IMF hints at further downgrade to global growth expectations

1 Sep 16

The International Monetary Fund has hinted today that another downgrade in global growth projections could be on the cards when it publishes its next economic outlook in October.


In its most recent update, published ahead of the G20 summit this weekend in Hangzhou, China, the fund highlighted that lethargic reform efforts and a lack of public investment were key factors in low global growth.

In the fund’s last world economic outlook, published in July, it downgraded its global growth projections for 2016 and 2017 by 0.1% on April’s forecast, which itself was a 0.2% cut to the growth the fund predicted in January.

Today, the fund said: “Recent data show muted activity, slower trade growth and very low inflation, pointing to an even more modest pace of global growth this year.  

“Despite record-low interest rates, investment continues to disappoint, reflecting demand conditions as well as high corporate sector debt and weak financial sector balance sheets in many countries. Weak investment further dampens underlying potential growth, which is already low due to dismal productivity trends.”

Presenting the fund’s “surveillance note” on the economy today, Helge Berger, the note’s lead author and division chief in the IMF’s research department, stressed that it was too early to do anything other than speculate on what might change in October’s outlook.

However he did point out that due to weaker than anticipated data in the first half of the year for the US economy, the forecast for US growth would certainly be cut.

“The US economy has a large share in the global outlook, about 15%, and a third of the advanced economies. So if you do the math, the mixed messages that we currently have in the data from the rest of the countries would have to come out in a certain way to compensate for that.”

In terms of the biggest shock to the global economy this year however – the UK’s Brexit vote – Berger noted that financial markets seem to have taken it “in stride”, with much of the immediate plunge in many countries and sectors now undone.

Still, the fund flagged the fallout from Brexit as a risk to growth, especially for Europe. Berger said in the longer term, the trajectory for the UK and elsewhere depends upon the conditions under which it exits from the European Union.

Berger warned however that the whole world could be heading for a “low growth trap” – a negative feedback loop whereby corporations see low growth ahead and are less inclined to invest, which slows trade and causes lower productivity, which perpetuate low growth.

One key reason behind the sluggish figures, the fund said, is a lack of needed reforms and public investment, including in many G20 countries.

For example, the fund highlighted that the leaders of the world’s most powerful economies have only managed to implement around 55% of the reforms they promised to make at summits in 2014, and only 45% of those they promised to make in 2015.

As a result the G20 is currently not on track to meet its commitment to raise its collective GDP by 2% by 2018, and the IMF said this seems “out of reach”, with the most optimistic scenario being 1.5% growth.

Another factor the fund flagged as concerning is rising inequality, which combined with low growth makes for a “challenging policy environment”.

Berger pointed out, for example, that income growth has largely bypassed low earners, showing the benefits of globalisation have not been shared equally.

“These developments threaten to open another negative dynamic, in which political action fails to deliver the structural reforms needed to lift growth and instead turns toward inward-looking assaults on free trade,” the fund said.

Other factors weighing on the world economy include negative long term trends, such as ageing and stubbornly low productivity, and risks including further hiccups in Chinese efforts to rebalance its economy away from manufacturing.

The fund called for an “ambitious” and coordinated policy agenda, that combines long and short term measures, and fiscal and monetary policies.

“G20 leaders should seize the opportunity to explain how the right policies can raise growth, ensure that growth is widely shared and help those who need to adjust to the changing global economy,” the fund said.

“At the national level, best practice should build worker skills and foster social mobility, and can include income policies, among other approaches. Globally, promoting trade integration, reducing external imbalances, and managing spillovers remain essential.”

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