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IMF cuts world economic growth, holds on India

Yatheendradas C.k. at 06:17 AM - Jan 20, 2016 ( ) Views: 362

IMF cuts world economic growth, holds on India

The IMF on Tuesday kept unchanged its growth forecasts for India at 7.5% for the next two years, but trimmed projections for global economic growth for 2016...

By: FE Bureau | New Delhi | January 20, 2016 1:27 AM

The IMF on Tuesday kept unchanged its growth forecasts for India at 7.5% for the next two years, but trimmed projections for global economic growth for 2016 and the year after that by 0.2 percentage point each on “subdued demand and diminished prospects”, reports fe Bureau in New Delhi. It has pegged the growth in 2015-16 for India at 7.3%, the same as last fiscal. The latest projections also suggest India will remain the fastest-growing major economy in the next two fiscals as well, outpacing China.

In its latest World Economic Outlook, the IMF cut US growth (from its October announcement) by 0.2 percentage point for 2016 and 2017. However, it raised the 2016 growth projection for the EU by 0.1 percentage point.

But what should worry India is the fact that the IMF has cut its global trade growth forecasts by 0.7 percentage point for 2016 and 0.5 percentage point for the year after that to 3.4% and 4.1%, respectively, and the downward revision of the economic growth projections for the US. India’s merchandise exports have already contracted for a 13th straight month through December, and with its biggest market — the US — likely to witness lower-than-expected recovery, any sharp rebound in India’s export prospects is unlikely any time soon.

According to the report, advanced economies will still perform better in 2016, with growth likely to rise to 2.1% from 1.9% in 2015. Even developing economies could witness higher growth in 2016 and 2017 at 4.3% and 4.7%, respectively, compared with 4% in 2015, which is the lowest since the financial crisis in 2008-09. Brazil saw a sharp downward revision in growth projections — a cut of 2.5 percentage points from the October forecast level to -3.5% for 2016.

The IMF believes further risks to global growth could stem more from emerging markets and developing countries than the developed ones.

“These risks relate mostly to the ongoing adjustments of the global economy, namely China’s rebalancing, lower commodity prices, and the prospects for the progressive increase in interest rates in the US,” it said in the update. A sharper-than-expected Chinese slowdown could bring more international spillovers through trade, commodity prices, and waning confidence. A gradual hike in the US interest rates along with financial market volatility have resulted in tighter external financial conditions, declining capital flows, and further currency depreciations in many emerging market economies.

It also added that commodity markets pose two-sided risks. “On the downside, further declines in commodity prices would worsen the outlook for already-fragile commodity producers, and widening yields on energy sector debt threaten a broader tightening of credit conditions.

“On the upside, the recent decline in oil prices may provide a stronger boost to demand in oil importers, including through consumers’ possible perception that prices will remain lower for longer.”

A fresh decline in commodity prices and weakness in global manufacturing are weighing on traded goods’ prices, so inflation will likely soften again.

It has asked policymakers in emerging markets and developing economies to “redirect activity to new sources of growth”. “These economies also need to press on with structural reforms to remove infrastructure bottlenecks, facilitate a dynamic and innovation-friendly business environment, and bolster human capital through reforms to education, labour, and product markets,” it said.

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