In its latest "World Economic Outlook", the IMF has projected the world economy to grow at 3.4 percent in 2016 and 3.6 percent in 2017, down 0.2 percentage points in both years from the previous estimates made last October. The global growth forecasts were cut for the third time in less than a year as new figures from Beijing showed that the Chinese economy had grown at its slowest rate in a quarter of century in 2015. To back its forecasts, the IMF cited a sharp slowdown in China's trade and weak commodity prices that were also hammering Brazil and other emerging markets. The updated forecasts came as global financial markets were roiled by worries over China's slowdown and plummeting oil prices. However, the IMF maintained its previous China growth forecasts of 6.3 percent in 2016 and 6.0 percent in 2017, which represented a sharp slowdown from 6.9 percent in 2015 as the world's second largest economy endured huge capital flows, a slide in the currency and a summer stock market crash. According to the IMF Economic Counsellor, Maurice Obstfeld, "we don't see a big change in the fundamentals in China compared to what we saw six months ago, but the markets are certainly very spooked by small events there that they find hard to interpret." The outlook for an acceleration of US output was also dimming as dollar strength weighs on manufacturing and lower oil prices curtail energy investment. The Fund now projects US growth at 2.6 percent for both 2016 and 2017, down 0.2 percentage point in both years from the October forecast. In Europe, lower oil prices would support private consumption. As such, the IMF has added 0.1 percentage point to its 2016 euro area growth forecast, bringing it to 1.7 percent, where it will remain in 2017. Brazil would stay mired in recession in 2016, with output contracting 3.5 percent, a 2.5 percentage-point downward shift from the previous forecast. There would also be no growth in 2017 as Latin America's largest economy would struggle with a lower Chinese demand.
A rather pessimistic view of the global economy by the IMF seems to be a reflection of the growing risks to the world economy and lower growth expected in China than the trends witnessed in the past. Downside risks, which are particularly prominent for emerging markets and developing economies, include a sharper-than-expected slowdown in China with international spillovers through trade, commodity prices and confidence, with attendant effects on global financial markets and currency valuations. Continued market upheaval could drag growth lower if it leads to major risk aversion and currency depreciations in major emerging markets. An escalation of ongoing political tensions in a number of regions could also adversely affect confidence and disruption in global trade and financial and tourism flows. A major change in the World Outlook is the growing importance of China in determining the prospects of the global economy. Previously, analysts used to generalise that "the world shivers if the US sneezes." As the World Economic Outlook seems to suggest, China is also following the US very closely in this respect. Anyway, there was some probability of global recession in 2016 as well as a soft consumer demand in the US and Japan and weaknesses in emerging market economies due to worries over plunging oil and commodity prices and capital outflows from China continue to stoke fears of depression. Obviously, if the key challenges to the world economy are not properly managed, global growth could be derailed with negative consequences like stagnation in trade, incomes and welfare of the majority of the world population. It may be mentioned that global recession is loosely defined as growth below the roughly 2.5 percent needed to keep up with the expanding population.
While a cut in global growth forecasts would be a bad news for most of the policymakers all over the world, the latest Outlook needs to be studied and interpreted very carefully by the economic managers of Pakistan. A recession or near recession in the global markets could damage our exports which are already declining at a fast rate. At the same time, home remittances which are a great comfort to our external sector, could also fall due to a lower demand of our labour in the Middle Eastern countries. However, plunging oil prices could lower the oil import bill. Also, it needs to be remembered that forecasts are just projections and could prove to be wrong by the end of the day. Nonetheless, policy responses need to be considered seriously because the forecasts of the IMF are generally more reliable due to highly professional economists at its disposal.
Comments
Comments are closed.