IMF lowers growth forecasts for US

Posted on October 4, 2016

Container Ship Loading Operations At Southampton Port©Bloomberg

The International Monetary Fund has lowered its growth forecasts for the US and other advanced economies, warning that the UK’s decision to leave the EU, the US presidential elections and rising protectionism are dragging on a world economy where politics now presents the biggest risks. 

    Updating its semi-annual forecasts for the global economy on Tuesday, the IMF sharply lowered its 2016 growth forecast for the US to 1.6 per cent from the 2.2 per cent it predicted in July, and for advanced economies as a whole to 1.6 per cent.

    However, it said a rebound in emerging and developing economies — which the IMF now expects to grow 4.2 per cent this year as a group — would offset that figure, resulting in its forecast for global growth remaining steady at 3.1 per cent this year. 

    Maurice Obstfeld, the IMF’s chief economist, said the move “sideways” for the global economy hid what were still significant risks fed by a “cocktail of interacting legacies” from the 2008 global financial crisis. These included high debt overhangs, bad loans on banks’ books and moribund investment, which were continuing to depress the global economy’s potential output, he said. 

    Moreover, he said, low growth and a slow recovery from the 2008 crisis in advanced economies had fuelled “political tensions [which] have now made advanced economies a major locus of policy uncertainty”. 

    Growth “has been too low for too long, and in many countries its benefits have reached too few — with political repercussions that are likely to depress global growth further”, Mr Obstfeld said. 

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    The most dramatic repercussion to date has been the June decision by voters in the UK to leave the EU, which would contribute to years of uncertainty for the UK and Europe, he said. The IMF raised its forecast slightly for UK growth this year to 1.8 per cent but said it expected a slide to growth of just 1.1 per cent in 2017, half what it predicted in April before the referendum.

    Anger over the refugee crisis in Europe meant “centrifugal forces across the continent are making it harder to advance or even maintain political reforms”, Mr Obstfeld added. 

    Though he declined to name Donald Trump, the Republican presidential nominee who has put anti-immigrant and protectionist policies at the centre of his campaign, Mr Obstfeld said “similar tensions afflict the US political scene”. 

    The IMF said it now expected global growth to rise slightly to 3.4 per cent next year. Among factors that could derail this was a sharp rise in trade barriers, Mr Obstfeld said. Mr Trump has proposed raising tariffs on China and Mexico in a move that many economists believe could set off a new tit-for-tat trade war with some of the US’s biggest trading partners and have dire consequences for the US and global economy. 

    In contrast, Mr Obstfeld said, what the global economy needed now was a “renewed commitment to lowering trade barriers”. 

    The IMF’s slashing of its US growth forecast highlights the dilemma facing the Federal Reserve. Its decision to put further tightening on hold after last December’s rate increase — the first in almost a decade — was the appropriate response to growing uncertainty, the IMF said. Any further increase — which some economists expect to come as soon as December — “should be gradual and tied to clear signs that wages and prices are firming durably”, the fund said. 

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    The dimmer outlook for advanced economies came as the IMF said it expected large emerging economies such as Brazil and Russia to emerge from recession next year, contributing to the slight increase in its growth forecast for emerging economies as a whole. 

    In China, it said, authorities were managing the economy’s rebalancing to a more services and consumption-driven model well, with growth expected to be 6.6 per cent this year, slowing to 6.2 per cent in 2017. But the continued growth of non-financial debt at what the IMF said was an unsustainable pace, and a growing misallocation of resources, “cast a shadow over the medium-term outlook”, fund economists wrote. 

    India, meanwhile, was expected to continue its recent strong growth, with the economy due to remain the fastest growing among major economies, expanding 7.6 per cent in the 2016/17 fiscal year. 

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