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IMF cuts its predictions for the world economy (but says the US is doing ok)

The IMF has cut its economic predictions for the next two years.

Image: acme401

THE INTERNATIONAL MONETARY Fund lowered its forecasts for global growth over the next two years, warning that weakness in most major economies will trump gains from lower oil prices.

The IMF’s report was released as China reported its slowest growth in 24 years.

It downgraded projections it issued in October by 0.3 percentage points each, predicting global growth at 3.5% this year and 3.7% in 2016.

But even with those reductions, the world economy will be growing faster than in 2014, when the IMF estimates it expanded 3.3%.

Much of the momentum is coming from an accelerating recovery in the US, the world’s largest economy.

China reported today that its economic growth slowed to 7.4% last year, the weakest expansion since 1990, compounding the challenges for the country’s communist leaders as they try to overhaul the economy.

Europe, Japan and Russia are also logging slower growth, while the U.S. is a rare bright spot.

IMF Source: IMF

‘Persistent negative forces’

“The recovery in the U.S. is quite strong and therefore it will continue, despite the appreciation of the dollar,” Olivier Blanchard, the IMF’s director of research, told reporters in Beijing in a briefing broadcast online.

The advanced economies are forecast to expand by 2.4% in 2015, a smidgen higher than earlier thought, and at the same rate in 2016. Growth in developing economies is forecast to slip to 4.3% from an estimated 4.4% in 2014, but then recover to 4.7% in 2016.

New factors supporting growth — lower oil prices, but also depreciation of the euro and yen — are more than offset by persistent negative forces, including the lingering legacies of the crisis and lower potential growth in many countries,” Blanchard said.

China IMF Economic Outlook IMF research director Olivier Blanchard Source: Andy Wong/AP/Press Association Images

Ireland is expected to have the fastest-growing economy in the eurozone this year and the next, but region-wide expansion is predicted to sit below 2%.

Diminished expectations for many economies are discouraging investment, which in turn is undermining potential future growth, the report said. Blanchard described Russia’s outlook as “quite bleak” and said the slower growth in China would hurt nations it imports from, especially in Asia.

“The most obvious risks involve stagnation in the eurozone, or Japan, or both,” Blanchard said.

Japan not responding to stimulus

Massive monetary and fiscal stimulus have yet to trigger strong corporate spending in Japan, where companies are pessimistic about a rebound in consumer demand because of the country’s shrinking and aging population.

Still, the 55% plunge in oil prices in US dollar terms since September is raising the purchasing power of consumers and businesses in Japan and many countries, while also raising demand among oil importers. It also reduces pressure on central banks to raise interest rates to cool inflation.

That presents a “complicated mosaic” of implications, Blanchard said, with some countries reaping windfalls in energy savings while others face smaller tax and export revenue.

Overall, weaker prices for oil and other commodities are sapping growth prospects for countries in the Middle East, sub-Saharan Africa — especially Nigeria and South Africa — and Latin America. China’s slowdown will stunt growth throughout developing Asia.

IMF2 Source: IMF

Among the key trends and possibilities it outlines:

  • World trade will accelerate in advanced economies, growing 3.7% in 2015 and 4.8 percent in 2016, up from 3.0% last year. But growth in trade volume will fall this year in emerging markets such as China before rebounding to expand 6.1% in 2016.
  • Weaker oil prices will drag on inflation, with consumer prices rising only 1.0% in the advanced economies and 5.7% in emerging markets.
  • Volatility in prices for oil and other resources has raised risks in global financial markets, with a potential for destabilizing outflows of money from emerging markets.
  • Geopolitical risks such as turmoil in the Middle East and war in Ukraine remain high, though ample supplies have reduced the likelihood of serious supply disruptions.
  • Lower oil prices could give both producing and consuming countries the leeway to enact energy reforms. Eliminating subsidies may free up resources for helping the poor or building needed infrastructure.

Additional reporting Peter Bodkin

READ: Ireland is the IMF’s star pupil. But that doesn’t mean you’re getting any debt relief >

READ: Not burning bondholders was ‘significant flaw’ of troika bailout: Central Bank boss >

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