IMF foretells divergent growth for emerging and advanced economies

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Economic growthGlobal growth will continue to be moderate in 2015 and 2016, driven largely by the improving recovery of advanced economies as emerging markets keep to a slower growth pace, says the IMF’s latest update on the “World Economic Outlook” (WEO).

The WEO update forecasts global growth in 2015 of 3.3%, down by 0.2% from its April 2015 prediction and lower than projections of 3.4% in 2014, reflecting an unexpected setback to economic activity in the first quarter of 2015, mostly in North America.

The world economy is forecast to improve next year with growth of 3.8%, unchanged from the April outlook.

The report said general economic directions are unfolding as predicted in April, “namely, an improving recovery in advanced economies and a slowdown in underlying growth in emerging markets and developing economies.”

“As dramatic as the events in Greece are,” said Olivier Blanchard, IMF economic counselor and director of research, “effects on the rest of the world economy from the further suffering of the Greek economy are likely to be limited.”

Stronger growth is seen for advanced economies, increasing from 1.8% in 2014 to 2.1% in 2015 (falling about 0.3 percentage points short of the forecast in April), and 2.4% in 2016.

The report notes that the unexpected weakness in North America in early 2015, which accounts for most of the growth forecast revision for 2015, will likely prove to be a temporary setback.

“The underlying drivers for consumption and investment in the United States—wage growth, labor market conditions, easy financial conditions, lower fuel prices, and a strengthening housing market—remain intact.”

The economic recovery in the euro area is more solidly anchored, with signs of increase in both domestic demand and inflation. Growth projections were revised up for many euro area economies (e.g., Spain, Italy).

Japan saw a stronger than expected growth in the first quarter of 2015, but much of the surprise reflected inventory accumulation. The pickup in growth in 2015 is now projected to be more modest.

How emerging markets will fare

On the other hand, growth in emerging market and developing economies is projected to slow from 4.6% in 2014 to 4.2% in 2015. The slowdown reflects the dampening impact of lower commodity prices and tighter external financial conditions—particularly in Latin America (e.g., Brazil) and oil exporters.

Other factors include rebalancing in China, structural bottlenecks, and economic distress related to geopolitical factors—particularly in the Commonwealth of Independent States and some countries in the Middle East and North Africa.

In 2016, growth in emerging market and developing economies is expected to pick up to 4.7 percent, largely on account of the projected improvement in economic conditions in a number of distressed economies, including Russia and some economies in the Middle East and North Africa.

In the Association of Southeast Asian Nations community, the five emerging economies of Indonesia, Malaysia, Philippines, Thailand, and Vietnam are expected to post growth of 4.7% in 2015 and 5.1% in 2016, down 0.5 and 0.2, respectively, from April forecasts.

Risks to the global outlook pertain mostly to persistent financial market volatility, with its associated risks of capital flow reversals in emerging market economies, said the report.

“Given the distribution of risks to the near-term outlook, global growth is more likely to fall short of expectations than to surprise on the upside. The boost from lower oil prices, especially in advanced economies, however, may still offer potential gains.”

Other risks include low medium-term growth or a slow return to full employment amid very low inflation and crisis legacies in advanced economies, a sharper-than-expected slowdown in China, and spillovers to economic activity from increased geopolitical tensions in Ukraine, the Middle East, or parts of Africa.

Photo: Derzsi Elekes Andor