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MEI Special Topic: The IMF's World Economic Outlook

The International Monetary Fund (IMF) prepares economic forecasts for the world economy which it releases at its twice-yearly meetings of member countries, with its most recent forecasts presented at its spring meeting in Washington DC in April.  The annual meeting is held in October each year. The IMF also releases its Global Financial Stability Report and Fiscal Monitor at its six-monthly meetings and since 2007 it has updated its forecasts in January and July each year.  The IMF also publishes regional economic outlooks.

The IMF prepares forecasts of all major macro-economic variables for its 189 member countries. The Treasury relies on them as a check on its own forecasts of economic growth for New Zealand’s main trading partners, which are an input to its forecasts of the New Zealand economy.[1] This special topic summarises the IMF’s latest forecasts and their implications for New Zealand.

Global growth outlook downgraded...

In its April 2016 World Economic Outlook (WEO),[2] the IMF once again downgraded its forecast for the global economy as a result of the recent weaker performance of many emerging and advanced economies.  It emphasised that the risks are skewed to the downside and have increased since its previous forecasts.

The IMF revised down its forecasts for world economic growth in 2016 by 0.2 percentage points (ppts) to 3.2% and for 2017 by 0.1ppt to 3.5% from its January Update.  The latest figures were reductions of 0.4ppts and 0.3ppts respectively from its October 2015 WEO.  Its forecasts have generally been revised down recently as the global economy has under-performed and the outlook has deteriorated.  Global growth of 3.2% in 2016 would represent a slight pick-up from an estimated 3.1% growth in output in 2015. Beyond 2017, world growth is expected to gradually strengthen, reaching 3.9% in 2021 as economic conditions normalise.

…for advanced and emerging economies…

The near-term economic outlook was downgraded as activity has softened in the major advanced economies: fourth quarter growth in the US disappointed at 0.3%, remained low at 0.3% in the euro area and contracted by 0.3% in Japan.  Those three economies account for nearly one third of the world economy in purchasing power parity (PPP) terms (ie, adjusted for price levels, which boosts the share of developing economies).

At the same time, growth has also been slowing in emerging market economies, particularly Russia and Brazil, as energy and hard commodity prices have fallen as a result of weak demand and increased supply. The outlook for sub-Saharan Africa is also significantly weaker, as hard commodity prices affect South Africa, and lower oil prices affect Nigeria, the largest economy in the region. Growth was also revised down in other oil-exporting economies. However, the outlook for emerging Asian economies was revised up, chiefly on faster growth for China (to 6.5% and 6.2% in 2016 and 2017 respectively) as a result of recent monetary and fiscal stimulus.

Growth in advanced economies is expected to be flat in 2016 at 1.9%, picking up to only 2.0% in 2017, while growth in emerging economies is expected to pick up only slightly to 4.1% in 2016 (from 4.0% in 2015), but then to accelerate to 4.6% in 2017. The downgrade in the growth outlook for emerging economies is particularly serious for the global outlook as they drove world growth before the global financial crisis (GFC) and immediately afterwards (Figure 1). Much of that growth was driven by China, including the GFC recovery.

Figure 1: IMF world economic outlook
Figure 1: IMF world economic outlook.
Source: IMF, April 2016 WEO

However, emerging economies’ growth has slowed since 2010 and many of them are now losing momentum as they encounter capacity constraints following their rapid expansion; some, particularly China, also face structural challenges of an ageing population, slower productivity growth, loss of international competitiveness and an unsustainable growth model (in China’s case based on debt and infrastructure investment).

Although the IMF revised up its near-term growth forecasts for China, it expects its growth to slow to 6.0% in 2018 and thereafter as authorities rebalance the economy from investment to consumption as the main driver of expansion. Investment is currently 43% of China’s GDP, high by even developing economy standards, so any reduction will reduce overall GDP growth as consumption growth will be unlikely to offset it.

Weaker growth in emerging economies will bring slower growth in the global economy as a whole.  Given their faster rate of growth since 2002 (led chiefly by China), their share of the global economy in PPP terms has increased from 43% in 2000 to 58% in 2015.

