The International Monetary Fund (IMF) slashed its expectations for global economic growth this week to 3.4% this year and 3.36% for 2017, with both predictions down 0.2% from its last forecast in October.
“This coming year is going to be a year of great challenges and policymakers should be thinking about short-term resilience and the ways they can bolster it, but also about the longer-term growth prospects,” noted Maurice Obstfeld, the IMF’s economic counselor and director of research, in a statement.
“All in all, there is a lot of uncertainty out there, and I think that contributes to the volatility,” he added. “We may be in for a bumpy ride this year, especially in the emerging and developing world.”
According to the latest update to its World Economic Outlook, so-called “advanced economies” such as the U.S. should still experience a “modest recovery” this year and next – in the case of the U.S., expanding at 2.6% in both 2016 and 2017 – while emerging market and developing economies will face the “new reality” of slower growth.
Overall economic activity “remains robust” in the U.S., the IMF said, supported by still-easy financial conditions and strengthening housing and labor markets. But there are also challenges stemming from the strength of the dollar, which is causing the U.S. manufacturing sector to shrink marginally.
It’s in “emerging market” and “developing economies” where the trouble is, with cyclical and structural forces undermining the traditional growth paradigm, as IMF chief Christine Lagarde pointed out in a recent speech.
India (projected to expand by 7.5% in 2016 and 2017) and parts of emerging Asia (6.3% this year and 6.2% in 2017) are bright spots, projected to grow at a robust pace, whereas Latin America and the Caribbean will again see a contraction in 2016 by some 0.3%, reflecting the recession in Brazil (predicted to contract 3.5% this year after contracting 2.8% in 2015) and economic stress elsewhere in the region.
Looking beyond the short-run forecasts, Obstfeld said “important risks to the outlook remain,” risks that are “particularly prominent” for emerging market and developing economies and could stall global recovery:
- A sharper-than-expected slowdown in China, which could bring more international spillovers through trade, commodity prices, and waning confidence.
- A further appreciation of the dollar and tighter global financing conditions which could raise vulnerabilities in emerging markets, possibly creating adverse effects on corporate balance sheets and raising funding challenges for those with high dollar exposures.
- A sudden bout of global risk aversion, regardless of the trigger, could lead to sharp further depreciations and possible financial strains in vulnerable emerging market economies.
- An escalation of ongoing geopolitical tensions in a number of regions, which could affect confidence and disrupt global trade, financial flows, and tourism.
- Further declines in commodity prices would worsen the outlook for already-fragile commodity producers, and widening yields on energy sector debt threaten a broader tightening of credit conditions.
- However, the recent decline in oil prices may provide a stronger boost to demand in oil importers, including through consumers’ possible perception that prices will remain lower for longer.