IMF Downgrades Global Economic Growth, China at 24-Year Low
There was few good news from a global economic perspective as the International Monetary Fund (IMF) sharply cut its outlook for global economic growth in the next two years. According to the IMF, global economic growth will only reach 3.5 percent (y/y) in 2015 and 3.7 percent in 2016 due to poorer prospects in China, Russia, the Eurozone, and Japan. Economic growth of China (the world’s second-largest economy) fell to a 24-year low at 7.4 percent year-on-year (y/y) in 2014, below the government target of 7.5 percent (y/y).
The 0.3 percentage point downward revision of global economic growth by the IMF underscores the sluggish international economic situation brought about by weak investment, slowing trade and declining commodity prices. Meanwhile, the IMF believes that the recently sharply fallen oil prices are unable to offset the persistent global weaknesses. Europe has to cope with limited economic growth and needs quantitative easing to avert deflation (this week the European Central Bank will decide on this matter), while China has to face a cooling property market and slowing export performance. Slowing economic growth in China is expected to spill over to other Asian countries, including Indonesia, as China’s demand for imports slows. Japan, the world’s third-largest economy is engaged in a battle against contraction and low inflation. Lastly, the economy of Russia, seriously hurt by low global oil prices and international sanctions over the Ukraine-case, is expected to contract
The economic recovery of the USA, however, will continue. The IMF expects the world’s largest economy to grow 3.6 percent (y/y) in 2015, up 0.5 percent from the institution’s previous forecast. With most other economic powers fighting against economic slowdown, it is fair to say that the global economy in the next few years will fly on a single engine: the US economy. However, US economic recovery also brings high volatility in global markets as the Federal Reserve has started to tighten its accommodative monetary policy since the start of 2014 hence causing a bullish US dollar at the expense of most other global currencies (and somewhat offsets the positive impact of low oil prices for those oil importing countries). This will be a challenge for central banks and governments around the globe.
IMF's Growth Predictions:
China’s Economic Slowdown
Economic growth in China touched its lowest level in 24 years. According to official government data, the country’s economy only grew 7.4 percent (y/y) in 2014, down from 7.7 percent (y/y) in the previous year, and below the government target of 7.5 percent (y/y). The last time China’s growth declined below seven percent was in 1990 (3.8 percent). The slowing growth pace in 2014 was primarily caused by the country’s cooling property market, collapsing credit, and spiking bad loans. However, on a positive note, China’s economic growth in the fourth quarter of 2014 was actually better than expected at 7.3 percent (y/y).
Forecasts for future economic growth in China are still gloomy, thus keeping pressures on the country's policymakers. The IMF expects China’s economy to slow further to 6.3 percent (y/y) in 2015 as the weak property market and high funding costs remain key challenges. Analysts disagree about the extent of support measures that need to be provided by the Chinese government and central bank to boost the economy.
On Monday (19/01) Chinese stocks posted their worst loss in over six years after authorities introduced tighter measures regarding the borrowing of money to private investors to engage in (speculative) stock trading. In 2014, Chinese stocks had gained significantly on expectation of further economic stimulus.