IMF cuts global growth forecast as China, falling oil prices weigh

Reuters , Tuesday 19 Jan 2016

Sharp slowdown in China trade and weak commodity prices hammering Brazil and emerging markets prompts IMF to cut world economic growth forecast to 3.4% in 2016

Containers are transported at a port in Lianyungang, eastern China's Jiangsu province on January 19, 2016. (AFP)

The International Monetary Fund cut its global growth forecasts for the third time in less than a year on Tuesday, citing a sharp slowdown in China trade and weak commodity prices that are hammering Brazil and other emerging markets.

The Fund forecast that the world economy would grow at 3.4 percent in 2016 and 3.6 percent in 2017, both years down 0.2 percentage point from the previous estimates made last October. It said that policymakers should be considering ways to bolster short-term demand.

The updated World Economic Outlook forecasts came as global financial markets have been roiled by worries over China's slowdown and plummeting oil prices.

The IMF maintained its previous China growth forecasts of 6.3 percent in 2016 and 6.0 percent in 2017, which nonetheless represent sharp slowdowns from 6.9 percent in 2015 and 7.3 percent in 2014.

But the Fund said a steeper slowing of demand in China remained a risk to global growth and that weaker-than-expected Chinese imports and exports were weighing heavily on other emerging markets and commodity exporters.

"We don't see a big change in the fundamentals in China compared to what we saw six months ago, but the markets are certainly very spooked by small events there that they find hard to interpret," IMF economic counselor Maurice Obstfeld said in a videotaped statement.

Continued market upheaval also could help drag growth lower if it leads to major risk aversion and currency depreciations in emerging markets, the IMF said in the report. It said other risks included further dollar appreciation and an escalation of geopolitical tensions.

The Fund said the outlook for an acceleration of U.S. output was dimming as dollar strength weighs on manufacturing and lower oil prices curtail energy investment. It now projects U.S. economic growth at 2.6 percent for both 2016 and 2017, down 0.2 percentage point in both years from the October forecast.

In Europe, lower oil prices will help support private consumption, so the IMF said it added 0.1 percentage point to its 2016 euro area growth forecast, bringing it to 1.7 percent, where it will remain for 2017.

Brazil will stay mired in recession in 2016, with output contracting 3.5 percent, a 2.5 percentage-point downward shift from the previous forecast, and there will be essentially no growth in 2017 as Latin America's largest economy struggles with lower Chinese demand.

Obstfeld said the Fund was encouraging monetary policy to remain expansive in some countries, such as Japan and in Europe.

"Where there is fiscal space, more infrastructure spending is certainly something that should be on the table," he added.

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