Global economy set to cool down, says IMF

9 Oct 13
The International Monetary Fund has revised down its global growth prediction for both this year and next, saying there is a ‘natural cooling’ underway following the stimulus-driven surge in activity after the financial crisis.

By Richard Johnstone | 9 October 2013

The International Monetary Fund has revised down its global growth prediction for both this year and next, saying there is a ‘natural cooling’ underway following the stimulus-driven surge in activity after the financial crisis.

In its latest World economic outlook, the fund said a number of ‘structural bottlenecks’ in infrastructure, labour markets and investment had contributed to a slowdown in many emerging markets. Much of the growth the world will see will be driven by advanced economies, the report stated.

The analysis of global growth is based on an assumption that the ongoing government shutdown in the US will be short-lived and the current federal government borrowing limit raised before any default. If the debt ceiling is not raised, the US Treasury has warned the country could be unable to pay bondholders as soon as October 22.

This ‘political standoff’ must be resolved, the IMF said, and the Federal Reserve should also carefully wind down its quantitative easing purchases.

Based on a quick resolution to the government funding crisis, the US is expected to grow by 1.6% this year, down by 0.1 percentage point compared to the projection in July’s WEO. This will increase to 2.6% next year.

The eurozone is predicted to contract by 0.4% this year, and then grow by 1% in 2014, the same as predicted by the European Forecasting Network yesterday.

According to the IMF, risks in the currency zone have stabilised, but growth in some peripheral countries is still constrained by credit bottlenecks from the recovering banking sector.
Meanwhile in Japan, fiscal stimulus and monetary easing, under Prime Minister Shinzo Abe’s so-called Abenomics programme, has led to an ‘impressive rebound’ in activity, the WEO stated. However, it expected forthcoming reductions in government spending, together with consumption tax hikes, to lower growth from 2% this year to 1.2% in 2014.

In China, growth is projected to fall from 7.6% this year to 7.3% in 2014. So far, Chinese policymakers have not introduced any stimulus due to concerns about financial stability, and the IMF said the country should be placed on ‘a more balanced and sustainable growth path’.

The report also stated there were risks faced by a host of emerging economies, which as a group have had their growth prospects for the next year downgraded. It is now expected they will grow by 4.5% in 2013 (down 0.5 percentage points from July) and 5.1% in 2014 (down 0.4 points).

Many developing countries are vulnerable to global market changes, such as hikes in asset prices. Unreformed financial sectors in developing countries could also impact growth, as could high government debt, the report stated.

‘Even if some of these risks materialised, they would affect all economies through cross-border trade and financial spillovers,’ the report said.

‘So the WEO highlights the risk of the global economy remaining stuck in low gear for a prolonged period.’

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