weak productivity growth."
The Fund has cut its forecast from 3.5% in April and its 6.8% forecast for China has remained unchanged. Euro Area growth of 1.6% is also unchanged from a July update and the US growth forecast has been increased by 0.1% compared with July to 2.6%. Irish GDP growth is forecast at 4.8% in 2015 and 3.8% in 2016.
UK growth has been raised from a rate equivalent to 2.25% in the first half of 2015 to an improvement of 2.5% for the year, falling to 2.2% next year.
The Funds latest World Economic Outlook (WEO) says the forecasts reflect a world economy that is at the intersection of at least three powerful forces. First, China’s economic transformation — away from export— and investment-led growth and manufacturing, in favor of a greater focus on consumption and services; second, and related, the fall in commodity prices; and third, the impending increase in US interest rates, which can have global repercussions and add to current uncertainties.
In this global environment, with the risk of low growth for a long time, the WEO underlines the need for policymakers to raise actual and potential growth.
“Six years after the world economy emerged from its broadest and deepest postwar recession, the holy grail of robust and synchronized global expansion remains elusive,” said Maurice Obstfeld, the IMF's chief economist and director of the Research Department.
“Despite considerable differences in country-specific outlooks, the new forecasts mark down expected near-term growth marginally but nearly across the board. Moreover, downside risks to the world economy appear more pronounced than they did just a few months ago,” Obstfeld said.
Global real GDP grew at 3.4% last year, and is forecast to grow at only 3.1% this year. Growth is expected to rebound to 3.6% next year (see table below).
Recovery in advanced economies on course
Growth in advanced economies is projected to increase modestly to 2% this year and 2.2% next. This year’s pickup reflects primarily a strengthening of the modest recovery in the Euro Area and a return to positive growth in Japan, supported by declining oil prices, accommodative monetary policy, and improved financial conditions, and in some cases, currency depreciation.
While growth is expected to increase in 2016, especially in North America, medium-term prospects remain subdued, reflecting a combination of lower investment, unfavorable demographics, and weak productivity growth.
Slower growth in emerging and developing economies
Growth prospects in emerging markets and developing economies vary across countries and regions. But the outlook in 2015 is generally weakening, with growth for these economies as a group projected to decline from 4.6% in 2014 to 4.0% in 2015.
The fifth straight year of slowing growth reflects a combination of factors: weaker growth in oil exporters, a slowdown in China with less reliance on commodity-intensive investment, adjustment in the aftermath of credit and investment booms, and a weaker outlook for exporters of other commodities, including in Latin America, following declines in their export prices. In addition, geopolitical tensions and domestic strife in a number of countries remain high, with immense economic and social costs.
External conditions are becoming more difficult for most emerging economies. The prospect of rising US interest rates and a stronger dollar has already contributed to higher financing costs for some borrowers, including emerging and developing economies. And while the growth slowdown in China is so far in line with forecasts, its cross-border repercussions appear larger than previously envisaged, including through weaker commodity prices and reduced imports.
The projected rebound in growth in emerging market and developing economies in 2016 therefore reflects not a general recovery, but mostly a less deep recession or a partial normalization of conditions in countries in economic distress in 2015 (including Brazil, Russia, and some countries in Latin America and in the Middle East), spillovers from the stronger pickup in activity in advanced economies, and the easing of sanctions on the Islamic Republic of Iran.
Growth in low-income developing economies is expected to slow to 4.8% in 2015, from 6% in 2014, in large part due to weak commodity prices and the prospect of tighter global financial conditions. Some countries (e.g., Kyrgyz Republic, Mozambique) have been running large current account deficits, benefiting from easy access to foreign savings and abundant foreign direct investment, especially in resource-rich countries, and hence are particularly vulnerable to external financial shocks.
Downside risks more significant
Given the distribution of risks to the near-term outlook, global growth is more likely to fall short of expectations than to surprise on the upside. The WEO report outlines important shifts that could stall global recovery. These include:
• Lower oil and other commodity prices, which although benefiting commodity importers, complicate the outlook for commodity exporters, some of whom already face strained initial conditions (e.g., Russia, Venezuela, Nigeria);
• A sharper-than-expected slowdown in China, if the expected rebalancing toward a more market-based and consumption-driven growth proves more challenging than expected;
• Disruptive asset price shifts and a further increase in financial market volatility could involve a reversal of capital flows in emerging market economies. Further, renewed concerns about China’s growth potential, Greece’s future in the Euro Area, the impact of sharply lower oil prices, and contagion effects could be sparks for market volatility;
• A further appreciation of the US dollar could pose balance sheet and funding risks for dollar debtors, especially in some emerging market economies, where foreign–currency corporate debt has increased substantially over the past few years; • Increased geopolitical tensions in Ukraine, the Middle East, or parts of Africa could take a toll on confidence.
Policy upgrades to avoid low-growth traps
The report underscores that raising actual and potential output must remain the policy priority. This will require a combination of demand support and structural reforms.
In advanced economies, accommodative monetary policy (ultra-low-interest rates) continues to be essential, alongside macroprudential tools to contain financial sector risks, the report notes. On the fiscal side, countries with room for fiscal stimulus, such as Germany, should use it to boost public investment, especially in quality infrastructure.
The IMF says "structural reforms are, of course, country specific. But the main planks include measures to strengthen labour force participation, facilitate labour market adjustment, tackle legacy debt overhang, and lower barriers to entry in product markets, especially in services."
The Fund says many emerging markets have increased their resilience to external shocks. Thanks to increased exchange rate flexibility, higher foreign exchange reserves, increased reliance on foreign direct investment flows and domestic-currency external financing, and generally stronger policy frameworks, many countries are now in a stronger position to manage heightened volatility.
Nevertheless, in a more complex external environment, emerging market and developing economies face a difficult trade-off between supporting demand amid slowing actual and potential growth and reducing vulnerabilities. The scope for policy easing varies considerably across countries, depending on macroeconomic conditions and sensitivity to commodity price shocks, as well as external, financial, and fiscal vulnerabilities.
For example, teh IMF says commodity exporters have to adjust to lower commodities-related revenue—gradually if fiscal buffers were built during the commodity boom, and more rapidly otherwise. In commodity-exporting countries with flexible exchange rate regimes, currency depreciation can help offset the demand impact of terms-of-trade losses. "Yet, sharp exchange rate changes can also exacerbate vulnerabilities associated with high corporate leverage and foreign currency exposure. Therefore, exchange rate policy should not lose sight of financial stability considerations. At the same time, countries need to diversify their economies. Targeted structural reforms to raise productivity and remove bottlenecks to production can help countries to diversify their export bases."
Pic above: Christine Lagarde managing director (2nd r), tours Machu Picchu, Peru, accompanied Maria del Carmen de Reparas (l), deputy minister of trade and tourism, 5 Oct 2015. Lagarde is in Peru to attend the 2015 IMF/World Bank Annual Meetings 9-11 Oct. IMF photo/Stephen Jaffe