Global growth is still in low gear and the drivers of growth are shifting, says the IMF’s latest WEO Update for October. The IMF has forecast global growth to average 2.9 per cent in 2013—below the 3.2 per cent recorded in 2012—and to rise to 3.6 per cent in 2014.
Much of the pickup in growth is expected to be driven by advanced economies. Growth in major emerging markets, although still strong, is expected to be weaker than the IMF forecast in its July 2013 WEO Update. This is partly due to a natural cooling in growth following the stimulus-driven surge in activity after the Great Recession. Structural bottlenecks in infrastructure, labor markets, and investment have also contributed to slowdown in many emerging markets.
“This transition is leading to tensions, with emerging market economies facing both the challenge of slowing growth and changing global financial conditions,” said Olivier Blanchard, the IMF’s chief economist and head of the research department.
These growth transitions, combined with an approaching turning point in US monetary policy, have led to new challenges and risks. In particular, long-term interest rates in the United States and many other economies have increased more than expected.
* In the United States, growth is expected to rise from 1½ per cent this year to 2½ per cent in 2014 driven by continued strength in private demand, which is supported by a recovering housing market and rising household wealth.
* In the Euro area, policy actions have reduced major risks and stabilised financial conditions, although growth in the periphery is still constrained by credit bottlenecks. The region is expected to gradually pull out of recession, with growth reaching 1 per cent in 2014.
* In Japan, fiscal stimulus and monetary easing under the authorities’ new policy package—the so-called Abenomics—has enabled an impressive rebound in activity. But the expected unwinding of fiscal stimulus and reconstruction spending together with consumption tax hikes will lower growth from 2 per cent this year to 1¼ per cent in 2014.
* Overall, growth in emerging market and developing economies is expected to remain strong at 4½-5 per cent in 2013-14, supported by solid domestic demand, recovering exports, and supportive fiscal, monetary and financial conditions. Commodity prices will continue to boost growth in many low-income countries, including those in sub-Saharan Africa.
* In China, growth is projected to decelerate slightly from 7½ per cent this year to 7¼ per cent in 2014. Policymakers have refrained from stimulating activity amid concerns for financial stability and the need to support a more balanced and sustainable growth path.
* For India, the forecast for FY2013-14 is for growth to average around 3.75 per cent at market prices and 4.25 per cent at factor cost; the rates will gradually pick up to 5.1 per cent at market price and 5 per cent at factor cost next year. The rates indicate sharp downward revisions by over one percentage point compared to July WEO Update. A number of domestic factors have played an important role in economy slowdown.
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WORLD ECONOMIC OUTLOOK PROJECTIONS (Y-O-Y % CHANGE)
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Projections
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Difference from July Update
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2011
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2012
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2013
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2014
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2013
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2014
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| World Output |
3.9
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3.2
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2.9
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3.6
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–0.3
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–0.2
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| Advanced Economies |
1.7
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1.5
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1.2
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2
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0
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0
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| Emerging Market and Developing Economies |
6.2
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4.9
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4.5
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5.1
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–0.5
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–0.4
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| BRICS Countries | ||||||
| Brazil |
2.7
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0.9
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2.5
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2.5
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0
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–0.7
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| Russia |
4.3
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3.4
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1.5
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3
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–1.0
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–0.3
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| India |
6.3
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3.2
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3.8
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5.1
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–1.8
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–1.1
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| China |
9.3
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7.7
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7.6
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7.3
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–0.2
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–0.4
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| South Africa |
3.5
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2.5
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2
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2.9
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0
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0
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Investment recovery is very slow and there are persistent supply-side constraints arising from problems in mining, energy, telecommunications and other sectors, says the WEO Update. Investment sentiment has been very weak in terms of slow project approvals, which has played a role in keeping investment much subdued. Also, given much tighter monetary conditions due to stubborn inflation, higher interest rates have played a role in limiting consumption demand. But exchange rate has depreciated significantly in real effective terms, and agricultural production is also undergoing a strong rebound. So, built on these factors, expected easing of supply bottlenecks and strengthening of exports, the economy growth is expected to pick up next year.
Downside risks still dominate
The WEO emphasises that the changing global growth constellations have exacerbated risks in emerging market economies. Less US monetary policy accommodation combined with domestic vulnerabilities in emerging market economies may lead to further market adjustment globally, with risks of asset price overshooting or even balance of payments disruptions.
Even if some of these risks materialised, they would affect all economies through cross-border trade and financial spillovers.
