IMF says global economy remains on stagnant path

4 Oct 16

The global economy’s growth deficiency is set to prevail in the long term, despite an uptick in emerging and developing economies, the International Monetary Fund has warned.

The fund’s regular update on the world economy, published today, downgraded its growth forecasts for most advanced economies on its July outlook, while predicting most emerging and developing economies were likely to get a boost over the coming few years.

But presenting the report, Maurice Obstfeld, the fund’s chief economist, warned that recent growth rates remain far from satisfactory.

“Other things being unchanged, the trend shift in global output away from the richer economies, which grow more slowly, towards emerging and developing economies, should raise global growth over time,” he said.

“But this has not happened.”

Compared to the 1998-2007 averages, long-term potential growth is now expected to be lower in all regions, and the fund described the growth is does forecast as “precarious”.

Obstfeld said this partly reflects developments such as ageing populations, or the loss of unsustainable economic surges driven by, for example, the ICT revolution, China’s boom years or the unbridled rise of the financial sector, which eventually culminated in the global financial crisis in 2007/08.

The latter in particular has left a cocktail of “self-perpetuating” legacies, Obstfeld said, which have spooked both investors and consumers and led to subdued demand.

This could be reversed, Obstfeld continued, but so far countries have applied the appropriate tools unevenly, relying far too heavily on central banks and monetary policy.

He reiterated the IMF’s cries for a three-pronged policy approach that utilises complementary monetary, fiscal and structural policies. The fund has been urging this approach for some time, but some nations seem reluctant to adopt it.

Politics, too, has become a substantial risk to the outlook, Obstfeld said, highlighting rising protectionist sentiment and geopolitical tensions.

In advanced economies, stagnating growth has had substantial political fallout that “blames globalisation for all woes”, he continued, and seeks to close nations off from the rest of the world.

As expected, the fund sharply lowered its 2016 growth forecasts for the US, from the 2.2% it predicted in July to 1.6%.

It also lowered its forecasts for advanced economies as a whole to 1.6%.

Rather than lowering its global growth predictions today as expected, the fund left its forecasts for unchanged at 3.1% for 2016 and 3.4% for the year after.

Growth emerging and developing markets is also expected to strengthen somewhat, to 4.2%, after five years of consecutive decline, while those that have been suffering through deep recessions, like Brazil and Russia, are forecast to return to growth next year.

“Taken as a whole, the world economy has moved sideways,” Obstfeld explained.

But generally, he stressed that growth has been “too low, for too long, and in many countries the benefits have reached too few – with political repercussions that are likely to depress global growth further”.  

He highlighted the UK’s Brexit vote as a specific example, but a similar trends can be identified in the mood towards the refugee crisis, the rise of US presidential candidate Donald Trump who has vowed to introduce bigger trade barriers for countries like China, and the backlash against major international trade deals.

“A renewed commitment to lowering trade barriers is especially important, in contrast to current trends,” Obstfeld said. 

  • Emma Rumney

    Emma is a reporter at Cooking Recipes International. She also writes for in the UK.

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