IMF Cuts Global Forecast For Next 2 Years, But Growth Set To Be Faster Than 2015

The global economy was expected to grow at 3.4 percent in 2016 and at 3.6 percent in 2017, according to the International Monetary Fund, which announced an update to its World Economic Outlook a day before the World Economic Forum kicks off in Davos, Switzerland. The numbers for both the years are 0.2 percentage points less than what IMF had estimated in its October 2015 World Economic Outlook.

The expected slowdown in growth was partly due to a more gradual-than-expected pickup in emerging markets and developing economies. While some big emerging economies like India continued stable and strong growth, others like Brazil and Russia had slowed significantly. Gradual economic recovery in those countries could offset the ongoing slowdown in China, which was one of the three key factors influencing IMF’s outlook.

China’s transition from exports to domestic consumption and from manufacturing to services had a spill-over effect on its trade partners and suppliers of raw materials, according to Maurice Obstfeld, chief economist at IMF. Calling the stock markets’ reaction to news coming out of China disproportionate — since Chinese data was broadly in line with IMF estimates — Obstfeld said Chinese authorities could quell market fears by providing more information about measures they are taking to keep the yuan stable.

Lower prices for oil and other commodities was another key factor considered by IMF. While it continues to affect the national budgets of countries that largely depend on oil and commodity exports, such as those in the Middle East and Africa, Obstfeld pointed out the benefit to end consumers. The IMF recommended measures such as removal of fuel subsidies in countries that rely heavily on oil exports. The slowdown in China, it said, was responsible for lower demand for commodities, and hence their lower prices.

A strong and sustained recovery in the U.S. economy, and the consequent increase in interest rates by the Federal Reserve in December, was the third factor in IMF’s estimates. The prospect of tightening financial conditions in the world’s biggest economy contributed to “declining capital flows and currency depreciations in many emerging market economies.”

The advanced economies are projected to grow at 2.1 percent in 2016 and 2017, 0.2 percentage points faster than they grew in 2015. The housing and labor markets continue to improve in the U.S. but the strengthening dollar could weigh on manufacturing activity. In the eurozone, weak exports were expected to be offset by strong consumption, supported by lower oil prices. “Growth in Japan is also expected to firm in 2016, on the back of fiscal support, lower oil prices, accommodative financial conditions, and rising incomes.”

The updated estimates, released Tuesday, also showed the pace of growth picking up, with global growth estimated at 3.1 percent in 2015.

Citing concerns about the possibility of higher risk aversion globally, sharper-than-expected slowdown in China, further dollar appreciation and escalation of geopolitical tensions, the report said: “Risks to the global outlook remain tilted to the downside and relate to ongoing adjustments in the global economy,” and added: “If these key challenges are not successfully managed, global growth could be derailed.”