The International Monetary Fund (IMF) continues to see weak global growth and risks to the outlook on the downside, it says in its latest economic forecast released Tuesday.
The IMF says that global growth is “in low gear”, and that growth in emerging economies, while still stronger than for developed markets, is slowing. Moreover, downside risks persist, it says. The IMF sees two major issues shaping the path of the global economy in the near term — the prospect of tightening monetary policy in the U.S., and a growing belief that China will grow more slowly over the medium term than in the recent past.
It forecasts GDP growth of 2% in the advanced economies in 2014, up from 1.25% in 2013. “Drivers of the projected uptick are a stronger U.S. economy, an appreciable reduction in fiscal tightening (except in Japan), and highly accommodative monetary conditions. Growth in the euro area will be held back by the very weak economies in the periphery,” it says.
The Canadian economy is projected to expand at slightly more than 1.5% in 2013 and 2.25% in 2014, “as net exports and business investment benefit from the U.S. recovery and more than offset slower consumption growth.”
“The balance of risks to Canada’s outlook is still tilted to the downside, emanating from potentially weaker external demand. Moreover, household debt remains historically high, which could amplify the negative growth impact of adverse shocks to the economy,” it says.
For the emerging markets, the IMF says that those economies are projected to expand by about 5% in 2014, “as fiscal policy is forecast to stay broadly neutral and real interest rates to remain relatively low.”
In the U.S., the forecast notes that recent indicators “suggest that the underlying recovery is gaining ground, supported by a rebound in the housing market and higher household net worth, although tighter financial conditions since May have somewhat slowed the bounceback in activity.”
It expects that growth will average 1.5% in 2013 and accelerate to 2.5% in 2014. “These projections, weaker than the April 2013 forecast, largely reflect a prolonged budget sequester, until the end of September 2014,” it says. “The forecast also assumes that the monetary policy stance will remain highly accommodative in that the Federal Reserve’s asset purchases will be scaled back only gradually starting later this year and policy rates will remain near zero until early 2016.”
The forecast assumes that the U.S. government shutdown is short, and the debt ceiling is raised promptly, but it notes that there is uncertainty about this. “While the damage to the U.S. economy from a short shutdown is likely to be limited, a longer shutdown could be quite harmful,” it warns. “And, even more importantly, a failure to promptly raise the debt ceiling, leading to a U.S. selective default, could seriously damage the global economy.”
Other risks include the prospect of tighter U.S. monetary policy, weak bank balance sheets in Europe, and the threat of insufficient fiscal consolidation and structural reforms in Japan. And, it notes, “a growing worry is a prolonged period of sluggish global growth.”
“A plausible downside scenario for the medium term would be characterized by a continuation of only modest growth in the euro area because of persistent financial fragmentation and unexpectedly high legacy effects from private indebtedness, a hobbling of emerging market economies by imbalances and supply-side bottlenecks, and prolonged deflation in Japan. Meanwhile, the end of U.S. quantitative easing could come with a greater and longer-lasting tightening of global financial conditions than is presently expected,” it says. As a result, the global economy could grow by only slightly more than 3% a year over the medium term, instead of reaccelerating to over 4%, it says.
“What is more worrisome, monetary policy in the advanced economies could be stuck at the zero interest bound for many years. Over time, worrisomely high public debt in all major advanced economies and persistent financial fragmentation in the euro area could then trigger new crises,” it warns.
“Forestalling the plausible downside scenario or the advent of new crises requires further policy efforts, mainly in the advanced economies,” it says, including repairing financial systems, adopting a banking union in the euro area, adopting plans for medium-term fiscal adjustment in Japan and the U.S., and policies to boost potential output through labour market reform and reducing barriers to entry into product and services markets.
The IMF says that policies in Canada need to continue to support near-term growth while reducing domestic vulnerabilities. “Fiscal consolidation, particularly at the provincial level, must proceed as planned to rebuild fiscal space against future shocks. The current accommodative monetary policy stance remains appropriate, with gradual tightening expected to begin in the second half of 2014,” it says.
Emerging markets are facing new policy challenges, too, as they attempt to deal with evolving economic conditions.