The International Monetary Fund warned in mid-April of the risk of political isolationism, notably Britain’s possible exit from the EU, and the risk of growing economic inequality as it cut its global economic growth forecast for the fourth time in a year.
In the run-up to the annual spring meetings of the IMF and the World Bank in Washington, D.C. this week, the IMF said the global economy was vulnerable to shocks such as sharp currency devaluations and worsening geopolitical conflicts.
In its latest World Economic Outlook, the IMF forecast global economic growth of 3.2 per cent this year, compared to a forecast of 3.4 per cent in January. The growth estimate also was lowered in July and October of last year.
For 2017, the IMF said the global economy would grow 3.5 per cent, down 0.1 percentage point from its January estimate.
Its latest report cited a worsening spillover from China’s economic slowdown as well as the impact of low oil prices on emerging markets such as Brazil. It also highlighted a persistent economic weakness in Japan, Europe and the United States.
The gloomier picture sets the stage for the IMF and the World Bank to call this week for more coordinated global action to support growth.
“In brief, lower growth means less room for error,” IMF’s chief economist, Maurice Obstfeld, told a news conference, adding that “scarring effects” from years of tepid growth could, in turn, weaken demand, thin the workforce, and reduce potential output further, creating a scenario of “secular stagnation.”
ISOLATIONISM GROWS
In its report, the IMF warned that the rise of nationalist parties in Europe, the 23rd June “Brexit” referendum, and anti-trade rhetoric in the U.S. presidential campaign posed threats to the global economic outlook.
A British exit from the EU could do “severe regional and global damage by disrupting established trading relationships,” it said.
“We’re definitely facing the risk of going into doldrums that could be politically perilous,” said Obstfeld, who pointed to stagnant wage growth as fueling a growing sense of economic inequality that is spilling into the voting booth in many countries.
The IMF urged policymakers to boost growth with actions such as deregulating certain industries and raising labour market participation. It recommended nations with fiscal breathing room boost investments in infrastructure and cut labour taxes, and it encouraged central banks to keep monetary policy accommodative.
The IMF’s report and the gathering of officials and central bankers in Washington this week comes against the backdrop of widening rows in Europe over negative interest rates, a refugee crisis, and how to shore up Greece’s financial bailout program.
German Finance Minister Wolfgang Schaeuble told Reuters in an interview on Tuesday that the European Central Bank’s record low-interest rates were causing “extraordinary problems” for German banks and pensioners, and risked undermining voters’ support for European integration.
Official negotiations over Greece’s bailout review have been idled during the IMF and World Bank meetings, but the debate over whether to provide more debt relief to Athens in exchange for further budget cuts is expected to continue on the sidelines.
Obstfeld repeated the IMF’s demand for a bailout program that would put Greece on a path to sustain its debt and begin growing again, adding that there should be some flexibility to help its government deal with the massive numbers of refugees who have fled to Greece from war-torn countries.
FORECASTS FOR JAPAN & U.S. ALSO CUT
The IMF on Tuesday cut Japan’s growth forecast for 2016 in half to 0.5 per cent. It 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 Latin America’s largest economy struggles through its deepest recession in decades.
Meanwhile, the United States, 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 U.S. exports from a stronger U.S. dollar, while low oil prices would keep energy investment weak.
U.S. Treasury Secretary Jack Lew will urge G20 and IMF members to take steps to bolster demand, but also to “avoid persistent exchange rate misalignments and refrain from targeting exchange rates for competitive purposes,” a senior Treasury official told reporters.
The IMF nudged China’s growth forecast slightly higher to 6.5 per cent this year, and 6.2 per cent in 2017, partly due to previously announced policy stimulus moves. However, the Fund added that it was reducing its longer-term growth forecasts for China and said the Asian nation’s “momentous” shift away from investment-led growth was continuing to chill global trade.