Sarwar Md. Saifullah Khaled
The International Monetary Fund (IMF) warning a low-growth future for the global economy said on October 04, 2016 that protectionist political trends risked "turning back the clock" on free trade. In its new World Economic Outlook (WEO) report, the global crisis lender IMF also sounded an alarm over what it called a "dangerous" credit binge in China. The IMF said populist politics imperilled trade liberalization and economic growth with Britain voting in 2016 to secede from the European Union (EU) and the United States (US) presidential candidates disfavouring open borders.
The IMF while upgrading its outlook for Japan and the Euro-zone, notably cut those for US, the world's largest economy saying that prospects for richer countries had darkened this year, in part due to the protectionist talks. It also downgraded forecasts both for growth in global trade volume and for advanced economies' output. The IMF chief economist Maurice Obstfeld said that it is vitally important to defend the prospects for increasing trade integration. Turning back the clock on trade can only deepen and prolong the world economy's current doldrums. Global Gross Domestic Product (GDP) is expected to grow in 2016 by 3.1 per cent before rising to 3.4 percent in the following year, estimates that are unchanged from July 2016.
Obstfeld said in his remarks on the new forecasts that as a whole the world economy has moved sideways. He said that around the world "sub-par growth" was stirring negative economic and political forces. The IMF raised its outlook slightly for emerging and developing economies to 4.2 per cent but downgraded it for advanced economies in 2016 by 0.2 percentage points to 1.6 per cent. Next year's (2017) forecasts were unchanged. The IMF said global growth still faces notable uncertainties, such as further economic shocks in China, a continued fall in commodity prices and the sudden imposition of new trade barriers. The report said geopolitical tensions could flare up adding to the humanitarian crises already afoot in the Middle East and Africa.
The US suffered the report's sharpest downward revision of 0.6 percentage points following a lacklustre second quarter, with growth now foreseen at 1.6 per cent in 2016 - slower than the Euro-zone - and 1.8 per cent in 2017. However, Japan was surprisingly a bright spot with forecasts revised upward. The Japanese economy is now due to grow by 0.5 and 0.6 per cent in 2016 and next. Likewise, with output expected to increase by 1.7 per cent this year and 1.5 per cent in 2017, the Euro-zone got a slight boost. According to the research firm Capital Economics, which said that IMF forecasts would probably be lowered even further over the coming year, the tone of the report was "decidedly gloomy". For a start, the IMF seems to be too upbeat on the prospects for the Euro-zone.
Obstfeld, in his remarks, warned of the "gathering political fallout" of a low-growth era in wealthy countries where income distribution has skewed "sharply towards the highest earners". He said the result in some richer countries has been a political movement that blames globalization for all woes and seeks somehow to wall off the economy from global trends rather than engage cooperatively with foreign nations. While prospects for China were unchanged, with this world's second largest economy expected to grow a robust 6.6 per cent in 2016 and 6.2 per cent the following year, contractions in Russia and Brazil are also due to end. But the IMF report cited an alarming growth in private sector credit in China, propping up state enterprises to postpone the recording of losses - risking an "eventual disruptive adjustment".
Meanwhile, Obstfeld pushed back against assertions that the IMF had been excessively alarmist in warning about the fallout of Britain's vote to leave the EU. The IMF said earlier in 2016 that the Brexit vote could cause a recession in the UK. But forecasts of October 04, 2016 say that instead revised British growth upwards by 0.1 percentage point for 2016, to 1.8 per cent. But it further downgraded the 2017 outlook to 1.1 per cent. British markets had reacted more favourably than anticipated but that current circumstances were within the range of possibilities the IMF had initially published, Obstfeld said. He said "We did focus on possible risks and those possible risks were there".
The IMF warned on October 04, 2016 that though developing nations continue to be the backbone of global growth, but they face a series of headwinds including a slowdown in China, weak demand in advanced economies, low commodity prices and political strife. The IMF said the outlook for emerging markets was lopsided, with India being a bright spot. But as they are hit by low demands for raw materials, the sub-Saharan Africa is enduring either a tepid growth or recession. Developing nations who were once considered a key driver of global growth have been battered since the financial crisis of 2008. As crucial custom from sputtering western economies has dried up, while governments struggle with huge debts. In an update of its WEO, the IMF said after the global turmoil unleashed worries at the start of the year over China's economy, the emerging economies had enjoyed "a period of relative calm in recent months".
Saying developing nations would make up more than three-quarters of projected world growth, the IMF also increased its forecasts in 2016 for these nations, to 4.2 per cent from 4.1 per cent estimated in July 2016. But it said the outlook for these economies is uneven and generally weaker than in the past, while external financing conditions have eased with expectations of lower interest rates in advanced economies, other factors are weighing on activity. These, it said, included the slowdown in China, whose spill-overs are magnified by its lower reliance on import and resource-intensive investment, commodity exporters' continued adjustment to lower revenues, spill-overs from persistently weak demand in advanced economies, and domestic strife, political discord, and geopolitical tensions in several countries.
China is considered as one of the key engines of the global economy. Instead of the massive government investment and cheap exports that have underpinned China's decades-long rise, it is seeking a recalibration to make consumer spending a key driver for growth. But the transition is proving painful as key indicators continue to come below par and as growth rates hit a 25-year low. Its outright influence on the global economy means the worldwide outlook is heavily dependent on what happens in China. The Chinese economy suffered its weakest annual growth rate in a quarter of a century was 6.9 per cent in 2015. The IMF said it expected growth of 6.6 per cent in 2016 - the same as its forecast in July 2016 - slowing to 6.2 percent in 2017. The report said China's adjustment to a slower growth path and the subdued outlook for commodity prices remain potent forces shaping prospects for many of other economies. After the credit boom of 2002-2012, most tangibly, these two large reconfigurations have burdened the operating environment for emerging markets and developing economy businesses, many of which are saddled with high debt.
Global commodity prices have been hammered by falling demand from developed nations and overcapacity, in recent years. The IMF said the lower prices had boosted India, where growth hit 7.6 per cent in 2015 and a number of structural reforms had been implemented. However, it warned that further measures were needed to boost employment, while the central bank should continue with its own reform agenda. Reserve Bank of India cut interest rates to a six-year low of 6.25 per cent on October 04, 2016. The IMF tipped growth of 7.6 per cent in 2016 and up from 7.4 per cent to boost employment generation as projected in July 2016.
The report said the outlook for Brazil, which saw President Dilma Rousseff impeached and removed in August 2016, and Russia, which is struggling with low oil revenues, has also improved. The IMF warned that South Africa has also been hit due to falling income from commodity exports combine with political uncertainty and weak policymaking. Outside of the so-called BRICS economies - Brazil, Russia, India, China and South Africa - the IMF's outlook for sub-Saharan Africa was cut to 1.4 per cent in 2016 and 2.9 per cent in 2017, that is, down from 1.6 per cent and 3.3 per cent predicted in July 2016.
The writer is a retired Professor of Economics, BCS General Education Cadre.