IMF cuts trade forecast, global growth more iffy
Though the IMF forecast for India remains unchanged at 7.5%, in keeping with trends over the past year, the IMF has once again trimmed its forecast for the rest of the world, albeit only marginally. What is more worrying, the mild recovery—growth rising from 3.2% in 2016 to 3.5% in 2017—is mostly dependent upon a recovery in emerging economies since, while both the US and Europe are forecast to grow just a tad faster than in 2016, Japan is expected to slip into a recession again. With no clarity on how events in China will pan out, the IMF has played it safe and projected growth slowing from 6.9% in 2015 to 6.5% in 2016 and 6.2% in 2017. In the event, the emerging markets turnaround is dependent upon Brazil reversing a minus 3.8% growth in 2016 to end up with zero growth in 2017, and Russia moving from a minus 1.8% growth in 2016 to a positive 0.8% in 2017. This, in turn, is dependent upon the current crash in global commodity prices—both oil and non-oil—turning around. While that can happen, there is no certainty since, apart from lower demand, especially from the commodity-intensive China, in areas like oil, there is a consistent increase in supply also—that is why, for instance, oil prices fell a further third between August 2015 and February 2016.
Matching the trend of slowing global growth, there is sharp slowdown in the IMF’s trade prospects —once again, slowing investment demand from China is the biggest culprit. While the IMF’s trade volume forecast for 2016, at 3.1%, is just 0.3 percentage points lower than that made in January, it is a whopping 1.3 percentage points lower than the 4.4% projection made last year in July. To the extent India’s industrial production growth is determined by the buoyancy in global exports—IIP for April-February was 2.6%—it will settle at a lower level, especially since there is little movement on the capital investment front in the face of both sluggish demand and 30%-plus levels of surplus capacity across the economy. What is particularly worrying, and in keeping with the collapse in oil prices, is how Saudi Arabian growth is projected to collapse from 3.4% in 2015 to a mere 1.2% in 2016. This is why India’s remittances were at an 18-quarter low in Q3FY16—at $15.8 billion, they are down from $16.99 billion in Q2 and $17.13 billion in Q1. With FDI inflows higher than the trade deficit, India is relatively insulated from the impact of volatile FII flows, global headwinds will continue to be a matter of concern.