Subdued Growth, Diminished Prospects, Action Needed

IMF Blog, January 19, 2016

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Authors: Maurice Obstfeld
Published: January 19, 2016

Global outlook — headline projections and drivers

Global economic growth projected at "3.1 percent" in 2015, accelerating to "3.4 percent" in 2016 and "3.6 percent" in 2017.
The 2016 and 2017 figures are both "0.2 percentage point" below the levels the IMF had projected in October.
Emerging market and developing economies account for more than "two-thirds" of this downward revision, but are still projected to accelerate moderately in both 2016 and 2017 compared with 2015.
Advanced economies are projected to accelerate slightly in both 2016 and 2017, but to growth rates slightly below those forecast in the last World Economic Outlook.
Key fundamental forces shaping the outlook:
- China’s slower growth and rising financial-market risks amid macroeconomic rebalancing away from industrial and construction sectors.
- The fall in commodity prices, notably oil.
- Asynchronous monetary-policy trends, especially between the United States and most other advanced economies.
Commodity-price developments since mid-October cited as examples: base metals declined a further "15 percent" and oil declined a further "40 percent."
Paradox noted: each adverse development also carries potential benefits (China’s rebalancing toward consumption, lower commodity prices benefiting consumers and producers, and the U.S. Federal Reserve’s "well communicated interest-rate increase of December" reflecting U.S. strength), but adjustment challenges remain and dominate the medium-term outlook.

Cross-country heterogeneity and notable country cases

Small downgrade in advanced-economy growth driven by slightly less optimism about the United States; growth prospects for the euro area, the United Kingdom, and Japan are broadly unchanged.
Emerging and developing group includes:
- Countries with severe multiple challenges and strongly negative 2015 growth (example: Brazil and Russia and its CIS neighbors), where sharp contractions this year should decelerate over the coming two-year period.
- Other Latin American economies and emerging and developing Europe with better growth than recent years, though reduced from earlier years.
- Parts of Asia where growth prospects have diminished somewhat because of unexpectedly big external spillovers from China’s growth transition.
- India identified as continuing to grow at the fastest pace among large emerging economies and characterized as a major net commodity importer.

Downside risks — specific channels and vulnerabilities

Direct risk: China’s economy could slow more than expected, affecting trade partners and disturbing foreign exchange and other financial markets worldwide.
- IMF maintained 2016 and 2017 growth assessments for China due to robust development of its service and “new economy” sectors and fiscal policy actions supporting demand, but warned that continued strong growth depends on prompt, decisive actions to address remaining imbalances and legacies of past ones, and on clear communication of a coherent overall policy strategy, including with respect to the yuan’s exchange rate.
Currency depreciation has acted as a shock absorber for many emerging and developing economies but could expose corporate balance-sheet weaknesses where there are foreign-currency exposures.
Private capital inflows to emerging and frontier markets came to a virtual halt in "the third quarter of 2015," with China accounting for most of the fall; acceleration and broadening of this trend is a potential threat despite enhanced international-reserve buffers.
Increase in sovereign spreads in Latin America and Africa is a stress indicator; a further increase in global risk aversion could tighten financial conditions for vulnerable economies.
Political and geopolitical risks have intensified:
- Refugee outflows from Syria and Iraq impose extreme burdens on neighboring countries and have spilled over into Europe, sparking political discord within the European Union and threatening its framework for free labor mobility.
- Rapid absorption of refugees into labor markets will ultimately lift output but places up-front demands on public budgets.
- Source-country security concerns impose immense costs, first of all on the refugees themselves.

Assessment of implications and character of the outlook

Despite modest reductions in growth prospects and some promise of improvement, downside risks to the IMF’s central scenario have intensified and are driving recent financial-market developments.
The IMF warns: “We may be in for a bumpy ride this year, especially in the emerging and developing world.”
Aggregate averages conceal considerable diversity among countries; medium-term adjustments will be significant for many.

Policy priorities and recommended actions

The IMF sets out three general priorities while noting policy recommendations must be country-specific:

1. Support aggregate demand in the face of subdued activity and, in some countries, continuing deflationary pressures. 2. Support economic efficiency and long-term economic growth in light of evidence that potential growth rates have fallen worldwide over the past decade; structural reform is highlighted and will be a main theme of the April 2016 World Economic Outlook. 3. Further strengthen and widen the international safety net to bolster global resilience.

Excerpted and summarized from "Subdued Growth, Diminished Prospects, Action Needed" — Maurice Obstfeld, January 19, 2016.