IMF cuts world growth forecast, warns of major risks

Agence France-Presse

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IMF cuts world growth forecast, warns of major risks


The International Monetary Fund expects the world economy to grow by only 3.4% in 2016

WASHINGTON, United States – The International Monetary Fund (IMF) warned of substantial risks in the major emerging market economies Tuesday, January 19, as it lowered its outlook for global economic growth this year.

Slower Chinese growth, a stronger US dollar, collapsed oil prices, and political turmoil could all wreak further havoc in struggling economies like Russia and Brazil and across the Middle East, putting the brakes on the global recovery, the Fund said.

It also warned of danger if China does not manage well its slowdown and reforms, already spinning shockwaves through global financial markets. (READ: China’s lowest growth for 25 years: What does it mean?)

And it said the Mideast refugee crisis poses formidable challenges to Europe as it tries to restart growth and urged more efforts to assimilate the new arrivals.

The IMF said it expects the world economy to grow by 3.4% this year, an improvement from 3.1% in 2015 but still 0.2 percentage points below what it predicted in October.

While the advanced countries will anchor world economic expansion in 2016, rather than picking up pace, the United States will grow only 2.6%, 0.2 percentage points less than previously expected due to the strong dollar’s hit on US exporters and the slump in investment in the energy industry.

Europe got a slight upgrade, to 1.7% this year, on the back of Spain’s stronger-than-expected rebound; and Japanese growth should pick up as well.

The Fund stuck to its forecast of 6.3% growth for the Chinese economy, slowing from 6.9% last year.

Separately, Beijing said early Tuesday that its economy grew 6.9% in 2015, slumping to its lowest annual expansion rate in a quarter of a century.

The IMF expressed guarded confidence in Beijing’s ability to manage its metamorphosis into a domestic consumption-driven economy and to modernize its financial sector.

Even so, it expects China’s deceleration will continue into 2017.

Latin America as a whole meanwhile will be dragged into recession by the deep troubles in regional giant Brazil, whose economy the IMF expects to contract by 3.5% this year, after 3.8% in 2015.

Overall, the picture for this year from the IMF, the world’s key crisis lender, is of slowing global trade and investment, with the sharp declines in commodity prices led by oil continuing to hurt exporters while not yet providing expected stimulus to importers and consumers. 

Indeed, rather than a net positive for growth, the steepness of the plunge in oil prices has become a drag as major exporters retrench in the face of large fiscal deficits and the entire oil industry slashes investment.

“Downside risks to our central scenario have intensified,” IMF chief economist Maurice Obstfeld said.

“We may be in for a bumpy ride this year, especially in the emerging and developing world.”

SLOWING ECONOMY. Women work in a clothes factory in Huaibei, Anhui province, China, January 19, 2016. Photo by Woo He/EPA

Focus on China’s reforms

The IMF‘s updated forecast for the world economy dwelled mostly on the interlinked problems that could exacerbate local crises and unleash shockwaves elsewhere.

The transition of China, the world’s second largest economy after the United States, topped the list.

The sharper-than-expected slowdown in Chinese imports and exports is putting more downward pressure on the depressed global commodities market.

“It’s created large spillover effects,” said Obstfeld.

Less directly, that is taking a toll on general economic confidence around the world and fueling more volatility in global markets, which discourages longer-term investment.

However, Obstfeld said markets may be overestimating the risks.

“They may be reacting very strongly to rather small bits of evidence,” he said. “The reactions are very extreme.” 

The IMF suggested that if China’s slowdown intensifies, its own currency could weaken and force down others.

Obstfeld urged Chinese authorities to “communicate more closely with markets” over its currency plans on order to ease volatility.

Added to that is the just-begun program of interest rate increases in the United States, which has strengthened the dollar and raised borrowing costs for emerging market and poorer countries and their corporate sectors.

The IMF also pointed to the potential problems of more political turbulence in countries like Brazil, where the Petrobras corruption scandal is challenging overall economic management, and regional geopolitical disturbances like those in the Middle East.

“In an environment of higher risk aversion and market volatility, even idiosyncratic shocks in a relatively large emerging market or developing economy could generate broader contagion effects,” the Fund warned. – Paul Handley, Agence France-Presse/

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