IMF Lowers Global Growth Forecasts for 2016, 2017

21 January 2016

The International Monetary Fund (IMF) revised downward its global growth forecasts for both this year and next, with growth now set to hit 3.4 percent in 2016 and 3.6 percent in 2017. The news of the lower estimates comes amid continued concern over slowdowns in China and other emerging markets and the potential ramifications for the global economy more broadly.

“Despite the modesty of the reduction we see in general growth prospects and the promise of improvement in coming years, downside risks to our central scenario have intensified,” said Maurice Obstfeld, IMF Economic Counsellor and Director of Research, in a related blog post following the publication of the newest World Economic Outlook.

“We may be in for a bumpy ride this year, especially in the emerging and developing world,” he added.

The revised figures do suggest that 2016 and 2017, with their expected growth of 3.4 and 3.6 percent respectively, are still improvements over last year’s 3.1 percent growth, despite being lower than earlier predictions.

The Fund has attributed the bulk of the change in forecasts to the situation in emerging and developing economies. That said, advanced, emerging, and developing economies are all set to see some accelerations in growth over the coming two years.

Specifically, advanced economies are set to grow at an average rate of 2.1 percent for both 2016 and 2017, while emerging market and developing economies are slated to see growth rates of 4.3 and 4.7 percent for those two years, respectively.

In a speech given in Paris a few days prior, IMF Managing Director Christine Lagarde similarly noted the challenges that emerging and developing countries – together making up 85 percent of the world’s population and nearly 60 percent of global GDP. These countries, she explained, are now facing a “new reality.”

“Growth rates are down, and cyclical and structural forces have undermined the traditional growth paradigm. On current forecasts, the emerging world will converge to advanced economy income levels at less than two-thirds the pace we had predicted just a decade ago. This is cause for concern,” she said.

The figures, released in the semi-annual World Economic Outlook, are themselves a downward revision from this past October. The IMF’s policy steering committee had already warned during its Annual Meetings that same month that global growth was modest and uneven, with many potential risks ahead. (See Bridges Weekly, 15 October 2015)

The news also comes as the World Economic Forum’s Annual Meeting gets underway, with the high-level event taking place from 20-23 January in the Swiss ski resort town of Davos-Klosters.

With this year’s meeting being held under the theme “Mastering the Fourth Industrial Revolution” – specifically in reference to the effects of rapidly evolving changes in digital technology – the potential dangers facing the global economy are widely expected to draw significant attention during the four-day meet.

China slowdown in focus

While advanced economies such as the US, Japan, and the euro area countries are set to see some growth increases, the IMF warned that these would be slightly less than previously forecast, and that risks for such countries remain, such as the potential diminishing of the American manufacturing sector as a result of the improved strength of the US dollar.

The estimates are less promising for some emerging and developing country economies, most notably China, the world’s largest exporter and this year’s president of the G-20 coalition of developed and emerging economies.

“One downside risk is that China’s economy could encounter rough patches where growth slows more than expected, directly affecting trade partners while disturbing foreign exchange and other financial markets worldwide,” said Obstfeld.

Lagarde, during a 12 January speech at the Banque de France, noted the potential long-run benefits of China’s attempts to rebalance its economy toward a growth path that is more sustainable, while also suggesting that in the near-term such changes are set to have “spillover effects” that could hit trade and commodity demand, among other areas.

Other risk factors for the global economy, according to the Washington-based institution, include further increases in geopolitical tensions that could, in turn, have adverse effects ranging from decreased tourism to trade flow disruptions.

“In advanced economies, currently projected growth rates are too low rapidly to reduce high unemployment and other legacies of recent crises, or to spark strong growth in real wages. In emerging and developing economies, currently projected growth rates substantially slow convergence to higher incomes,” said Obstfeld in his blog for the Fund, outlining a series of general actions that could help supporting aggregate demand, economic efficiency, and the international safety net.

The IMF official noted, however, that along with these general recommendations, country-specific policy actions will also be key moving forward.

ICTSD reporting; “China’s economic turmoil sends ripples of anxieties across G20,” FINANCIAL TIMES, 18 January 2016; “Davos Takes a Fresh Look at Emerging Markets,” THE NEW YORK TIMES, 19 January 2016.

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