IMF Says World Economy More Exposed to Risks; Cuts Global Growth Forecast

In its latest World Economic Outlook, the Internationa Monetary Fund (IMF) forecasts global growth at 3.2 percent in 2016 and 3.5 percent in 2017, a downward revision of 0.2 percent and 0.1 percent, respectively, compared with the January 2016 Update.

IMF Managing Director Christine Lagarde has warned that the recovery remains too slow, too fragile, with the risk that persistent low growth can have damaging effects on the social and political fabric of many countries.

“Lower growth means less room for error,” said Maurice Obstfeld, IMF Economic Counsellor and Director of Research. “Persistent slow growth has scarring effects that themselves reduce potential output and with it, demand and investment,” he added.

Moderate recovery in advanced economies

Growth in advanced economies is projected to remain modest at about 2 percent, according to the WEO. The recovery is hampered by weak demand, partly held down by unresolved crisis legacies, as well as unfavorable demographics and low productivity growth.

In the United States, expected growth this year is flat at 2.4 percent, with a modest uptick in 2017. Domestic demand will be supported by improving government finances and a stronger housing market that help offset the drag on net exports coming from a strong dollar and weaker manufacturing.

In the euro area, low investment, high unemployment, and weak balance sheets weigh on growth, which will remain modest at 1.5 percent this year and 1.6 percent next year.

In Japan, both growth and inflation are weaker than expected, reflecting in particular a sharp fall in private consumption. Growth is projected to remain at 0.5 percent in 2016 before turning slightly negative to -0.1 percent in 2017, as the scheduled increase in the consumption tax rate goes into effect.

Emerging and developing economies slowing further

While emerging markets and developing economies will still account for the lion’s share of world growth in 2016, prospects across countries remain uneven and generally weaker than over the past two decades.

The WEO projects their growth rate to increase only modestly—relative to 2015—to 4.1 percent this year and 4.6 percent next year.

This forecast reflects a variety of factors, such as the modest slowdown in China, where growth continues to shift away from manufacturing and investment to services and consumption. On the positive side, India remains a bright spot—with strong growth and rising real incomes.

The ASEAN-5 economies—Indonesia, Malaysia, Philippines, Thailand, and Vietnam—are also performing well. And Mexico, Central America, and the Caribbean are beneficiaries of the U.S. recovery and, in most cases, lower oil prices.

Risks are on the rise

In the current environment of weak growth, risks to the outlook are now more pronounced.

The WEO says that an additional bout of exchange rate depreciations in emerging market economies could further worsen corporate balance sheets, and a sharp decline in capital inflows could force a rapid compression of domestic demand.

A protracted period of low oil prices could further destabilize the outlook for oil-exporting countries. Meanwhile, a sharper slowdown in China than currently projected could have strong international spillovers through trade, commodity prices, and confidence, and lead to a more generalized slowdown in the global economy.

On the upside, the recent decline in oil prices may boost demand in oil-importing countries more strongly than currently envisaged, including through consumers’ possible perception that prices will remain lower for longer.

The WEO warns that policymakers also need to make contingency plans and design collective measures for a possible future in case downside risks materialize. Cooperation to enhance the global financial safety net and global regulatory regime is also central to a resilient international and financial system.

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