The title of the International Monetary Fund’s (IMF) latest World Economic Outlookreport, published this week, pretty much says it all: “Adjusting to Lower Commodity Prices.” The Chinese economy, which has been driving demand for raw materials in recent years, is slowing. As a result, metals, oil, and food exporters, most of which are still emerging economies, are suffering. At the same time, the advanced economies are growing at a “persistently modest pace.” In response, the IMF’s growth prognoses are largely being adjusted downward. Its experts have further trimmed global GDP growth forecasts for 2015, down to 3.1 percent, its lowest level in six years.
“For emerging markets and developing economies as a whole, our forecast is that 2015 will mark the fifth consecutive year of declining growth,” says Maurice Obstfeld, the IMF’s new chief economist, in the introduction to the report, which was presented Tuesday in Lima, Peru, where the organization’s Annual Meetings are currently being held.
For emerging markets and developing economies as a whole, 2015 will mark the fifth consecutive year of declining growth”
IMF chief economist Maurice Obstfeld
Over the last five years, GDP growth has averaged four percent annually among this heterogeneous group of nations, led by China, India, Russia and Brazil. This is a very low rate for what has been the motor of global growth: in the last two decades, the only lower figures were seen in 2009 (3.1 percent), after the crisis that hit the advanced economies the year before, and 2001 (3.8 percent), following the bursting of the dot.com bubble. In 2007, just before the Great Recession, emerging economies and developing countries averaged nine percent growth – in the case of China, 14 percent.
What stands out in the new forecast is that while the “growth slowdown in China” is the main reason for the pessimistic predictions made for the rest of the emerging economies (and some of the advanced ones as well), the Asian giant’s own economy is not included in these downward revisions. Neither the sharp fall of the Shanghai stock exchange this summer, nor the mounting evidence that property investment or industrial output are not doing well has changed the opinion of the IMF’s experts, who say that domestic consumption will take up the slack. The IMF is sticking to its forecast made at the beginning of the year that Chinese GDP will grow by 6.8 percent in 2015 and 6.3 percent in 2016.
“While the growth slowdown in China is so far in line with forecasts, its cross-border repercussions appear greater than previously envisaged. This is reflected in weakening commodity prices (especially those for metals) and reduced exports to China (particularly in some east Asian economies), says the IMF.
It adds that oil prices have fallen by 46 percent over the last year, while the price of base metals has dropped by 22 percent and foodstuffs by 17 percent. The IMF anticipates that this period of low commodity prices will continue for at least another two years, holding back growth by between one and 2.25 percentage points in exporting nations between 2015 and 2017.
Latin American forecasts revised downward
Latin America comes off worst in the IMF’s scenario analysis. This is in part due to tougher borrowing conditions imposed on emerging economies (an increase in US interest rates spells an end to plentiful liquidity), as well as capital flight to traditional refuges such as the United States, Japan, or the euro zone. The new forecast is that the combined GDP of the Latin American and Caribbean economies will shrink by 0.3 percent, down from the 0.5 percent growth rate predicted as recently as July.
Venezuela (-10 percent), Brazil (-3 percent) and Ecuador (-0.6 percent) are the worst performers, their growth prospects substantially reduced since the last forecasts. At the same time, growth is slowing down in the Pacific Alliance countries of Chile, Mexico, Colombia and Peru, although these nations will still manage growth of around 2.5 percent. Argentina’s situation has slightly improved this year (-0.7 percent), although it can only delay recession at best until 2016. Bolivia continues to grow at 4.1 percent, thanks largely to a successful renegotiation of its long-term natural gas contracts.
Russia, which has been hit by the fall in oil prices, the conflict in Ukraine and economic sanctions, has had its growth prospects reduced by the IMF, down from 3.8 percent in July to 3.4 percent. Forecasts for India have also been adjusted downward, but its 7.3 percent growth for this year tops that of China.
The fall in commodity prices, along with the slowdown of Chinese exports, has already impacted on the advanced economies, which will register slightly higher growth this year (two percent) to 2014 (1.8 percent). The IMF highlights “crisis legacies in some advanced economies (high public and private debt, financial sector weakness, low investment),” adding to other medium-term problems (ageing populations and low productivity),” meaning that the positive impact of cheaper oil imports and favorable financial conditions thanks to the intervention of the central banks will do little to help to stimulate more vigorous growth.
Forecasts for Spain have not improved: the IMF predicts growth of 3.1 percent, 0.2 percentage points below the Spanish government’s prognosis
The IMF’s forecasts are slightly worse for Germany (growth of 1.5 percent for this year) and Japan (0.6 percent), both big exporters that will be affected by a downturn in Chinese consumption. Advanced economies that are dependent on raw material exports, such as Canada, Norway and Australia, have also had their growth previsions cut.
The outlook is slightly better for the United States (2.6 percent) and the United Kingdom (2.5 percent). In the case of the United States, the IMF anticipates that improvements in the labor market, with unemployment at 5.1 percent, could lead the Federal Reserve to raise interest rates at the end of the year, although it points out that neither inflation nor salaries show any sign of reactivating.
Forecasts for Spain have not improved: the IMF predicts growth of 3.1 percent, 0.2 percentage points below the Spanish government’s prognosis. But the IMF does highlight what it calls Spain’s “intensive” growth forecast, which is double that of the euro zone’s 1.5 percent.
In conclusion, the IMF believes that the global economy will begin to gather pace in 2016, despite having lowered its growth forecast to 3.6 percent. The organization’s experts also believe the recession in Brazil and Russia will be short lived, as will the sharp fall in commodity exports. This, along with continued gradual improvement in the economies of the developed world, will help make up for China’s slowdown. All that remains to be seen now is whether these predictions will hold up, or whether we can expect another downward revision from the IMF in a couple of months.