IMF World Economic Outlook (WEO) Update, January 2016: Subdued Demand, Diminished Prospects

World Economic Outlook, January 19, 2016

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Published: January 19, 2016
Series: World Economic Outlook

Key Global Projections and Recent Developments

Global growth is currently estimated at 3.1 percent in 2015, projected at 3.4 percent in 2016 and 3.6 percent in 2017.
The pickup in global activity is projected to be more gradual than in the October 2015 World Economic Outlook (WEO), especially in emerging market and developing economies.
In 2015, growth in emerging market and developing economies declined for the fifth consecutive year, while a modest recovery continued in advanced economies.
Three key transitions influencing the outlook:
- The gradual slowdown and rebalancing of economic activity in China away from investment and manufacturing toward consumption and services.
- Lower prices for energy and other commodities.
- A gradual tightening in monetary policy in the United States amid continued easing in several other major advanced economy central banks.

Recent sectoral and market developments

China: Overall growth evolving broadly as envisaged, but a faster-than-expected slowdown in imports and exports due in part to weaker investment and manufacturing.
Global trade and manufacturing: Manufacturing activity and trade remain weak globally; decline in investment in extractive industries and dramatic import declines in distressed emerging market and developing economies are weighing on global trade.
Oil and commodities:
- Oil prices declined markedly since September 2015 due to expectations of sustained OPEC production increases amid global production in excess of consumption.
- Futures markets (as of December 10, 2015) assume oil prices of $41.97 in 2016 and $48.21 in 2017.
- The average price of oil in U.S. dollars a barrel was $50.92 in 2015.
- Prices of other commodities, especially metals, have fallen as well.
Financial conditions:
- Monetary easing in the euro area and Japan proceeding broadly as previously envisaged.
- In December 2015 the U.S. Federal Reserve lifted the federal funds rate from the zero lower bound.
- Prospects of gradual U.S. rate increases and bouts of financial volatility have contributed to tighter external financial conditions, declining capital flows, and currency depreciations in many emerging market economies.
Inflation:
- Headline inflation broadly moved sideways in most countries; renewed declines in commodity prices and global manufacturing weakness likely to soften traded goods’ prices.
- Core inflation rates remain well below inflation objectives in advanced economies.
- Mixed inflation developments in emerging market economies reflect weak domestic demand and lower commodity prices versus marked currency depreciations.

Updated Forecast — Advanced Economies

Global growth for advanced economies projected to rise by 0.2 percentage point in 2016 to 2.1 percent, and hold steady in 2017.
United States: Overall activity remains resilient, supported by still-easy financial conditions and strengthening housing and labor markets; dollar strength weighs on manufacturing and lower oil prices curtail investment in mining structures and equipment.
Euro area: Stronger private consumption from lower oil prices and easy financial conditions outweigh weakening net exports.
Japan: Growth expected to firm in 2016 on the back of fiscal support, lower oil prices, accommodative financial conditions, and rising incomes.

Updated Forecast — Emerging Market and Developing Economies

Aggregate growth projected to increase from 4 percent in 2015 to 4.3 percent in 2016 and 4.7 percent in 2017.
China: Growth expected to slow to 6.3 percent in 2016 and 6.0 percent in 2017, primarily reflecting weaker investment growth during rebalancing.
India and emerging Asia: Generally projected to continue robust growth, though some countries face headwinds from China’s rebalancing and global manufacturing weakness.
Latin America and the Caribbean: Aggregate GDP projected to contract in 2016 as well, albeit at a smaller rate than in 2015, reflecting the recession in Brazil and other distressed countries.
Middle East: Higher growth projected overall, but lower oil prices and geopolitical tensions weigh on the outlook.
Emerging Europe: Broadly steady pace with some slowing in 2016; Russia expected to remain in recession in 2016.
Sub-Saharan Africa: Most countries will see a gradual pickup but to rates lower than those of the past decade, reflecting adjustment to lower commodity prices and higher borrowing costs affecting Angola, Nigeria, South Africa, and other commodity exporters.

