World growth outlook withstands currency crisis

Global growth projections are holding up against China's surprise move to change its exchange-rate regime as economists remain confident a slowdown there won't be severe enough to derail the world economy. Forecasters see the global economy gaining 3.1 percent in 2015, unchanged from their consensus view a month earlier, a survey of economists showed. Respondents predict growth will accelerate to 3.5 percent next year, compared with 3.6 percent in the prior survey, according to the median estimate.

The People's Bank of China moved to weaken the nation's currency Tuesday, touching off the yuan's steepest two-day drop since 1994. While the Chinese action stirred speculation that the nation's growth momentum may be slowing more than expected, most economists said the global fallout from the devaluation will be minimal.

"I don't think we should see the devaluation as a bad thing for the global economy and global growth," Robert Minikin, head of Asia foreign-exchange strategy at Standard Chartered Bank in London, said in a phone interview on Wednesday. "To the extent that it's an orderly, contained adjustment, and that actually brings us toward a more reasonable set of FX rates, it could actually be a healthy development."

China's central bank cut the currency's reference rate by 1.9 percent on Aug. 11 and has lowered it further since. Under the PBOC's new system to set the daily fixing, market makers who submit contributing prices must consider the previous day's close, foreign-exchange demand and supply, as well as changes in major currency rates. The PBOC said in a press conference that there's no basis for depreciation to persist and policy makers will step in to control large fluctuations.

Two motivations could have prompted China's decision, said Zheng Liu, a senior research adviser at the Federal Reserve Bank of San Francisco. The move might be part of the nation's push to make the currency more freely floating in order to meet the criteria to become a member of the IMF's Special Drawing Rights basket of reserve currencies.

"It's more likely that in China, the government realizes that the slowdown is worse than they thought, so they're trying to stimulate the economy," he said in an interview on Wednesday. Chinese growth that's weaker than expected could drive commodity prices and global inflation lower, he said.

China's move came against a backdrop of lackluster economic data: The International Monetary Fund projected in July that the country's economy will expand 6.8 percent this year, down from 7.4 percent growth in 2014. Reports in recent days have showed a pullback in Chinese industrial production and a slump in exports.

The yuan changes were probably partly "a panicked decision by some politicians in China" in response to the nation's economic slowdown, Adam Posen, president of the Peterson Institute for International Economics in Washington, said in an interview on Tuesday. "It also raises the prospect that their panic is based on them knowing something bad that we don't know yet -- we being people outside the government." The yuan weakening will create winners and losers, Minikin said. A cheaper yuan could cost trading partners in Asia, whose goods become less competitive when their currencies become more expensive against China's. That effect could be offset if China's move boosts its export performance, causing positive reverberations throughout the supply chain.

"If you do get a further depreciation in the currency and that helps the Chinese economy, that could be very positive for global growth," said Gennadiy Goldberg, a U.S. rates strategist at TD Securities in New York. In the US, economic spillover from the devaluation will probably be limited, economists said.