Global growth continues to grow albeit in an inert manner, with pockets of high activity—particularly in India and Southeast Asia—bringing some brightness into the picture for 2016 and 2017, according to the International Monetary Fund’s latest World Economic Outlook (WEO) released this month.
In India, growth is projected to notch up to 7.5% in 2016-2017, driven by private consumption, which has benefited from lower energy prices and higher real incomes. With the revival of sentiment and pickup in industrial activity, a recovery of private investment is expected to further strengthen growth.
The ASEAN-5 economies (Indonesia, Malaysia, Philippines, Thailand, Vietnam) are forecast to log growth of 4.8% in 2016. Growth will ease in 2016 in Malaysia and Vietnam (to 4.4% and 6.3%, respectively) but increase moderately in Indonesia, the Philippines, and Thailand (to 4.9%, 6.0%, and 3.0%, respectively). Regional growth for the five is envisaged to pick up further in 2017 and thereafter to 5.1%, underpinned by strong domestic demand and a gradual increase in exports.
Overall global growth, on the other hand, continues to be sluggish, forecast at 3.2% in 2016 and 3.5% in 2017, a downward revision of 0.2% and 0.1%, respectively, compared with the IMF’s January 2016 update.
This leaves the world economy more exposed to risks, said the IMF. Managing director Christine Lagarde warns that the recovery “remains too slow, too fragile, with the risk that persistent low growth can have damaging effects on the social and political fabric of many countries.”
“Lower growth means less room for error,” said Maurice Obstfeld, IMF economic counselor and director of research. “Persistent slow growth has scarring effects that themselves reduce potential output and with it, demand and investment,” he added.
The current diminished outlook calls for an immediate, proactive response, Obstfeld noted. To support global growth, he emphasized, there is a need for a more potent policy mix—a three-pronged policy approach based on structural, fiscal, and monetary policies.
“If national policymakers were to clearly recognize the risks they jointly face and act together to prepare for them, the positive effects on global confidence could be substantial,” Obstfeld added.
Growth in advanced economies is projected to remain modest at about 2%, according to the WEO. The recovery is hampered by weak demand, partly held down by unresolved crisis legacies, as well as unfavorable demographics and low productivity growth.
In the United States, expected growth this year is flat at 2.4%, with a modest uptick in 2017. Domestic demand will be supported by improving government finances and a stronger housing market that help offset the drag on net exports coming from a strong dollar and weaker manufacturing.
In the euro area, low investment, high unemployment, and weak balance sheets weigh on growth, which will remain modest at 1.5% this year and 1.6% next year.
In Japan, both growth and inflation are weaker than expected, reflecting in particular a sharp fall in private consumption. Growth is projected to remain at 0.5% in 2016 before turning slightly negative to -0.1% in 2017, as the scheduled increase in the consumption tax rate goes into effect.
While emerging markets and developing economies will still account for the lion’s share of world growth in 2016, prospects across countries remain uneven and generally weaker than over the past two decades.
The WEO projects their growth rate to increase only modestly—relative to 2015—to 4.1% this year and 4.6% next year.
In the current environment of weak growth, risks to the outlook are now more pronounced, including a return of financial turmoil, impairing confidence.
Other risks are a protracted period of low oil prices that could further destabilize the outlook for oil-exporting countries, and a sharper slowdown in China than currently projected could have strong international spillovers.
Moreover, shocks related to geopolitical conflicts, political discord, terrorism, refugee flows, or global epidemics loom over some countries and regions and, if left unchecked, could have significant spillovers on global economic activity.
On the upside, the recent decline in oil prices may boost demand in oil-importing countries more strongly than currently envisaged, including through consumers’ possible perception that prices will remain lower for longer.
Photo: Mickstout
