The IMF’s latest World Economic Outlook foresees lower global growth compared to last year, with modest pickup in advanced economies and a slowing in emerging markets, primarily reflecting weakness in some large emerging economies and oil-exporting countries.
“Six years after the world economy emerged from its broadest and deepest postwar recession, the holy grail of robust and synchronized global expansion remains elusive,” said Maurice Obstfeld, the IMF economic counselor and director of the research department.
“Despite considerable differences in country-specific outlooks, the new forecasts mark down expected near-term growth marginally but nearly across the board. Moreover, downside risks to the world economy appear more pronounced than they did just a few months ago,” Obstfeld said.
Global real GDP grew at 3.4% last year, and is forecast to grow at only 3.1% this year. Growth is expected to rebound to 3.6% next year.
These forecasts reflect a world economy that is at the intersection of at least three powerful forces, Obstfeld noted. First, China’s economic transformation—away from export- and investment-led growth and manufacturing, in favor of a greater focus on consumption and services; second, and related, the fall in commodity prices; and third, the impending increase in US interest rates, which can have global repercussions and add to current uncertainties.
In this global environment, with the risk of low growth for a long time, the WEO underlines the need for policymakers to raise actual and potential growth.
Recovery on Course
Growth in advanced economies is projected to increase modestly to 2% this year and 2.2% next year. This year’s pickup reflects primarily a strengthening of the modest recovery in the eurozone 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.
EMs Slower Growth
Growth prospects in emerging markets and developing economies vary across countries and regions. But the outlook in 2015 is generally weakening, with growth for these economies as a group projected to decline from 4.6% in 2014 to 4% in 2015.
The fifth straight year of slowing growth reflects a combination of factors: weaker growth in oil exporters, a slowdown in China with less reliance on commodity-intensive investment, adjustment in the aftermath of credit and investment booms, and a weaker outlook for exporters of other commodities, including in Latin America, following declines in their export prices. In addition, geopolitical tensions and domestic strife in a number of countries remain high, with immense economic and social costs.
External conditions are becoming more difficult for most emerging economies. The prospect of rising US 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 normalization 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.
Downside Risks
Given the distribution of risks to the near-term outlook, global growth is more likely to fall short of expectations than to surprise on the upside. The WEO report outlines important shifts that could stall global recovery. These include:
Lower oil and other commodity prices, which although benefiting commodity importers, complicate the outlook for commodity exporters, some of whom already face strained initial conditions (e.g., Russia, Venezuela, Nigeria).
A sharper-than-expected slowdown in China, if the expected rebalancing toward a more market-based and consumption-driven growth proves more challenging than expected.
Disruptive asset price shifts and a further increase in financial market volatility could involve a reversal of capital flows in emerging market economies. Further, renewed concerns about China’s growth potential, Greece’s future in the eurozone, the impact of sharply lower oil prices, and contagion effects could be sparks for market volatility.
