IMF Says World at Risk of 'Economic Derailment’

Global Economy Faces Rising Risk of Economic Derailment - IMF

The International Monetary Fund – IMF has advised that the global economy tends to face a rising risk of economic derailment. David Lipton, Deputy Director has called for urgent steps to increase global demand. He had mentioned in his speech to the National Association for Business Economics in Washingtonrecently, that they are clearly at a delicate juncture. He warned that the IMF’s latest reading of the global economy indicates once again a weakening baseline.

His comments have come up after weaker than expected trade figures from China portrayed that the exports had plunged by a quarter from a year ago, in February. With the second largest economy of the world often stated as `the engine of global growth’, weaker global demand for its goods seems to be read as an indicator of the general global economic climate. IMF have already mentioned that it would be likely to downgrade the present forecast of 3.4% for global growth when it tend to release in April, the economic predictions. International lender had warned last month, that the world economy seemed to be highly susceptible and had called for new efforts to spur growth.

Downside Risks Clearly Pronounced

Ahead of last month’s Shanghai G20 meeting, in a report, the IMF had mentioned that the group need to plan a co-ordinated stimulus programme since the world growth had reduced and could be derailed by market turbulence, the oil price crash as well as geopolitical conflicts. In his speech in Washington, Mr Lipton had stated that the burden to lift growth falls more squarely on advanced economics which tend to have fiscal room to move.

He added that the `downside risks are clearly much more pronounced than earlier and the case for more forceful and concerted policy action has become more compelling. Moreover risks seemed to have increased further with volatile financial markets and low commodity prices creating fresh concern about the health of the global economy’. A swing of weak economic data had lately been added to these apprehensions and the US ratings agency Moody’s had downgraded its outlook for China from `stable’ to `negative’.

Time to Support Economic Activity

The rising unemployment is also another worry as Beijing tends to slowly shift its economy from over dependence on manufacturing and industry to more services and consumer spending. The economy of China seems to be growing at the slowest rate in 25 years which has resulted in considerable uncertainty in the financial markets all over the world leading to sharp falls in commodity prices.

Lipton has commented that `together with bank repair wherever needed and with adequate targeting on infrastructure, this approach could create jobs and probably reduce public debt-to-GDP ratios in the medium term by motivating nominal GDP as well as support credit and financial stability. On strengthening the global outlook, this coordinated action could hurry healing in the banking sector and prevent continent liabilities for the government which appear in case of inaction.

 Moreover it would also have considerable positive spill-overs to susceptible emerging economics comprising of commodity exporters which would be unable to participate in the fiscal expansion, directly. He added that at the recent G20 meetings in China, he thinks that `there was broad recognition of these risks and priorities and now is the time to support economic activity and put the global economy on a sounder footing’.

IMF Cuts Global Growth Forecast As China Growth Slows

IMF Cuts Forecast of Global Growth

Recently the International Monetary Fund – IMF had cut its forecasts of global growth for the third time in less than a year, as the new figures from Beijing indicated that the Chinese economy in 2015, had been at its slowest rate in a quarter of a century. The IMF, to support its forecasts had cited a sharp slowdown in China trade and weak product prices which were hammering Brazil together with the other emerging markets.

 The Fund had forecast that the world economy would tend to grow at 3.4% towards 2016and 3.6% in 2017; both the years would be down by 0.2% point from the earlier estimates made last October. It has stated that policymakers need to consider means of bolstering short-term demand.

The updated forecast of the World Economic Outlook came as global financial markets were shaken by worries over the slowdown of China as confirmed by official Chinese data on Tuesday together with the plunging oil prices. IMF had maintained its earlier China growth forecasts of 6.3% in 2016 and 6.0% in 2017 representing sharp slowdowns from 2015.

Concern over Beijing’s Hold on Economic Policy

According to China’s report, growth for 2015 had hit 6.9% after a year wherein the world’s second biggest economy had suffered huge capital outflows, a slip in the currency as well as summer stock market crash. There was a rise in shares in Europeand Asia and the dollar gained after the China data had been released, while investors expected greater effort by Beijing to spur growth.

 There was concern over Beijing’s hold on economic policy which had shot to the top of global investors’ risk list for the year 2016 after drop in its stock markets as well as the Yuan fuelled worries that the economy would be quickly weakening.

The Fund also mentioned that a steeper slowing of demand in China seemed to be a risk to the global growth. The weaker than expected Chines imports as well as exports had been weighing heavily on the other emerging markets as well as commodity exporters.

Major Risk Aversion/Currency Depreciation/Dollar Appreciation

Maurice Obstfeld, IMF economic counsellor had mentioned in a videotaped statement that `they do not see a big change in the fundamentals in China compared to what is was seen six months ago though the markets are certainly very spooked by small events there that they find it hard to interpret’ He further added that the global financial markets seems to be overreacting to the oil prices drop as well as the risk of a sharp downturn in China and it was critical that China is clear about its overall economic strategy inclusive of its currency.

At a news conference Obstfeld had stated that `it is not a stretch to suggest that markets may be responding very strongly to rather small bits of evidence in an environment of volatility and risk aversion. The oil price puts strains on oil exporters, but there is a silver lining for consumers worldwide, so it is not an unmitigated negative’.

The IMF report states that continued market upheaval would also tend to help in dragging growth lower if it heads to major risk aversion and currency depreciation in the emerging markets. Besides this, other risk would comprise of further dollar appreciation and acceleration of geopolitical tensions.