IMF slashes 2015-2016 world growth forecast

Gerard Lim
IMF slashes 2015-2016 world growth forecast


The IMF said poorer prospects in China, Russia, the euro area and Japan will hold world GDP growth to just 3.5% this year and 3.7% in 2016

WASHINGTON DC, USA – The International Monetary Fund on Tuesday, January 20, sharply cut its 2015-2016 world growth forecast of only 6 months ago, saying lower oil prices did not offset pervasive weaknesses around the globe.

The IMF said poorer prospects in China, Russia, the euro area and Japan will hold world GDP growth to just 3.5% this year and 3.7% in 2016.

The forecasts were lower than the 3.8% and 4% growth for 2015 and 2016 respectively given in the previous World Economic Outlook in October. The cut underscored the steady deterioration of the economic picture for many countries, due to sluggish investment, slowing trade and falling commodity prices.

While the United States will remain the one bright spot among major economies, Europe will continue to struggle with disinflation, the IMF said.

Meanwhile, China’s growth – which Beijing said Tuesday had slowed to 7.4% in 2014, its weakest for 24 years – will decelerate further, hit by poor export growth and a real estate slump, the organization said.

The IMF forecast that the United States, the world’s largest economy, will expand by 3.6% this year, up a half-percentage point from the previous outlook.

But the economy of China, the global number two, is expected to grow 6.8% this year, the IMF said – 0.3% slower than previously expected – and 6.3% in 2016.

The last time Chinese growth fell below seven percent was in the crunch of 1990, when it slowed to 3.8%.

“Lower growth in China will have an adverse effect on its trade partners, in particular on the rest of Asia,” Oliver Blanchard, the IMF’s chief economist, said at a briefing in Beijing, as the organization also downgraded growth prospects for other Asian countries.

For the eurozone and Japan, it said, “stagnation and low inflation are still concerns” requiring sustained monetary easing and other measures to keep interest rates from rising.

In the eurozone, where the region’s central bank is expected to decide to boost stimulus this week, low oil prices and the depreciated euro are a help to growth. But it will also struggle with low investment levels and poorer demand for the region’s exports from emerging economies.

The region is expected to expand 1.2% in 2015, and 1.4% next year. 

Japan’s stimulus has not worked as well as expected, and the IMF expects it to expand just 0.6% this year, picking up to a still-sluggish 0.8% in 2016.

“At this stage potential medium-term growth in Japan is very very low,” Blanchard said.

“So far both private domestic and foreign demand have disappointed.”

Russia, already pressed by sanctions over its support for secessionists in Ukraine, is particularly hurt by lower oil prices. The IMF now says the Russian economy will contract 3.0% this year and 1.0% in 2016. In October the IMF was still predicting slight growth for the country.

Cheap oil good but…

The world’s crisis lender warned that continued volatility in markets, partially a product of the US beginning to tighten monetary policy, pushing the dollar higher, will challenge governments and central banks around the world for some time to come.

And while the halving of crude prices is a net positive for the world, the strong dollar partially negates that effect for many oil importers using weakening currencies. And the impact of slower growth in trade, low commodity prices and market turbulence will all but erase the gains from cheap oil.

“New factors supporting growth – lower oil prices, but also depreciation of euro and yen – are more than offset by persistent negative forces, including the lingering legacies of the crisis and lower potential growth in many countries,” said Blanchard, the IMF’s chief economist.

It meant “good news for oil importers, bad news for oil exporters” he added. “Good news for commodity importers, bad news for exporters… Good news for countries more linked to the euro and the yen, bad news for those more linked to the dollar.”

The IMF stressed that countries need to persist in restructuring, reform and investment despite the weaker conditions.

“Raising actual and potential output is a policy priority in most economies… There is an urgent need for structural reforms in many economies, advanced and emerging market alike,” even as they face different choices and needs in their overall economic policies, it said.

It included in that prescription the need for governments to take advantage of lower oil prices to cut subsidies to strengthen their budgets for the long term. –

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