IMF sees world economy ′moving sideways′ | Business| Economy and finance news from a German perspective | DW | 04.10.2016
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IMF sees world economy 'moving sideways'

The International Monetary Fund (IMF) has left its global growth forecast unchanged, but warned the global economy is failing to break out of its decade-long low-growth trap despite signs of stability.

The Washington-based crisis lender released its World Economic Outlook on Tuesday, forecasting worldwide growth to reach 3.1 percent this year and 3.4 percent in 2017 - unchanged from an IMF projection published in July.

IMF chief economist Maurice Obstfeld described the world economy as "moving sideways," saying that long-term potential growth was now lower in all regions compared to the decade before the 2008/2009 financial crisis.

"Growth has been too low for too long," he told a news conference in Washington and its benefits had reached too few

The Fund downgraded forecasts both for growth in global trade volume and for advanced economies' output, saying that prospects for richer countries had darkened this year.

With a reference to stalled free trade negotiations between the European Union and the United States, the IMF Chief Economist urged leaders on both sides of the Atlantic to defend the prospect for increasing trade integration, saying this was vitally important. "Turning back the clock on trade can only deepen and prolong the world economy's current doldrums."

The IMF downgraded its outlook for advanced economies this year by 0.2 percentage points to 1.6 percent but raised it slightly for emerging and developing economies to 4.2 percent. Next year's forecasts were unchanged.

Eurozone faces Brexit uncertainty

According to IMF data, the 19-nation eurozone is expected to grow 1.7 percent this year and 1.5 percent in 2017. But uncertainty would remain high in the euro currency area due to the still unknown consequences of Britain's decision to leave the EU and ongoing worries over low inflation.

"Low oil prices, a modest fiscal expansion in 2016, and easy monetary policy will support growth, while weaker investor confidence on account of uncertainty following the Brexit vote will weigh on activity," the IMF stated in the report.

The IMF warned that super low inflation would remain a reality in Europe for at least the next five years in a warning that the waves of unprecedented stimulus by the ECB would fail to substantially boost prices.

It also sounded alarm over the current recovery in eurozone domestic demand, which was decelerating in some of the larger euro area economies after successive quarters of stronger-than-expected growth.

"The European Central Bank should maintain its current appropriately accommodative stance," the IMF said, with still additional stimulus needed if inflation fails to pick up.

In eurozone countries more severely affected by the crisis - such as Greece, Portugal and Spain - growth and investment is expected to remain "well below their precrisis levels." In addition, trouble at banks in the eurozone, weighed down by bad loans, has potentially held back lending and suppressed investment across the bloc.

"Most dramatically, the unexpected vote for Brexit... brings political and economic uncertainties that threaten to dampen investment and hiring throughout Europe," the IMF said.

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US losing steam

With regard to the world's biggest economy, the United States, the lender-of-last-resort surprisingly downgraded its outlook, saying business investment is proving weaker than expected.

For 2016, the IMF sees US growth to come in at 1.6 percent - down from 2.2 percent it had predicted in July - and significantly lower than the 2.6-percent US growth figure of last year.

The fund blames the reluctance of US firms to invest on cutbacks in the energy industry, a strong dollar that's depressing exports and "policy uncertainty" surrounding

the November elections.

The IMF said America's weakness was offset by improving prospects among emerging economies.

Upgrades as China stabilizes

In 2016, commodity prices had stabilized, the IMF noted, after last year's free fall caused by a slowdown in demand notably from China.

Growth in China and other emerging economies was likely to continue, the fund said, as it increased India's growth estimate, for example, to 7.6 percent - the fastest rate among the world's major economies.

Russia was also expected to be faring better than last year, even though the oil-dependent economy would still see a mild contraction of minus 0.8 percent

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Regarding growth in the world's second largest economy, China, the IMF left its estimate unchanged at 6.6 percent for this year. It warned, however, that the country's dependence on debt was growing at a "dangerous pace" and it must act to head off a brewing crisis.

The IMF also urged Chinese leaders to speed up vital reforms or risk a painful correction, adding that Beijing's "unsustainably high" growth goals were adding to the problem. While the country has made progress in its attempts to recalibrate the driver of growth, the Fund said failure to address structural issues could destroy that work.

China should rein in the credit growth and cut off support to "unviable" state-owned enterprises, "accepting the associated slower GDP growth."

China's total debt is reported to have hit 168.48 trillion yuan ($25 trillion, 22 trillion euros) at the end of last year, equivalent to 249 percent of national gross domestic product (GDP). Its economy expanded 6.7 percent in the April-June period, the same as the first three months of the year and slowing from 6.9 percent in 2015.

uhe/kd (Reuters, AFP, dpa)


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