IMF con­firms slower global GDP growth tar­gets in 2015 and 2016

Financial Mirror (Cyprus) - - FRONT PAGE - By Jon C. Ogg

When Chris­tine La­garde of the In­ter­na­tional Mon­e­tary Fund (IMF) spoke last week, it had all the hall­marks of a pre­cur­sor to a down­grade of the IMF’s global growth tar­gets. Now we have a con­fir­ma­tion that the IMF did in fact down­grade its global growth views ahead in the Oc­to­ber ver­sion of the World Eco­nomic Out­look.

There ac­tu­ally may be some good news here de­spite the di­rec­tion of the move.

Global GDP growth is mod­er­ate and un­even, and the new IMF forecast is for global GDP growth of 3.1% for 2015 and 3.6% in 2016. That growth was 3.4% in 2014. Again, think of the sever­ity (or lack thereof) rather than the di­rec­tion and think about those num­bers ver­sus how the mar­kets were re­act­ing to slow­ing eco­nomic num­bers in Au­gust and Septem­ber.

A fo­cal point of the IMF, as you would ex­pect, is that there are dis­parate for­tunes be­tween the ad­vanced and emerg­ing mar­ket and de­vel­op­ing economies. The other point made was that lower com­mod­ity prices are weigh­ing on com­mod­ity ex­porters — a move that may not end any time soon. Three forces were cited for the for­mal growth down­grade: - China’s eco­nomic trans­for­ma­tion that is away from ex­port-led and in­vest­ment-led growth and man­u­fac­tur­ing, in favour of a greater fo­cus on con­sump­tion and ser­vices; - The fall in com­mod­ity prices; - The im­pend­ing in­crease in U.S. in­ter­est rates, which can have global reper­cus­sions and add to cur­rent un­cer­tain­ties.

The IMF noted that the re­cov­ery in ad­vanced economies is stay­ing its course. It said: “Growth in ad­vanced economies is pro­jected to in­crease mod­estly to 2% this year and 2.2% next. This year’s pickup re­flects pri­mar­ily a strength­en­ing of the mod­est re­cov­ery in the euro area and a re­turn to pos­i­tive growth in Ja­pan, sup­ported by de­clin­ing oil prices, ac­com­moda­tive mon­e­tary pol­icy, and im­proved fi­nan­cial con­di­tions, and in some cases, cur­rency de­pre­ci­a­tion… While growth is ex­pected to in­crease in 2016, es­pe­cially in North Amer­ica, medium-term prospects re­main sub­dued, re­flect­ing a com­bi­na­tion of lower in­vest­ment, un­fa­vor­able de­mo­graph­ics, and weak pro­duc­tiv­ity growth.”

What the world needs to be more con­cerned about than any­thing is a slower growth in emerg­ing and de­vel­op­ing economies. The IMF’s out­look in 2015 is gen­er­ally weak­en­ing, with growth for emerg­ing and de­vel­op­ing economies as a group pro­jected to de­cline to 4.0% in 2015 from 4.6% in 2014. This would be the fifth straight year of slow­ing growth.

Weaker oil ex­port from oil na­tions, the woes of China, Latin Amer­i­can weak­ness and geopo­lit­i­cal ten­sions and do­mes­tic strife in a num­ber of coun­tries were all also noted for a slower global growth story.

The IMF said: “Ex­ter­nal con­di­tions are be­com­ing more dif­fi­cult for most emerg­ing economies. The prospect of ris­ing U.S. in­ter­est rates and a stronger dol­lar has al­ready con­trib­uted to higher fi­nanc­ing costs for some bor­row­ers, in­clud­ing emerg­ing and de­vel­op­ing economies. And while the growth slow­down in China is so far in line with fore­casts, its cross-bor­der reper­cus­sions ap­pear larger than pre­vi­ously en­vis­aged, in­clud­ing through weaker com­mod­ity prices and re­duced im­ports.”

The pro­jected re­bound in growth in emerg­ing mar­ket and de­vel­op­ing economies in 2016 there­fore re­flects not a gen­eral re­cov­ery, but mostly a less deep re­ces­sion or a par­tial nor­mal­i­sa­tion of con­di­tions in coun­tries in eco­nomic dis­tress in 2015 (in­clud­ing Brazil, Rus­sia, and some coun­tries in Latin Amer­ica and in the Mid­dle East), spillovers from the stronger pickup in ac­tiv­ity in ad­vanced economies, and the eas­ing of sanc­tions on the Is­lamic Re­pub­lic of Iran.

Growth in low-in­come de­vel­op­ing economies is ex­pected to slow to 4.8% in 2015, from 6% in 2014, in large part due to weak com­mod­ity prices and the prospect of tighter global fi­nan­cial con­di­tions. Some coun­tries (e.g., Kyr­gyz Re­pub­lic, Mozam­bique) have been run­ning large cur­rent ac­count deficits, ben­e­fit­ing from easy ac­cess to for­eign sav­ings and abun­dant for­eign di­rect in­vest­ment, es­pe­cially in re­sourcerich coun­tries, and hence are par­tic­u­larly vul­ner­a­ble to ex­ter­nal fi­nan­cial shocks.

Frankly, none of this should be sur­pris­ing to any­one who has been pay­ing at­ten­tion to the fi­nan­cial media.

Another con­sid­er­a­tion, a prob­lem that has ex­isted with the other eco­nomic watchdog groups (in­clud­ing our own Fed­eral Re­serve), is that ev­ery­one’s global growth tar­gets seem to have been too high rou­tinely.

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