MF Sees 2015 Global Economic Growth at Weakest Rate Since Financial Crisis
Downgrades forecast for 2015 growth to 3.3% as China and other emerging markets decelerate
International Monetary Fund Economic Chief Economist Olivier Blanchard responds to a question at an April news conference on the World Economic Outlook. Thursday the IMF updated its outlook, saying global growth is set to slow this year to its weakest rate since the financial crisis. PHOTO: EUROPEAN PRESSPHOTO AGENCY
WASHINGTON—Global growth is set to slow this year to its weakest rate since the financial crisis, the International Monetary Fund said Thursday, as China and other emerging markets decelerate and advanced economies still struggle to shrug off the legacies of the crisis.
China’s recent stock-market turbulence is fueling investor worries over deepening economic problems in the world’s second-largest economy, while Greece’s long-festering debt woes threaten to once again damp the eurozone’s nascent recovery.
Greece’s crisis is a warning, said Olivier Blanchard, the IMF’s chief economist. “The postcrisis world is one of high debt and it doesn’t take much with these debt dynamics to go wrong,” he said. “We have to be ready to see other episodes of that kind.”
The IMF downgraded its growth forecast for 2015 by 0.2 percentage point to 3.3% in its report on the world economic outlook. That marks a slowdown from last year’s pace of 3.4% and the feeblest clip since the global economy contracted in 2009.
Still, the IMF expects global growth to pick up in 2016 to 3.8%, if the U.S. and European recoveries gather steam as projected, and if the wobbly global economy isn’t knocked off course by more market meltdowns, geopolitical turmoil or softer growth in the world’s largest economies.
Authorities have fewer options left to respond to downside surprise: Governments have pushed debt to dangerously high levels and central banks are constrained by the lower limits of interest-rate reductions.
“Structural reforms may help a bit, but we have entered a period of low growth,” Mr. Blanchard said, referring to politically controversial economic overhauls that can bump up economic potential.
Weak growth, high debt levels and limited policy options are perfect conditions for more market volatility ahead, including in China.
While the IMF’s chief economist said potential turbulence in financial markets may not create the type of global economic contractions seen in the wake of the 2008-09 financial crisis, “it will clearly lead to some uncertainty for a period of time.”
The revision follows the fund slashing the prospects for U.S. growth after a series of negative shocks, such as a strong dollar, bad weather and a collapse in oil-sector investment, sapped momentum for job creation and expansion. The IMF earlier this week urged the Federal Reserve to hold off raising interest rates for the first time in nearly a decade to avoid potentially stalling the U.S. economy and wreaking havoc in global markets. The strong dollar has fomented trouble for many emerging-market economies and companies that borrowed heavily in dollar-denominated debt, and the prospect of higher interest rates amid weak growth have fostered concerns about the ability of many corporations and governments to pay back their obligations.
“Disruptive asset price shifts and a further increase in financial-market volatility remain an important downside risk,” the IMF said.
International Monetary Fund Economic Chief Economist Olivier Blanchard responds to a question at an April news conference on the World Economic Outlook. Thursday the IMF updated its outlook, saying global growth is set to slow this year to its weakest rate since the financial crisis. PHOTO: EUROPEAN PRESSPHOTO AGENCY
WASHINGTON—Global growth is set to slow this year to its weakest rate since the financial crisis, the International Monetary Fund said Thursday, as China and other emerging markets decelerate and advanced economies still struggle to shrug off the legacies of the crisis.
China’s recent stock-market turbulence is fueling investor worries over deepening economic problems in the world’s second-largest economy, while Greece’s long-festering debt woes threaten to once again damp the eurozone’s nascent recovery.
Greece’s crisis is a warning, said Olivier Blanchard, the IMF’s chief economist. “The postcrisis world is one of high debt and it doesn’t take much with these debt dynamics to go wrong,” he said. “We have to be ready to see other episodes of that kind.”
The IMF downgraded its growth forecast for 2015 by 0.2 percentage point to 3.3% in its report on the world economic outlook. That marks a slowdown from last year’s pace of 3.4% and the feeblest clip since the global economy contracted in 2009.
Still, the IMF expects global growth to pick up in 2016 to 3.8%, if the U.S. and European recoveries gather steam as projected, and if the wobbly global economy isn’t knocked off course by more market meltdowns, geopolitical turmoil or softer growth in the world’s largest economies.
Authorities have fewer options left to respond to downside surprise: Governments have pushed debt to dangerously high levels and central banks are constrained by the lower limits of interest-rate reductions.
“Structural reforms may help a bit, but we have entered a period of low growth,” Mr. Blanchard said, referring to politically controversial economic overhauls that can bump up economic potential.
Weak growth, high debt levels and limited policy options are perfect conditions for more market volatility ahead, including in China.
While the IMF’s chief economist said potential turbulence in financial markets may not create the type of global economic contractions seen in the wake of the 2008-09 financial crisis, “it will clearly lead to some uncertainty for a period of time.”
The revision follows the fund slashing the prospects for U.S. growth after a series of negative shocks, such as a strong dollar, bad weather and a collapse in oil-sector investment, sapped momentum for job creation and expansion. The IMF earlier this week urged the Federal Reserve to hold off raising interest rates for the first time in nearly a decade to avoid potentially stalling the U.S. economy and wreaking havoc in global markets. The strong dollar has fomented trouble for many emerging-market economies and companies that borrowed heavily in dollar-denominated debt, and the prospect of higher interest rates amid weak growth have fostered concerns about the ability of many corporations and governments to pay back their obligations.
