IMF Survey : Uncertainty, Complex Forces Weigh on Global Growth
IMF News, October 6, 2015
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- Published: October 6, 2015
Overview
- The IMF’s latest World Economic Outlook (WEO) foresees lower global growth compared to last year, with a modest pickup in advanced economies and a slowing in emerging markets, primarily reflecting weakness in some large emerging economies and oil-exporting countries.
- Global real GDP grew at 3.4 percent last year, and is forecast to grow at only 3.1 percent this year. Growth is expected to rebound to 3.6 percent next year.
Major forces shaping the outlook
- The WEO identifies at least three powerful forces intersecting in the world economy:
- China’s economic transformation—away from export- and investment-led growth and manufacturing, in favor of a greater focus on consumption and services.
- The fall in commodity prices.
- The impending increase in U.S. interest rates, with potential global repercussions and added uncertainties.
- The WEO notes downside risks to the world economy are more pronounced than a few months earlier.
Advanced economies: recovery and constraints
- Projected growth in advanced economies:
- 2 percent this year.
- 2.2 percent next year.
- Drivers of the current pickup include declining oil prices, accommodative monetary policy, improved financial conditions, and in some cases, currency depreciation.
- Medium-term prospects remain subdued due to:
- Lower investment.
- Unfavorable demographics.
- Weak productivity growth.
Emerging market and developing economies: slower growth and heterogeneity
- Growth for emerging market and developing economies as a group:
- 4.6 percent in 2014.
- Projected 4.0 percent in 2015.
- Factors behind the fifth straight year of slowing growth:
- Weaker growth in oil exporters.
- A slowdown in China with less reliance on commodity-intensive investment.
- Adjustment following credit and investment booms.
- Weaker outlook for exporters of other commodities, including in Latin America, after declines in export prices.
- High geopolitical tensions and domestic strife in a number of countries.
- External conditions becoming more difficult:
- Prospect of rising U.S. interest rates and a stronger dollar has contributed to higher financing costs for some borrowers.
- China’s slowdown has larger cross-border repercussions than previously envisaged, including weaker commodity prices and reduced imports.
- The projected rebound in 2016 for emerging markets largely reflects:
- A less deep recession or partial normalization in countries in economic distress in 2015 (including Brazil, Russia, and some countries in Latin America and in the Middle East).
- Spillovers from stronger pickup in advanced economies.
- The easing of sanctions on the Islamic Republic of Iran.
- Growth in low-income developing economies:
- Expected to slow to 4.8 percent in 2015, from 6 percent in 2014.
- Weak commodity prices and the prospect of tighter global financial conditions are major factors.
- Some countries (e.g., Kyrgyz Republic, Mozambique) running large current account deficits and vulnerable to external financial shocks.
Downside risks highlighted by the WEO
- Key risks that could stall global recovery include:
- Lower oil and other commodity prices, complicating outlook for commodity exporters (examples: Russia, Venezuela, Nigeria).
- A sharper-than-expected slowdown in China if rebalancing proves more challenging than expected.
- Disruptive asset price shifts and increased financial market volatility leading to reversal of capital flows in emerging market economies; renewed concerns about China, Greece, sharply lower oil prices, and contagion effects could spark volatility.
- Further appreciation of the U.S. dollar posing balance sheet and funding risks for dollar debtors, especially in emerging market economies with increased foreign–currency corporate debt.
- Increased geopolitical tensions in Ukraine, the Middle East, or parts of Africa harming confidence.
Policy recommendations and priorities
- Raising actual and potential output is the policy priority; this requires a combination of demand support and structural reforms.
- Advanced economies:
- Continue accommodative monetary policy.
- Use macroprudential tools to contain financial sector risks.
- Countries with fiscal space (example: Germany) should use it to boost public investment, especially in quality infrastructure.
- Structural reforms to strengthen labor force participation, facilitate labor market adjustment, tackle legacy debt overhang, and lower barriers to entry in product markets, especially in services.
- Emerging market and developing economies:
- Many have increased resilience through greater exchange rate flexibility, higher foreign exchange reserves, increased reliance on foreign direct investment flows and domestic-currency external financing, and stronger policy frameworks.
- Policymakers face a trade-off between supporting demand amid slowing growth and reducing vulnerabilities; scope for policy easing varies considerably by country.
- Commodity exporters should adjust to lower commodity-related revenue—gradually if fiscal buffers were built during the commodity boom, and more rapidly otherwise.
- In commodity-exporting countries with flexible exchange rates, currency depreciation can help offset demand impacts of terms-of-trade losses, but sharp exchange rate changes can exacerbate vulnerabilities from high corporate leverage and foreign currency exposure.
- Exchange rate policy should consider financial stability; countries also need to diversify their economies through targeted structural reforms to raise productivity and remove bottlenecks to production.
IMF Survey — October 6, 2015