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IMF again lowers its global economic growth forecasts

Impact of lower oil prices expected to be more than offset by the challenges weighing on the global economy

Prospects for growth in China have dimmed, but Prof Blanchard says the sub-7 per cent growth expected this year "reflects a welcome decision to reorient the economy towards consumption and away from the real estate sector and shadow banking".


THE International Monetary Fund (IMF) on Tuesday revised downwards its world economic growth projections for this year and the next, acknowledging that not even the benefits of plunging oil prices can compensate for other adverse influences weighing on the global economy.

This was the latest in a series of downward revisions in growth by the IMF as deflation and declining investment levels continue to sap the global economy - even in the face of monetary easing by central banks in the US, Britain, Japan and, imminently, the European Union.

In its latest six-monthly update to its World Economic Outlook report launched on Tuesday in Beijing, the IMF said that growth would be boosted by lower oil prices, which reflect, to an important extent, a higher supply. "But this boost is projected to be more than offset by negative factors including investment weakness, as adjustment to diminished expectations about medium-term growth continues in many advanced and emerging market economies."

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The IMF's forecast for global growth this year is 3.5 per cent, 0.3 percentage point higher than global growth in 2014, but 0.3-point less than the IMF's forecast last October, said IMF economic counsellor and research director Olivier Blanchard. "For 2016, we forecast 3.7 per cent growth, again a downward revision (of 0.3-point) from the last World Economic Outlook."

Underlining sharp differentiation in prospects, the IMF has revised its US growth forecast for 2015 up by 0.5-point to 3.6 per cent, but revised euro-area growth down by 0.2-point to 1.2 per cent, and Japan's growth down by 0.2-point to just 0.6 per cent.

Growth in emerging Asia will remain "very high", it said, although China's projection has been revised down by 0.3-point to 6.8 per cent and India's by 0.1-point to 6.3 per cent. Growth in Asean's five biggest economies is revised down 0.2-point to 5.2 per cent.

Russia will take an especially bad hit with growth this year revised down by 3.5-points to minus-3 per cent; big downward revisions have also been made for Latin America and sub-Saharan Africa.

Prof Blanchard said that the world economy was facing "strong and complex cross currents". On the one hand, major economies were benefiting from the decline in the price of oil; on the other, lower long-run prospects in many parts of the world will adversely affect demand, "resulting in a strong undertow".

Oil prices have plunged from around US$100 a barrel last June to under US$50 now, and much of this decline is likely to be "persistent", he suggested.

"The sudden decline appears largely due to an unexpected change in Opec's strategy, namely the decision to maintain Opec supply in the face of steadily increasing non-Opec supply and weakening global demand."

For oil importers, the price plunge is good news, said Prof Blanchard. It raises real income and decreases costs of production for firms - two trends that trigger more spending. "The effect could potentially be large," he said.

But he added that lower oil prices also lead to lower inflation, which, at other times, could be a blessing; in the current environment of too-low inflation and central banks' policy rates being close to zero, it is a source of worry.

On balance, the effect for oil importers is strongly positive, while that for oil exporters and firms involved in new forms of energy production, it is clearly the opposite.

Prof Blanchard said that the oil price plunge could turn out to be a "stronger shot in the arm" than has been implicit in the IMF's forecasts, and that if so, the IMF might have to revise up its forecasts later.

Another important development has been the movement in exchange rates, he noted. Since August, the dollar has appreciated in real terms by 7 per cent; the euro has depreciated by 3 per cent, and the yen by 10 per cent.

Dollar appreciation will boost demand in the euro area and Japan, and maybe help them out of their slump, but these positive developments are offset by bad news on a number of fronts.

"One of the major disappointments of 2014 was the low growth in Japan. Sustained growth there requires more private demand in the short run, and higher potential growth in the medium run.

"But both private domestic and foreign demand have disappointed recently, and the structural reform impetus still seems too weak to raise expectations about future growth and spur investment."

The IMF has revised down its assessment of underlying growth potential in many countries as the effects of the decline in commodity prices which began in 2011 are becoming clearer.

Prof Blanchard noted: "In China, on the other hand, the gradual decrease in growth to below 7 per cent in 2015 reflects a welcome decision to reorient the economy towards consumption and away from the real estate sector and shadow banking."

The chief downside risks involve stagnation in the euro area and in Japan, where monetary policy, fiscal policy and structural policies "continue to be of the essence", he said.

"Risks of another episode of turmoil associated with the increase in short rates in the US are present, but limited. Some emerging market corporates indebted in dollars could also prove vulnerable to the additional pressures from a strong dollar and weak earnings from low commodity prices."