The International Monetary Fund (IMF) yesterday lowered its forecast of global economic growth over the next two years amid the deepening slowdown in emerging markets and a continued slump in oil prices. The IMF now projects the world economy will grow 3.4 percent this year, which is 0.2 percentage points lower than its earlier estimates.
Next year’s growth is estimated at 3.6 percent. It is the second time this year that the IMF has downgraded its forecast for global economic growth. “Growth expectations seem to fall consistently. I think the year coming is going to be a year of great challenges,” said the IMF’s chief economist, Maury Obstfeld.
The largest downgrade of all is for Nigeria, which has been hit by the low price of crude oil, but Brazil, Russia and many others are also now expected to experience weaker performance.
Although the global economy has appeared to recover from the financial crisis and the recession, the IMF has become increasingly concerned about its lacklustre performance. Fears that the outlook could be even gloomier roiled financial markets during the first few weeks of the year.
China officially entered a bear market last week after a brutal selloff Friday that sent the Shanghai Composite Index down 20 percent from last year’s high. It also announced late Monday that its growth rate had slowed to 6.9 percent in 2015, the slowest pace in a quarter century.
IMF managing director Christine Lagarde has previously described the current state of the world economy as “the new mediocre”. The new report is subtitled: “Too slow for too long”.
It warns of risks that could lead to results worse than the main forecast. One danger highlighted is a return to the financial market turmoil that hit the world earlier in the year.
China’s efforts to shift the national economy towards consumer spending and services are described as something that will eventually benefit China itself and the world. But given the country’s important role in world trade, “bumps along the way” could be damaging for others.
There is a warning about “the global impact of the unwinding of prior excesses in China’s economy as it transitions to a more balanced growth path after a decade of strong credit and investment growth.”
There is also a concern that persistent slow growth could reduce the capacity for further growth in the future. There is a risk, the report says, of the world economy falling into widespread stagnation.
The IMF forecast that growth in China will further slow to 6.3 percent this year and fall to 6 percent in 2017 – below Beijing’s official target. Many analysts are skeptical of the country’s estimates of growth, and some fear its economy is in much worse shape than officials are willing to acknowledge.
China’s boom had been built on exporting its low-priced goods around the world, driving domestic investment in factories, equipment and infrastructure. China’s seemingly insatiable demand for raw materials also helped buoy resource-rich countries, such as Brazil and Zambia. Now the tide is turning.
Chinese exports face stiff price competition from other Asian countries at the same time that worldwide demand is sagging. Beijing is attempting to shift the country’s economic engine from manufacturing and trade to consumer spending, but the adjustment is slow and painful. And lately, investors have begun to question whether officials are up to the challenge.
“We don’t see a big change in fundamentals in China… but the markets are certainly very spooked by small events that they find very hard to interpret,” Obstfeld said.
Meanwhile, the IMF said it expects oil prices to remain “low for long.” The price of Brent crude oil on international markets recently fell below $30 a barrel, a psychologically important benchmark.
Many analysts expect Iran to ramp up production after US sanctions were lifted this weekend, thus adding to the global supply glut and holding down prices.