IMF bearish on world growth

Dubai - Fund slices forecasts, saying global economy increasingly at risk of stalling

The world economy is increasingly at risk of stalling, the International Monetary Fund warned on Tuesday as it revised growth forecast for the UAE and rest of the world, citing unexpected weakness in the US and Japan.
While the UAE growth was revised to 2.4 per cent this year, below the fund's January forecast of 2.6 per cent - the country's slowest growth rate since 2010 - the global growth outlook was cut to 3.2 per cent, a decline of 0.2 percentage points from January's 3.4 per cent growth forecast.  
The UAE, which recorded an average growth rate of 5.7 per cent per year in the decade from 1998 to 2007, saw its growth prospects cut significantly since October 2015.
The fund maintained its economic forecasts for Saudi Arabia due to low oil prices and lowered its expectations for the Middle East and North Africa overall. The Saudi economy is set to grow by 1.2 per cent in 2016, the lowest in seven years, and by 1.9 per cent next year, the IMF said.
"Consecutive downgrades of future economic prospects carry the risk of a world economy that reaches stalling speed and falls into widespread secular stagnation," IMF chief economist Maurice Obstfeld said in the much awaited World Economic Outlook  entitled "Too slow for too long".
Warning of widespread stagnation risk, the IMF said weaker growth could leave the global economy more vulnerable to shocks such as currency depreciations or worsening geopolitical conflicts. China's slowdown and weak commodity prices are taking a deeper toll on emerging markets than expected and rich countries are still struggling to escape the legacies of the financial crisis, the fund said.
The downward revision is the fourth straight cut in a year, putting world economic growth just a hair over last year's 3.1 per cent and only marginally above the three per cent rate the IMF has previously considered a technical recession globally.
The fund called on global policymakers attending the IMF and World Bank meetings to take coordinated actions to boost demand with structural economic reforms, fiscal stimulus where possible and accommodative monetary policy.
"With its downside possibilities, the current diminished outlook calls for an immediate, proactive response. To repeat: there is no longer much room for error. But by clearly recognising the risks they jointly face and acting together to prepare for them, national policymakers can bolster confidence, support growth, and guard more effectively against the risk of a derailed recovery," Obstfeld  said.
The IMF cut Japan's growth forecast in half to 0.5 per cent in 2016 and said Brazil's economy would now shrink by 3.8 per cent this year versus the previous forecast of a 3.5 per cent contraction as it struggles through its deepest recession in decades.  
The US, one of the relative bright spots in the global economy, also saw its 2016 growth forecast cut to 2.4 per cent from 2.6 per cent. The IMF said it anticipated an increased drag on US exports from a stronger dollar, while low oil prices would keep energy investment weak.
The IMF raised China's growth forecast slightly to 6.5 per cent this year, and 6.2 per cent in 2017, partly due to previously announced policy stimulus. But it still expects China's growth to continue to weaken as it transitions to a consumer-driven economy.
"A sharper slowdown in China than currently projected could have strong international spillovers through trade, commodity prices, and confidence, and lead to a more generalised slowdown in the global economy, especially if it further curtailed expectations of future income," the fund said.
Obstfeld said that global growth could easily weaken from the latest IMF forecasts which could reinforce a deflationary spiral of weak growth that erodes future output potential. He said this phenomenon is known in some economic circles as "secular stagnation".
The IMF said India continues to remain a bright spot in the otherwise bleak global outlook. India will be the fastest growing major economy in 2016-17 growing at 7.5 per cent, ahead of China, at a time when global growth is facing increasing downside risks.
IMF said global growth will strengthen from 2017 aided by the gradual increase in the global weight of fast-growing countries such as China and India.
India's growth will continue to be driven by private consumption, which has benefited from lower energy prices and higher real incomes, IMF said, adding that "with the revival of sentiment and pickup in industrial activity, a recovery of private investment is expected to further strengthen growth".
IMF, however, flagged India's slowing trade growth as one of the risk factors to growth.
"Growth in China and India has been broadly in line with projections, but trade growth has slowed down noticeably. The trade slowdown is related to the decline in investment growth across emerging market economies, which reflects rebalancing in China but also the sharp scaling down of investment in commodity exporters, particularly those facing difficult macroeconomic conditions," it said.
- issacjohn@khaleejtimes.com

• Dubai