IMF cuts global growth forecasts for a second time

A Peruvian policewoman at the venue of the IMF/World Bank meetings in Lima. The IMF advised emerging markets to be ready for the US to tighten monetary policy and urged advanced economies to address "crisis legacies".
A Peruvian policewoman at the venue of the IMF/World Bank meetings in Lima. The IMF advised emerging markets to be ready for the US to tighten monetary policy and urged advanced economies to address "crisis legacies".PHOTO: REUTERS

It urges governments to boost demand as China growth slows and commodity prices weaken

LIMA • The International Monetary Fund cut its global growth forecasts for a second time this year yesterday, citing weak commodity prices and a slowdown in China and warned that policies aimed at increasing demand were needed.

The fund, whose annual meeting starts in Peru this week, forecast that the world economy would grow at 3.1 per cent this year and by 3.6 per cent next year.

Both new forecasts are 0.2 percentage point below its July forecast and 0.4 percentage point and 0.2 percentage point below its April outlook, respectively.

"The 'holy grail' of robust and synchronised global expansion remains elusive," IMF chief economist Maurice Obstfeld said in a statement accompanying the Washington-based fund's World Economic Outlook.

The downgrades come after central banks in major industrial economies have cut rates to near zero and spent around US$7 trillion (S$10 trillion) in quantitative easing programmes in the seven years since the global financial crisis.

Despite these measures, investment, growth and productivity are stuck below pre-crisis levels and there is a lack of consumer demand.

The IMF advised emerging markets to be ready for the US to tighten monetary policy, urged advanced economies to address "crisis legacies" and suggested nations consider the "compelling" case for public infrastructure investment at a time of very low, long-term interest rates.

Among major economies, the United States is expected to grow by 2.6 per cent this year and by 2.8 per cent in 2016, the euro zone is forecast to grow by 1.5 per cent and 1.6 per cent, respectively, with Japan seen at 0.6 per cent and 1 per cent.

The fund sees growth in China slowing to 6.8 per cent this year and 6.3 per cent in 2016.

The IMF expects the US Federal Reserve to start raising rates this year, although it expects the central bank to stay its hand until it sees signs of inflation rising toward its two percent target. "Regardless of the timing of the initial policy move, the data would suggest that the subsequent rate increases should be gradual," the IMF said.

It stressed that monetary policy alone would not re-ignite global growth. Output gaps in the euro zone remain large, it said, and recent economic indicators suggest Japan may be losing traction.

It also cautioned that commodity-dependent emerging market economies faced risks due to a large build-up of corporate debt, some of it in state-owned enterprises.

"Complementary fiscal policy action in countries with fiscal space is also important, supporting global rebalancing, and demand-supporting structural reforms are necessary, in particular to improve productivity and stimulate investment."

REUTERS, BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on October 07, 2015, with the headline 'IMF cuts global growth forecasts for a second time'. Print Edition | Subscribe