IMF WEO lowers its forecasts, again
Given the massive fluctuations in the US economy, and the dramatic 2.9% contraction in the GDP in the first quarter of 2014—the last contraction was 12 quarters ago, and it was under half as severe—it is not surprising the IMF’s latest update of the World Economic Outlook has lowered its US estimates quite substantially, and those for the world economy a little less so. It is true the Q1 contraction has largely been due to unusually freak weather, but as a result, the US economy is projected to grow at just 1.7% in 2014, a far cry from the 2.8% projection just three months ago by IMF economists. Global growth, projected at 3.7% in April, is now expected to be around 3.4%.
The lower growth projections, though, are not the result of just a freak quarter, they have been trending down for some time now, reflecting how uncertain the nature of the recovery is. In April 2013, IMF’s economists had projected a global growth of 4% with the US growing at 3%, the Euro Area at 1.1% and emerging market economies (EMEs) at 5.7%. Today, those projections are 1.7% for the US, they are on track for the Euro Area, but a dramatically lower 4.6% for EMEs—Europe’s unemployment remains so high and the debt burden so high, the recovery remains fragile. With global growth slowing, not surprisingly, global trade projections are down sharply, from a 5.3% volume growth for 2014 in the April 2013 projection to a much lower 4% now—between three months ago and now, these are down 0.3 percentage points.
The fact that the US recovery is going to be slower than expected implies economies like India can hope to benefit from strong forex inflows for a while longer, but the Fed’s current plans mean that interest rates are likely to start rising by the middle of next year, triggering another bout of volatility. In the emerging markets, China remains a big threat as there is no knowing just where its shadow banking crisis will go—debt numbers for local government are up over two-thirds since 2010 and much of this has been invested in property. Ruchir Sharma, who heads emerging markets for Morgan Stanley, had pointed out a few months ago that of the 33 countries which had extreme credit booms like China, 22 suffered a credit crisis in the next 5 years; not one got away without either a crisis or a major economic slowdown. The Russian crisis has meant its growth projections for 2014 have been lowered from 1.3% in April to a mere 0.2% now. Increased geo-political risks could also lead to higher oil prices, though the US shale revolution plays the role of a big stabiliser. A recent BIS report that financial markets seem to be taking on exceptional risks due to an extended period of low interest rates adds to worries. In other words, while there is a minor improvement in global macros as India claws back to a 5% growth, the headwinds are equally strong.