IMF Survey : Global Economy Faltering from Too Slow Growth for Too Long
IMF News, April 12, 2016
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- Published: April 12, 2016
Global outlook and headline forecasts
- WEO forecasts global growth at 3.2 percent in 2016 and 3.5 percent in 2017.
- These figures represent downward revisions of 0.2 percent and 0.1 percent, respectively, compared with the January 2016 Update.
- Key characterization: growth continues but at a sluggish pace, leaving the world economy more exposed to risks.
- Analytical point: “Persistent slow growth has scarring effects that themselves reduce potential output and with it, demand and investment.” — Maurice Obstfeld.
Advanced economies: moderate recovery
- Projected growth in advanced economies: about 2 percent.
- United States:
- Expected growth in 2016: 2.4 percent (described as flat at 2.4 percent).
- Modest uptick expected in 2017 (no numerical value provided).
- Domestic demand supported by improving government finances and a stronger housing market; drag from a strong dollar and weaker manufacturing.
- Euro area:
- Growth projected at 1.5 percent in 2016 and 1.6 percent in 2017.
- Constraints: low investment, high unemployment, weak balance sheets.
- Japan:
- Growth projected at 0.5 percent in 2016 and -0.1 percent in 2017.
- Drivers: weaker than expected growth and inflation, sharp fall in private consumption, scheduled consumption tax increase.
Emerging and developing economies: slowing further
- WEO projects growth for emerging markets and developing economies at 4.1 percent in 2016 and 4.6 percent in 2017.
- Contributing factors to weaker prospects:
- Slowing growth in oil exporters due to oil price decline.
- Weak outlook for non-oil commodity exporters, including in Latin America.
- Modest slowdown in China as growth shifts from manufacturing and investment to services and consumption.
- Deep recessions in Brazil and Russia; weak growth in some Latin America and Middle East countries hit by oil price decline and conflicts.
- Diminished growth prospects in many African and low-income nations due to the unfavorable global environment.
- Positive performers:
- India described as a bright spot with strong growth and rising real incomes.
- ASEAN-5: Indonesia, Malaysia, Philippines, Thailand, and Vietnam performing well.
- Mexico, Central America, and the Caribbean benefiting from the U.S. recovery and, in most cases, lower oil prices.
Risks to the outlook
- Risks are more pronounced in a weak growth environment; notable risks listed:
- Return of financial turmoil impairing confidence (e.g., additional exchange rate depreciations in emerging market economies worsening corporate balance sheets; sharp decline in capital inflows forcing rapid compression of domestic demand).
- Protracted period of low oil prices further destabilizing oil-exporting countries.
- Sharper slowdown in China than currently projected, with spillovers through trade, commodity prices, and confidence, possibly leading to a generalized global slowdown.
- Noneconomic shocks: geopolitical conflicts, political discord, terrorism, refugee flows, global epidemics — these could have significant spillovers if unchecked.
- Upside possibility: decline in oil prices may boost demand in oil-importing countries more strongly than currently envisaged, partly via consumer perceptions of lower-for-longer prices.
Policy recommendations: three-pronged approach
- WEO emphasizes a three-pronged policy approach: (1) structural reforms, (2) fiscal support with growth-friendly composition and fiscal stimulus where appropriate and where fiscal space allows, and (3) monetary policy measures.
- Structural reform guidance:
- Strong need and scope for further structural reforms.
- Labor and product market reforms in advanced economies can boost growth prospects over the medium to long term.
- Product market reforms should be implemented forcefully to boost output even under weak macroeconomic conditions and without weighing on public finances.
- Where possible, narrowing unemployment benefits and easing job protection should be accompanied by other policies to offset short-term costs on vulnerable groups.
- Reforms coupled with fiscal support are most valuable, including reducing inefficient taxes on labor and increasing public spending on research and development and active labor market policies.
- Monetary and exchange rate guidance:
- In many advanced economies, accommodative monetary policy remains essential to support economic activity and lift inflation expectations.
- In many emerging market and developing economies, monetary policy must address weaker currencies’ impact on inflation and private sector balance sheets.
- Exchange rate flexibility, where feasible, should be used to cushion terms of trade shocks.
- Financial sector and contingency planning:
- Further financial sector strengthening is essential to create a context in which monetary, fiscal, and structural policies can be most effective.
- Policymakers need contingency plans and collective measures in case downside risks materialize.
- Cooperation to enhance the global financial safety net and global regulatory regime is central to a resilient international and financial system.
Source: IMF Survey : Global Economy Faltering from Too Slow Growth for Too Long