The International Monetary Fund (IMF) has projected this year's global economic growth to be lower than last year's despite modest pickup in advanced economies because of a slowdown in emerging markets, primarily reflecting weakness in some large emerging economies and oil-exporting countries.
Global real GDP grew at 3.4 per cent last year, and is forecast to grow at only 3.1 per cent this year. Growth is expected to rebound to 3.6 per cent next year, IMF said in its latest World Economic Outlook.
IMF also lowered India's growth rate marginally from the previous 7.5 per cent to 7.3 per cent this year due to a difficult external environment.
''India remains one of the fastest growing economies in the world. We have a more difficult external environment in general, with a slowdown in growth relative to last year,'' said Gian Maria Milesi-Ferretti, deputy director, research department, IMF.
''Six years after the world economy emerged from its broadest and deepest postwar recession, the holy grail of robust and synchronized global expansion remains elusive,'' said Maurice Obstfeld, the IMF Economic Counsellor and Director of the Research Department.
''Despite considerable differences in country-specific outlooks, the new forecasts mark down expected near-term growth marginally but nearly across the board. Moreover, downside risks to the world economy appear more pronounced than they did just a few months ago,'' Obstfeld said.
These forecasts reflect a world economy that is at the intersection of at least three powerful forces, Obstfeld noted.
First, China's economic transformation - away from export- and investment-led growth and manufacturing, in favour of a greater focus on consumption and services; second, and related, the fall in commodity prices; and third, the impending increase in US interest rates, which can have global repercussions and add to current uncertainties.
In this global environment, with the risk of low growth for a long time, the WEO underlines the need for policymakers to raise actual and potential growth.
Growth in advanced economies is projected to increase modestly to 2 per cent this year and to 2.2 per cent next year.
IMF attributes this year's pickup primarily to a strengthening of the modest recovery in the euro area and a return to positive growth in Japan, supported by declining oil prices, accommodative monetary policy, and improved financial conditions, and in some cases, currency depreciation.
While growth is expected to increase in 2016, especially in North America, medium-term prospects remain subdued, reflecting a combination of lower investment, unfavorable demographics, and weak productivity growth.
Growth prospects in emerging markets and developing economies vary across countries and regions. But the outlook in 2015 is generally weakening, with growth for these economies as a group projected to decline from 4.6 per cent in 2014 to 4.0 per cent in 2015, the WEO noted.
The slowing of growth for the fifth year in a row reflects a combination of factors, including weaker growth in oil exporters, a slowdown in China with less reliance on commodity-intensive investment, adjustment in the aftermath of credit and investment booms, and a weaker outlook for exporters of other commodities, including in Latin America, following declines in their export prices, the WEO noted.
In addition, geopolitical tensions and domestic strife in a number of countries make external conditions more difficult for most emerging economies.
The prospect of rising US interest rates and a stronger dollar has already contributed to higher financing costs for some borrowers, including emerging and developing economies. Also the spillover effects of the growth slowdown in China appear larger than previously envisaged, including through weaker commodity prices and reduced imports.
The projected rebound in growth in emerging market and developing economies in 2016 therefore reflects not a general recovery, but mostly a less deep recession or a partial normalisation of conditions in countries in economic distress in 2015 (including Brazil, Russia, and some countries in Latin America and in the Middle East), spillovers from the stronger pickup in activity in advanced economies, and the easing of sanctions on the Islamic Republic of Iran.
Growth in low-income developing economies is expected to slow to 4.8 per cent in 2015, from 6 per cent in 2014, in large part due to weak commodity prices and the prospect of tighter global financial conditions.
Given the distribution of risks to the near-term outlook, global growth is more likely to fall short of expectations than to surprise on the upside. The WEO report outlines important shifts that could stall global recovery. These include:
- Lower oil and other commodity prices, which although benefiting commodity importers, complicate the outlook for commodity exporters, some of whom already face strained initial conditions (eg, Russia, Venezuela, Nigeria);
- A sharper-than-expected slowdown in China, if the expected rebalancing toward a more market-based and consumption-driven growth proves more challenging than expected;
- Disruptive asset price shifts and a further increase in financial market volatility could involve a reversal of capital flows in emerging market economies. Further, renewed concerns about China's growth potential, Greece's future in the euro area, the impact of sharply lower oil prices, and contagion effects could be sparks for market volatility;
- A further appreciation of the US dollar could pose balance sheet and funding risks for dollar debtors, especially in some emerging market economies, where foreign–currency corporate debt has increased substantially over the past few years; and
- Increased geopolitical tensions in Ukraine, the Middle East, or parts of Africa could take a toll on confidence.
The report underscores that raising actual and potential output must remain the policy priority. This will require a combination of demand support and structural reforms.
In advanced economies, accommodative monetary policy continues to be essential, alongside macroprudential tools to contain financial sector risks, the report notes. On the fiscal side, countries with room for fiscal stimulus, such as Germany, should use it to boost public investment, especially in quality infrastructure.
Structural reforms are, of course, country specific. But the main planks include measures to strengthen labor force participation, facilitate labor market adjustment, tackle legacy debt overhang, and lower barriers to entry in product markets, especially in services.
Many emerging markets have increased their resilience to external shocks. Thanks to increased exchange rate flexibility, higher foreign exchange reserves, increased reliance on foreign direct investment flows and domestic-currency external financing, and generally stronger policy frameworks, many countries are now in a stronger position to manage heightened volatility.
Nevertheless, in a more complex external environment, emerging market and developing economies face a difficult trade-off between supporting demand amid slowing actual and potential growth and reducing vulnerabilities. The scope for policy easing varies considerably across countries, depending on macroeconomic conditions and sensitivity to commodity price shocks, as well as external, financial, and fiscal vulnerabilities, the reports said.