“Disruptive asset price shifts and a further increase in financial-market volatility remain an important downside risk,” the IMF said.
The revision follows weaker forecasts for commodity exporters such as Canada, Mexico and Nigeria as export prices continue to slump.
The IMF also downgraded its forecasts for developing countries with strong market ties to China, such as Brazil and major members of the Association of Southeast Asian Nations.
Though markets have since bounced back, souring investor confidence sparked a rout that cut half-a-trillion dollars off China’s stock-market value, spreading into debt and currency markets and putting further downward pressure on commodities.
“Chinese people should get used to very wild gyrations of stock markets,” Mr. Blanchard said. “This is not the first one, it may not be the last.”
The fund warned that China may slow faster than expected as it overhauls its economy, a risk illustrated by the financial-market turbulence. Weakness overseas, overinvestment in real estate and manufacturing and questionable borrowing strategies are forcing the government to revise growth targets to their slowest levels in decades. Those pressures have added to the growth-curbing effects of a planned overhaul of its economy.
Mr. Blanchard pointed to a number of factors should soothe anxious investors. For one, China’s markets play a much smaller role in the economy. There are also signs that authorities have been able to restrain credit growth and real-estate investment. And if growth slowed faster than authorities want, Beijing would likely stimulate growth through the central bank and the government’s budget.
The IMF cautioned that Europe’s evolving Greek crisis risks damping the region’s burgeoning recovery, despite much stronger barriers to contagion. “Timely policy action should help to manage such risks if they were to materialize,” the IMF said.
Europe has built up its bailout funds since the last time Greece’s potential euro exit pulled the region into a growth quagmire, depressed investment and sparked worries about some of its other weak economies. The European Central Bank has also proved to markets its readiness to use its monetary arsenal to douse financial-market fires.
“Nevertheless, recent increases in sovereign bond yields in some euro area economies reduce upside risks to activity in these economies, and some risks of a re-emergence of financial stress remain,” the IMF report said.
Mr. Blanchard warned that anemic potential growth, together with increasing income inequality, are “a recipe for social, political, fiscal problems which may well have dire implications.”
Along with a strengthening U.S., the recovering eurozone was supposed to help offset a fundamental slowdown in emerging markets. Many of those industrializing nations are suffering from a debt-driven hangover as commodity prices fall, interest rates are set to rise and their governments haven’t overhauled their economies to make them more competitive.
Brazil, for example, is expected to contract by 1.5% this year, a half-percentage point lower than the IMF predicted in April, while Russia continues to suffer from Western sanctions and plummeting oil prices.
The revision follows weaker forecasts for commodity exporters such as Canada, Mexico and Nigeria as export prices continue to slump.
The IMF also downgraded its forecasts for developing countries with strong market ties to China, such as Brazil and major members of the Association of Southeast Asian Nations.
Though markets have since bounced back, souring investor confidence sparked a rout that cut half-a-trillion dollars off China’s stock-market value, spreading into debt and currency markets and putting further downward pressure on commodities.
“Chinese people should get used to very wild gyrations of stock markets,” Mr. Blanchard said. “This is not the first one, it may not be the last.”
The fund warned that China may slow faster than expected as it overhauls its economy, a risk illustrated by the financial-market turbulence. Weakness overseas, overinvestment in real estate and manufacturing and questionable borrowing strategies are forcing the government to revise growth targets to their slowest levels in decades. Those pressures have added to the growth-curbing effects of a planned overhaul of its economy.
Mr. Blanchard pointed to a number of factors should soothe anxious investors. For one, China’s markets play a much smaller role in the economy. There are also signs that authorities have been able to restrain credit growth and real-estate investment. And if growth slowed faster than authorities want, Beijing would likely stimulate growth through the central bank and the government’s budget.
The IMF cautioned that Europe’s evolving Greek crisis risks damping the region’s burgeoning recovery, despite much stronger barriers to contagion. “Timely policy action should help to manage such risks if they were to materialize,” the IMF said.
Europe has built up its bailout funds since the last time Greece’s potential euro exit pulled the region into a growth quagmire, depressed investment and sparked worries about some of its other weak economies. The European Central Bank has also proved to markets its readiness to use its monetary arsenal to douse financial-market fires.
“Nevertheless, recent increases in sovereign bond yields in some euro area economies reduce upside risks to activity in these economies, and some risks of a re-emergence of financial stress remain,” the IMF report said.
Mr. Blanchard warned that anemic potential growth, together with increasing income inequality, are “a recipe for social, political, fiscal problems which may well have dire implications.”
Along with a strengthening U.S., the recovering eurozone was supposed to help offset a fundamental slowdown in emerging markets. Many of those industrializing nations are suffering from a debt-driven hangover as commodity prices fall, interest rates are set to rise and their governments haven’t overhauled their economies to make them more competitive.
Brazil, for example, is expected to contract by 1.5% this year, a half-percentage point lower than the IMF predicted in April, while Russia continues to suffer from Western sanctions and plummeting oil prices.
