By: Katrina Bishop
October 7, 2014
The International Monetary Fund (IMF) has downgraded its global growth forecast for both this year and next, as a divergence emerges between those economies that are recovering—and those that are not.
The organization, which represents 188 countries, now expects world growth to come in at 3.3 percent in 2014, down 0.1 percent from its forecast in July. While in 2015, it expects growth of 3.8 percent, down 0.2 percent from earlier expectations.
It comes less than a month after the Organisation for Economic Co-operation and Development (OECD) slashed its expectations for the global economy because of concerns about a stuttering recovery in the U.S. and the continued fragility of the euro zone.
Speaking as the IMF’s World Economic Outlook was released on Tuesday, Research Director Olivier Blanchard said the world’s economic recovery was “weak and uneven,” and highlighted countries’ “very different evolutions.”
“Growth is uneven and still weak overall and remains susceptible to many downside risks,” the IMF’s report said.
Among the economies which are managing to recover and post decent growth are the U.S. and U.K., Blanchard said, although he stressed that potential growth was still lower than it was in the early 2000s.
U.S. gross domestic product (GDP) surged in the second quarter, expanding at a 4.0 percent annual rate, while Britain’s economy grew by 0.9 percent from the first three months of the year.
Some emerging markets are also performing well, with China managing to overcome the end of a housing and credit boom to post substantial growth.
“Looking forward, rebalancing is likely to imply slightly lower growth, but this must be seen as a healthy development,” Blanchard added.
It’s a different story in the euro zone, however, with growth grinding to a halt earlier this year. GDP was flat in the second quarter, missing expectations.
“While this reflects in part temporary factors, both legacies, primarily in the south, and low potential growth, nearly everywhere, are playing a role in slowing down the recovery,” Blanchard said.
And some emerging economies are also struggling, with geopolitical uncertainty hitting the outlook for both Brazil and Russia. “Uncertain investment prospects in Russia had already led to low growth before the Ukraine crisis, and the crisis has made it worse,” he added.
Given this weakness, the IMF lowered its growth forecasts for emerging markets and developing economies to 4.4 percent this year and 5.0 percent next year.
Geopolitics, euro zone weigh
The organization called for policy makers to be “on the lookout” for downside risks, amid growing concern that macro prudential tools might not be up to the task of taking them on.
Among the risks facing global economies are rising interest rates—as central banks in countries the U.S. and U.K. respond to strengthening economies—geopolitical risks and the euro zone’s stalling recovery.
Blanchard was speaking at a time of unrest across many parts of the world, with protests in Hong Kong, ongoing conflict between Russia and Ukraine and threats from ISIS in Syria and Iraq. But he was quick to stress that—to date—there was “little evidence” of their economic impact.
“But, clearly, the risk that they do so in the future is there, and could affect the world economy in a major way,” he added.
With regards to the euro zone’s economic slowdown, the IMF highlighted the threat of weakening demand and even a slide into deflation. It comes after consumer price growth in the euro zone slipped again in September, coming in at just 0.3 percent, adding to fears that the region could be heading for a period of growth-sapping deflation.
“This is not our baseline, as we believe fundamentals are slowly improving, but, were it to happen, it would clearly be the major issue confronting the world economy,” Blanchard added.
To address these risks, the IMF said that both fiscal policy and structural reforms were needed: “The challenge for policy makers is to re-establish confidence, through a clear plan to deal with both the legacies of the crisis and the challenge of low potential growth.”
Gold Goliath is not your typical gold dealer.