IMF’s economic counsellor and director of research department Olivier Blanchard (centre) is flanked by chief of the World Economic Outlook Division Thomas Helbling (2nd left) and deputy director in the Western Hemisphere Department Gian Maria Milesi-Ferretti (2nd right), as he responds to a question from the news media during the World Economic Outlook press conference in Washington. The IMF said better policies were needed to raise the world’s productive capacity and avoid a prolonged period of sluggish growth.
Reuters, AFP/Washington
The International Monetary Fund yesterday predicted the global recovery would strengthen this year as output in richer nations picked up, but it warned of rising risks in emerging economies.
In its latest global economic snapshot, the Washington-based IMF said better policies were needed to raise the world’s productive capacity and avoid a prolonged period of sluggish growth.
Global output should expand 3.6% this year, slightly lower than forecast in January, and grow 3.9% next year, the IMF said in its twice-yearly “World Economic Outlook.”
But the number masks an increasing divergence among countries. While less fiscal austerity should help unshackle growth in the US and Europe, emerging markets are likely to grow more slowly than thought just a few months ago due to tighter financial conditions, the IMF said.
Geopolitical risks have also entered the picture because of the conflict between Russia and Western countries over Ukraine.
In its World Economic Outlook report, the IMF cut its GDP growth forecast for this year for Russia to 1.3% from 1.9%, blaming “emerging market financial turbulence and geopolitical tensions relating to Ukraine... on the back of already weak activity.”
Russia’s deputy economy minister Andrei Klepach predicted last week that growth could fall short of 1% this year, while the World Bank late last month gave a worse-case scenario of the Russian economy contracting by 1.8% in 2014.
The IMF said Ukraine’s output would “likely drop significantly as the acute economic and political shocks take their toll on investment and consumption.”
“The main effect is clearly on Ukraine first,” chief Fund economist Olivier Blanchard told reporters.
The crisis has already negatively affected Russia’s investment climate, Blanchard said.
“(There is) more hesitation on the part of investors to put their money in Russia, to leave it in Russia, so one can expect fairly substantial capital outflows.”
Russia’s Central Bank said yesterday that capital outflows had reached $50.6bn in the first three months of the year, compared with $59.7 for the whole of 2013.
Vedomosti business daily reported that account holders at Sberbank, the country’s largest bank, withdrew almost 1.5bn euros in March.
The Ukrainian crisis could have effects beyond the former Soviet Union, the IMF said.
“Greater spillovers to activity beyond neighbouring trading partners could emerge if further turmoil leads to a renewed bout of increased risk aversion in global financial markets, or from disruptions to trade and finance due to intensification of sanctions and counter-sanctions,” the Fund said.
“In particular, greater spillovers could emerge from major disruptions in production or the transportation of natural gas or crude oil, or, to a lesser extent, corn and wheat,” the IMF said.
“The strengthening of the recovery from the Great Recession in the advanced economies is a welcome development,” the organisation said. “But growth is not evenly robust across the globe, and more policy efforts are needed to fully restore confidence, ensure robust growth, and lower downside risks.”
Despite weather-related weakness at the start of the year, the IMF said the US should enjoy above-trend growth of 2.8% this year thanks to less severe budget cutting, a recovering housing market and an easy monetary policy.
It said it did not expect the US Federal Reserve to raise interest rates until the third quarter of next year.
Economic activity in the eurozone should pick up slightly as countries slow the pace of fiscal austerity, even though the currency bloc continues to suffer from financial fragmentation and weak credit supply and demand, it said.
The IMF repeated warnings about the very low level of inflation in the eurozone and said it saw about a 20% chance of growth-sapping deflation in the region.
“Sustained low inflation would not likely be conducive to a suitable recovery of economic growth,” the IMF said, calling again on the European Central Bank to ease monetary policy.
Deflation is less of an immediate threat to Japan than it has been in the past, the IMF said, largely because a planned increase in the consumption tax will help support prices because the tax will have the effect of raising prices.
But it said the tax hike would likely cut into Japan’s growth and warned of a one in five chance the world’s third-largest economy could slip into recession this year.
The IMF said it expected Japan’s economy to grow 1.4% this year, down from an earlier 1.7% forecast, before slowing to 1.0% in 2015.
The Washington-based Fund has previously been upbeat on Abe’s growth policy blitz — a mixture of big government spending and central bank monetary easing dubbed Abenomics, which is designed to drag the economy out of years of deflation and laggard growth.
The plan’s so-called “third arrow” — reforms that include more flexible labour markets and free-trade deals — have been more talk than action so far, although Tokyo on Monday agreed on a long-awaited trade deal with Australia.
The agreement was the first time Japan had negotiated a comprehensive economic partnership agreement or free trade deal with a major economy.
But separate negotiations involving the US, Japan and 10 other nations, known as the Trans-Pacific Partnership, have stalled.
The IMF cut forecasts for some of the biggest middle-income countries, including Russia, Turkey, Brazil and South Africa. It forecast that emerging markets overall would grow 4.9% this year, 0.2 percentage point lower than in January.
“In emerging market economies, vulnerabilities appear mostly localized,” the IMF said. “Nevertheless, a still-greater general slowdown in these economies remains a risk.”
The IMF warned the tug of war between Russia and Western countries over Ukraine could undercut growth in other ex-Soviet economies. Russia, a top producer of both commodities and a key natural gas supplier to Europe, was hit with EU and US sanctions over its annexation of Ukraine’s Crimea region.
“Greater spillovers to activity ... could emerge if further turmoil leads to a renewed bout of increased risk aversion in global financial markets, or from disruptions to trade and finance due to intensification of sanctions and countersanctions,” the IMF said, also warning of the potential for disruptions to natural gas and crude oil production.
The report painted a picture of a global economy that could face a period of stagnation without the right policy actions, particularly in the eurozone and Japan.
Potential growth is already low in advanced economies and likely has fallen in emerging markets as China rebases its economy from investment toward consumption, the IMF said.
“Fiscal policy needs to play a critical role if growth remains at subpar levels,” it said. “In that case, more ambitious measures aimed at raising the growth potential ... should be contemplated.”
