The IMF has, once again, revised down their world growth forecast. This has been a perpetual theme for many years, which has effectively undermined the credibility of the IMF forecasts.
The world economy grew by an estimated 3.4% in 2014 (see charts attached) and is now forecast to growth by 3.3% in 2015, which is down 0.2 percentage points relative to the IMF’s April 2015 forecast. The latest downward revision mostly relates to the US outlook, which has been revised lower by a substantial 0.6 percentage points for 2015. It was very evident to most private sector economists that the IMF’s initial forecast for the US was unrealistically optimistic. Correspondingly, the latest downward revision to US growth projections will not shock the market. Other notable revisions include a sharp reduction in the outlook for Nigeria. This is also not especially surprising given the lower oil price and recent concerns about the state of government finances in Nigeria. The IMF kept South Africa’s growth forecast unchanged. We have been highlighting the growth outlook for South Africa has become increasingly weighted to the downside. Encouragingly, the growth outlook for the Euro-area in 2016 was revised slightly higher.
In adjusting their economic forecast the IMF made the following key points:
Growth
Global growth is projected at 3.3% in 2015, marginally lower than in 2014, with a gradual pickup in advanced economies and a slowdown in emerging market and developing economies. In 2016, growth is expected to strengthen to 3.8%.
The setback in economic activity during Q1 2015, mostly in North America, was due to one-off factors, notably harsh winter weather and port closures, as well as a strong downsising of capital expenditure in the oil sector. (There was also a sharp contraction in US exports, although the IMF decided to not highlight this component of the US economy).
The underlying drivers for acceleration in consumption and investment in the United States—wage growth, labour market conditions, easy financial conditions, lower fuel prices, and a strengthening housing market—remain intact.
The economic recovery in the euro area seems broadly on track, with a generally robust recovery in domestic demand and inflation beginning to increase.
In Japan, growth in the first quarter of 2015 was stronger than expected, supported by a pickup in capital investment. However, consumption remains sluggish and more than half of quarterly growth stemmed from changes in inventories. With weaker underlying momentum in real wages and consumption, the pickup in growth in 2015 is now projected to be more modest.
The underlying drivers for a gradual acceleration in economic activity in advanced economies—easy financial conditions, more neutral fiscal policy in the euro area, lower fuel prices, and improving confidence and labor market conditions—remain intact.
In emerging market economies, the continued growth slowdown reflects several factors, including lower commodity prices and tighter external financial conditions, structural bottlenecks, rebalancing in China, and economic distress related to geopolitical factors.
Inflation
Monthly headline inflation rates have started to bottom-out in many advanced economies, but the impact of disinflationary factors earlier in the year was stronger than expected, particularly in the United States.
Core inflation has remained broadly stable well below inflation objectives. In many emerging market economies, notably those with weak domestic demand, headline inflation has declined.
Bond yields
Higher US bonds yields partly reflect improving economic activity and the bottoming out of headline inflation, while in the euro area, they also reflect a correction after earlier declines to extremely compressed levels in response to increased bond purchases by the European Central Bank.
Bond yields and risk premiums in emerging market economies have risen broadly in line with those on advanced economy instruments. But capital flows to those economies are estimated to have decreased in 2015 compared to the second half of 2014, and many have seen further currency depreciation.
Risks
The distribution of risks to global economic activity is still tilted to the downside. Near-term risks include increased financial market volatility and disruptive asset price shifts, while lower potential output growth remains an important medium-term risk in both advanced and emerging market economies. Lower commodity prices also pose risks to the outlook in low-income developing economies after many years of strong growth.
Impact of China equity market volatility
According to the IMF the recent stock market developments in China have not changed the broad outlook picture for the global economy. (The Shanghai composite index was up by over 150% when it peaked in mid-June. Since then the Chinese stock market has declined by about 30%, with the authorities taking several steps to contain the decline and the rise in market volatility).
