DRESSED FOR SUCCESS
IMF cites geopolitical tensions, slowed domestic demand in China
A worker wears a god-of-fortune costume to attract customers into his shop selling Chinese-made souvenirs in Beijing on Thursday. China’s manufacturing rose in July to its highest level in 18 months. For the outlook on economic growth around the world,
OTTAWA — While the global economy continues to expand, the pace of recovery has been dampened by harsh winter weather in the United States, slowing domestic demand in China and concerns over geopolitical tensions, according to the world’s largest lending agency.
“Global growth could be weaker for longer, given the lack of robust momentum in advanced economies, despite very low interest rates,” the International Monetary Fund said Thursday in an update to its World Economic Outlook report. Monetary policy should “remain accommodative in all major advanced economies.”
In Canada, where policymakers have held the key interest rate at one per cent since September 2010, output is also expected to be weaker than previous IMF projections.
The Washington-based IMF is forecasting our economy to expand 2.2 per cent this year, down from 2.3 per cent in the agency’s April outlook, although the pace of growth remains on track for 2015 at 2.4 per cent. Those projections are in line with the Bank of Canada forecasts released on July 16 in its quarter Monetary Policy Report.
Meanwhile, the IMF said the United States, the world’s biggest economy and Canada’s largest trading partner, will grow 1.7 per cent this year, below its previous forecast of 2.8 per cent.
“The inventory overhang at the end of 2013 turned out to be larger than expected, leading to a stronger correction. A harsh winter further dampened demand, exports declined sharply after a strong fourth quarter, and output contracted in the first quarter of 2014.”
However, the U.S. is expected to pick up speed next year, likely at a pace of three per cent. The Federal Reserve has kept its benchmark lending rate in a range of zero to 0.25 per cent since December 2008, waiting for sustained economic and employment growth.
Economists do not anticipate rates will change in Canada and the U.S. until mid-2015 or later, depending on domestic and international headwinds, which remain questionable.
“Geopolitical risks have risen relative to April,” the IMF said.
“Risks of an oil price spike are higher due to recent developments in the Middle East, while those related to Ukraine are still present,” it said. “In global financial markets, there is a risk of a renewed rise in longer-term interest rates, particularly if U.S. long-term rates increase more sharply and rapidly than expected as monetary policy normalization proceeds.”
The IMF, which groups emerging markets with developing economies, predicts growth in those countries of 4.6 per cent this year, a touch below 4.7 per cent expansion in 2014 but down 0.2 per cent from the April outlook. Together, those countries — including China, Russia, India, Brazil and Mexico — grew 4.7 per cent in 2013 and 5.1 per cent a year earlier.
The IMF barely touched its previous forecasts for 2015. It sees global growth of four per cent next year, with advanced economies likely to add 2.4 per cent overall — down just 0.1 per cent from the agency’s April outlook. Emerging markets are expected to increase by 5.2 per cent in 2015 — also 0.1 per cent lower than previously thought.
In particular, the IMF said China, the world’s second largest economy — it overtook Japan in 2010 — is expected to gain 7.4 per cent this year before easing to 7.1 per cent in 2015. Both estimates are down 0.2 per cent from April outlook levels.
The IMF concluded that for many economies, both advanced and emerging, “there is an urgent need for structural reforms to strengthen growth potential or make growth more sustainable.”