IMF World Economic Outlook (WEO), October 2016: Subdued Demand: Symptoms and Remedies

World Economic Outlook, October 4, 2016

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Global growth is projected to slow to 3.1 percent in 2016 before recovering to 3.4 percent in 2017.
The forecast is revised down by 0.1 percentage point for 2016 and 2017 relative to April.
Revision reflects:
- A more subdued outlook for advanced economies following the June U.K. vote in favor of leaving the European Union (Brexit).
- Weaker-than-expected growth in the United States.
These developments have put further downward pressure on global interest rates, with monetary policy now expected to remain accommodative for longer.
Market reaction to the Brexit shock was described as “reassuringly orderly,” but the ultimate impact is unclear because institutional and trade arrangements between the United Kingdom and the European Union are uncertain.

Short- and long-term forces point to subdued growth for 2016 and a gradual recovery thereafter, but with downside risks. Forces include:
- New shocks (for example, Brexit).
- Ongoing realignments in China and among commodity exporters.
- Slow-moving trends in demographics and productivity growth.
- Noneconomic factors, such as geopolitical uncertainties.
Financial market sentiment toward emerging market economies has improved because of:
- Expectations of lower interest rates in advanced economies.
- Reduced concern about China’s near-term prospects following policy support to growth.
- Some firming of commodity prices.
Divergent regional prospects:
- Emerging Asia in general, and India in particular, show robust growth.
- Sub-Saharan Africa is experiencing a sharp lowdown.
Political economy risk: In advanced economies, a subdued outlook with sizable uncertainty and downside risks may fuel political discontent and strengthen antiintegration policy platforms.
Policy challenges for commodity exporters: Several emerging market and developing economies face daunting adjustment challenges to weaker commodity prices.

Trade growth has slowed since 2012 relative to its strong historical performance and to overall economic growth.
Primary restraint on trade growth: overall weakness in economic activity, especially in investment—accounting for up to three-fourths of the slowdown.
Other contributing factors:
- Waning pace of trade liberalization.
- Recent uptick in protectionism (quantitative impact thus far limited).
- Decline in the growth of global value chains.
Policy implication: Addressing weak economic activity, particularly by boosting investment, will stimulate trade; further trade reforms that lower barriers, combined with measures to mitigate adjustment costs for affected groups, would boost international exchange and help revive the virtuous cycle of trade and growth.

Inflation has declined markedly in many economies; disinflation is broad based across countries, measures, and sectors—larger for tradable goods than for services.
Main drivers of recent disinflation: persistent economic slack and softening commodity prices.
Most measures of medium-term inflation expectations have not declined substantially so far.
The sensitivity of inflation expectations to inflation surprises has increased in countries where policy rates have approached their effective lower bounds (ELB).
- While the magnitude of this change is modest, it suggests the perceived ability of monetary policy to combat persistent disinflation may be diminishing in these economies.
Chapter includes analysis of costs of disinflation, persistently low inflation, and deflation; and examines inflation dynamics, anchoring of expectations, and country-specific experiences (for example, Japan).

China’s rebalancing affects the global outlook through:
- Direct negative impact on global demand through trade.
- Indirect impact through commodity prices.
- Effects on asset prices.
A well-managed transition would benefit the global economy over the long term by supporting more sustainable growth and reducing risks of a disruptive adjustment.
Recommended actions:
- China can help by accepting the slowdown and clearly communicating policy intentions.
- Countries experiencing negative spillovers should use policy buffers in the short term, plan for adjustment, and explore new opportunities to bolster trade.
Migration: Presents both challenges and opportunities:
- Migration can provoke political backlash in recipient economies.
- Migration offers gains in terms of higher growth and relief from population aging.
- Labor market integration is key to harnessing growth gains and migrants’ fiscal contributions.
- Source countries may face negative growth effects that can be mitigated by remittances, diaspora networks, and policies addressing emigration of young and skilled populations.

IMF World Economic Outlook (WEO), October 2016: Subdued Demand: Symptoms and Remedies