Forecast Revisions and Trade

Forecasts for global growth revised downward by 0.2 percentage point for both 2016 and 2017 versus October 2015 WEO.
Revisions largely accounted for by Brazil, the Middle East, and the United States (where momentum is expected to hold steady rather than accelerate).
Prospects for global trade growth revised down by more than ½ percentage point for 2016 and 2017, reflecting developments in China and distressed economies.

Downside Risks to the Outlook

A sharper-than-expected slowdown in China’s transition to more balanced growth with wider international spillovers affecting trade, commodity prices, confidence, financial markets, and currency valuations.
Adverse corporate balance sheet effects and funding challenges from further dollar appreciation and tighter global financing conditions as the U.S. exits from extraordinarily accommodative monetary policy.
A sudden rise in global risk aversion triggering sharp depreciations and possible financial strains in vulnerable emerging market economies, with potential contagion from idiosyncratic shocks.
Escalation of geopolitical tensions disrupting confidence and global trade, financial, and tourism flows.
Commodity markets: further declines in commodity prices would worsen the outlook for fragile commodity producers and increase yields on energy sector debt, possibly tightening credit conditions; conversely, oil price declines could provide a stronger-than-envisaged boost to demand in oil importers if perceived to persist.

Policy Priorities and Recommendations

Overall objective: raise actual and potential output through a mix of demand support and structural reforms given a weaker-than-expected pickup and downside risks.
Advanced economies:
- Maintain accommodative monetary policy while inflation remains below targets.
- Where conditions allow, near-term fiscal policy should be more supportive of the recovery, especially through investments that augment future productive capital.
- Fiscal consolidation where warranted should be growth friendly and equitable.
- Structural reforms to raise potential output, focusing on strengthening labor market participation and trend employment, tackling legacy debt overhang, and reducing barriers to entry in product and services markets.
- In Europe, implement policies to support integration of refugees into the labor force to allay social exclusion concerns, long-term fiscal costs, and unlock potential long-term economic benefits.
Emerging market and developing economies:
- Manage vulnerabilities and rebuild resilience against potential shocks while lifting growth and ensuring convergence to advanced economy income levels.
- Net commodity importers: reduced inflation pressures and external vulnerabilities may allow policy space, but currency depreciations could limit scope for monetary easing.
- Commodity exporters: reduce public expenditures while raising efficiency, strengthen fiscal institutions, and increase noncommodity revenues to facilitate adjustment to lower fiscal revenues.
- Allow exchange rate flexibility to cushion adverse external shocks, while closely monitoring effects of depreciations on balance sheets and inflation.
- Press on with structural reforms to alleviate infrastructure bottlenecks, facilitate an innovation-friendly business environment, bolster human capital, deepen local capital markets, improve fiscal revenue mobilization, and diversify exports away from commodities.

Key Statistics (selected from Table 1 and text)

World Output: 3.4 (2014), 3.1 (2015), 3.6 (2017 projection); overall statement: 3.4 percent in 2016 and 3.6 percent in 2017.
Advanced economies growth: projected 2.1 percent in 2016.
Emerging market and developing economies growth: 4.6 (2014), 4.0 (2015), 4.3 (2016), 4.7 (2017).
China growth: 7.3 (2014), 6.9 (2015), 6.3 (2016), 6.0 (2017).
India: 7.5 (2014), 7.6 (2015) — data and forecasts for India are presented on a fiscal year basis.
Brazil: -3.8 (2014), -3.5 (2015) with deeper recession noted in text.
Oil prices: average $50.92 in 2015; assumed $41.97 in 2016 and $48.21 in 2017 (simple average of U.K. Brent, Dubai Fateh, and West Texas Intermediate).
World trade growth: revised down by more than ½ percentage point for 2016 and 2017.

Source: IMF, World Economic Outlook Update, January 2016

IMF World Economic Outlook (WEO) Update, January 2016: Subdued Demand, Diminished Prospects

Source details

Other formats

Bibliographic details

Key Global Projections and Recent Developments

Recent sectoral and market developments

Updated Forecast — Advanced Economies

Updated Forecast — Emerging Market and Developing Economies

Forecast Revisions and Trade

Downside Risks to the Outlook

Policy Priorities and Recommendations

Key Statistics (selected from Table 1 and text)

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References