The “increasingly disappointing” world economy is facing the threat of a “synchronised slowdown” and mounting risks including another bout of financial market turmoil and a political backlash against globalisation, the International Monetary Fund has warned.
In its semi-annual World Economic Outlook, the IMF on Tuesday reduced its global growth forecast for 2016 by 0.2 percentage points to 3.2 per cent, downgrading its expectations for a wide range of advanced and emerging economies.
The IMF said the world economy was increasingly vulnerable to “downside risks” including further market turmoil in the wake of this year’s China-led downturn as well as the political consequences of lacklustre growth since the 2008 global financial crisis.
“Growth has been too slow for too long,” said Maurice Obstfeld, the IMF’s chief economist, warning of a widespread sense that too many people were being left behind.
“Across Europe the political consensus that once propelled the European project is fraying,” he said, arguing that the refugee crisis and recent terrorist attacks had combined with economic pressures, including stagnant wages, to lead to a “rising tide of inward-looking nationalism”.
He cited the “real possibility” that the UK would vote in its June 23 referendum to leave the EU, adding that in the US a backlash against globalisation “threatens to halt or even reverse the postwar trend of ever more open trade”.
In a sign of its concern, the IMF called for policymakers in large economies to identify policies “that could be implemented quickly if there are signs that global downside risks are about to materialise” to prevent a slip back into global recession.
The IMF said that the threat of synchronised slowdown required “bold multilateral actions to boost growth and contain risks at this critical stage of the global
Its gloomy forecasts include downgrades for the growth prospects of major economies ranging from the US, which it now expects to grow by just 2.4 per cent this year, to Japan (0.5 per cent), the euro area (1.5 per cent) and the UK, which it also expects to slow to 1.9 per cent growth this year.
The one bright spot among major economies was China, which the IMF said it now believed would grow 6.5 per cent in 2016, up from its previous forecast of 6.3 per cent growth, thanks to a raft of short-term stimulus measures pushed through by Beijing to meet politically-loaded growth targets. But even that came with a caveat. The IMF said it was downgrading its longer term forecasts for China as the better short-term picture was built on expanding credit and other unhealthy policies that would come at a cost to growth later.
Elsewhere among emerging economies the IMF forecast that growth would fade and recessions would linger. Both the Brazilian and Russian economies would contract again this year, the fund said, while sub-Saharan Africa would grow just 3 per cent, a full percentage point slower than the IMF forecast just three months ago.
Despite again being forced to downgrade its forecasts, a pattern that has become familiar since the financial crisis, the fund said it still expected global growth to accelerate next year, forecasting marginally higher growth of 3.5 per cent for the global economy next year.
But that forecast, it conceded, hinged on growth rising in emerging and developing economies thanks to recoveries in stressed economies such as Brazil and Russia. With growth in advanced economies expected to remain modest it also depended on China’s growth remaining relatively high even as it achieved a successful rebalancing away from an investment- and export-driven model to one more reliant on domestic consumption.
“In the current environment, the likelihood that this central scenario [for 2017] will materialise has weakened, as risks of weaker growth have become more salient,” wrote IMF economists. Financial Times