IMF's 40bps cut in trade growth worrying
Given the IMF’s record in lowering its growth projections each time it makes a new forecast—the 2016 global GDP growth forecast of 3.8% in April 2015 was lowered to 3.2% in April—it was hardly surprising it has done this again, lowering the 2016 projection to 3.1%. More so since, though global markets have recovered from their manic phase immediately after the Brexit vote, as the World Economic Outlook says, there is no way of knowing how markets will react once Brexit actually happens and whether the damage will be contained. In the perfect scenario where the fallout if restricted to the UK losing large parts of its financial sector to Europe, all that happens is that the UK’s growth forecast for next year gets cut by around one percentage point, or maybe more with successive IMF forecasts. But were Europe’s unresolved banking crisis to unravel with more countries wanting to exit—especially the ones with the weaker banks whose bonds are largely held by Germany—the resultant stress would be much larger as well as widespread. IMF’s severe stress situation sees global growth in 2017 slowing from around 3.4% to 3.1%—while the IMF says it looks less likely right now, the fact is no one knows just where the stresses will show up.
More worrying is the fact that in even the IMF’s benign scenario, global trade volumes are seen as slowing 40bps from the projected 3.1%—in the case of emerging and developing markets, the growth estimates are cut by 50bps. The resultant growth is still higher than that in 2015, and may be some relief for India’s exports which has been declining for over a year, but keep in mind chief economic advisor Arvind Subramanian’s recent comment that it was unlikely India could sustain even an 8% growth without a very significant exports performance. The IMF’s 2017 trade forecast of a 3.9% growth for emerging economies looks encouraging, but this is well below the 9-10% levels of the glory days of 2003-07 as a result of which India’s exports could grow at 24%+ levels. Couple this with the fact that gross fixed capital formation has contracted 1.5% in the three months to March this year, for the first time in seven years, and the picture starts looking that much less reassuring—though the government is trying to spend more in capital formation, there is just that much it can do.