IMF warns G20 that China slowdown, other risks threaten global outlook

An investor reacts in front of screens showing stock market movements at a brokerage house in Shanghai on Sept 1, 2015.
An investor reacts in front of screens showing stock market movements at a brokerage house in Shanghai on Sept 1, 2015. PHOTO: AFP

WASHINGTON (AFP, REUTERS) - Downside risks to the global economy have risen and a combination of threats including slower growth in China and rising market volatility could severely cut the outlook, International Monetary Fund staff warned on Wednesday (Sept 2).

A note prepared by IMF staff for a meeting of Group of 20 central bank and finance chiefs this week describes a cocktail of potentially dangerous risks ranging from China's slowdown, a stronger US dollar to depreciating currencies in emerging markets, falling commodity prices and weaker capital inflows.

"Risks are tilted to the downside, and a simultaneous realization of some of these risks would imply a much weaker outlook," said the note, prepared for the G20 meeting in Ankara, Turkey, on Friday and Saturday.

The IMF warned that advanced and emerging economies need to continue to support demand with reforms and investment to ensure that the turbulence in markets and China's troubles do not stall economic activity in the rest of the world.

"China's transition to a lower growth, while broadly in line with forecasts, appears to have larger-than-previously-envisaged cross-border repercussions, reflected in weakening commodity prices and stock prices," the Fund said.

Especially, "near-term downside risks for emerging economies have increased" from China-related fallout, sinking commodity prices, the strong US dollar, and sharp reversals in financial markets, it said.

The report, which will be used for discussion at the G20 meeting, did not revise the IMF's previous estimate for global growth this year of 3.3 per cent.

But earlier this week IMF Managing Director Christine Lagarde said in Indonesia that global growth would be "likely weaker" than forecast.

"Now the situation is changing yet again, and we are all feeling the impact of China's rebalancing and moving to a revised business model," she said.

The report expressed continued confidence that growth is picking up "modestly" in advanced economies in the second half of 2015 and in 2016, helped by the impact of cheaper oil.

But the oil price plunge, along with other commodities, is hurting emerging market economies, and they are also being buffeted by the impact on their currencies of China's yuan devaluation and the strong dollar.

The US dollar's strength, the Fund warned, could take a toll on companies with dollar liabilities.

The Fund highlighted an increase in risks to overall global growth: that China would not confront its slowdown with growth-supporting policies; that commodity prices would slide further; that the US dollar would continue to rise; and that companies would suffer from higher debts.

"Simultaneous materialization of some of these risks would imply a much weaker outlook," it said.

The need for policies to boost growth among G20 nations has become more urgent in the last six months and accommodative monetary policy in advanced economies was "essential," the Fund said, also stressing the case for structural reforms to boost potential output and productivity.

The US Federal Reserve, whose next policy meeting on Sept. 16-17 is being keenly awaited to see if it will raise benchmark interest rates for the first time since 2006, should keep its decisions "data-dependent."

The Bank of Japan should stand ready for further easing, and the European Central Bank should extend its asset-buying programme unless inflation, which is showing signs of stabilization, picks up sufficiently, the note said.

But while economic activity in advanced economies is projected to pick up modestly this and next year, the outlook for emerging markets was more worrisome and the policy response trickier.

Although allowing currencies to depreciate was critical for countries with limited room to cut interest rates or boost spending, weaker exchange rates could worsen the outlook for inflation, the Fund said.