…exacerbated by global growth imbalances…

There are many other factors which impinge on the current outlook as well. Chief amongst these is the uneven pattern of growth in the world economy: amongst the advanced economies the US is recovering reasonably strongly, while the euro area and Japan continue to experience only low growth. At the same time, growth is slowing in many emerging economies, as noted above.
This difference in growth rates is reflected in different monetary policy stances as the Federal Reserve has commenced interest rate increases, while the Bank of Japan and European Central Bank have adopted negative policy rates and quantitative easing. The increase in US interest rates and resulting appreciation of the US dollar have caused concern to US exporters and manufacturers, while authorities in Japan and the euro area would like their currencies to support demand for their exports.

The tightening of US monetary policy is also affecting many emerging market economies which are directly or indirectly linked to US monetary settings through interest and/or exchange rates, leading to concerns about the impact on US dollar debt in those emerging economies and their competitiveness if their currencies appreciate.

...highlighted by financial market volatility…

These concerns about slow or slowing growth in most economies apart from the US (which influences global financial conditions through its monetary policy) were reflected in heightened financial market volatility in the first quarter of 2016. Global share indices fell by 10%, oil prices fell by 25% and commodity indices by around 10%, before recovering by the end of the quarter.

The concerns about the growth outlook were initially triggered by some weak data from China, compounded by share market volatility, large capital outflows and fears of a devaluation of the yuan. These concerns were exacerbated by a view that central banks and governments had limited room to support growth. Monetary policy is close to or below the zero lower bound in many advanced economies and government debt is high (advanced economy government debt is above 100% of GDP[3]). In addition, there was concern that even if central banks could loosen policy further, it might not have much effect.

…and downside risks…

The IMF highlighted the risks to the economic outlook: in a list of ten major risks, only one was positive for growth, namely that lower oil prices might stimulate private consumption in oil-importing economies. The negative risks include current stresses in some economies, rebalancing in China, weak commodity demand, no rebound in growth in developing economies, weaker growth in advanced economies, capital outflows from developing economies, low oil prices leading to stresses in oil-exporting economies, a sharp slowdown in China, and non-economic shocks (eg, geopolitical conflicts, political discord, terrorism, refugee flows and global epidemics).

The IMF also developed a scenario in which policy proves ineffective at stimulating demand in an environment of ongoing low growth and low inflation; this could be the “secular stagnation” hypothesis whereby low interest rates and ample liquidity fail to increase investment in the face of ongoing weak final demand. Low productivity and wage growth also form a part of this scenario.  Global growth would be 0.4ppts lower in each year in the absence of a policy response.

…but the IMF made a policy prescription

The IMF’s policy prescription for advanced economies is to strengthen growth through structural reforms, supported by monetary and fiscal policy, and for developing economies to reduce vulnerabilities and increase resilience. A synchronised slowdown, similar to the global financial crisis, would require a coordinated policy response, possibly including reforms to the global financial safety net and financial support for those at most risk of negative spill-overs.

What this outlook means for New Zealand

New Zealand’s trading partners are concentrated in emerging Asian economies (chiefly China) and other economies closely linked to them, including Australia, the newly industrialised economies (NIEs) and ASEAN-4.[4] Together these economies account for more than half of New Zealand’s merchandise exports. These economies are continuing to perform relatively well, although the outlook for some of them, especially the NIEs, was revised down in the WEO. As a result, the average growth rate of New Zealand’s main trading partners is slightly above the world average; however, it has been affected more by the recent downgrade than the global average, with growth lower in 2016 than 2015 and a smaller pick-up in 2017 (Table 1).

However, New Zealand is expected to be less affected by some of the developments in the global economy than many other economies. In particular, the rebalancing of China’s economy from investment to consumption as the main driver of growth is expected to be less negative for New Zealand than some other economies because it will favour demand for the soft commodities (food) which New Zealand exports rather than the hard commodities (metals and energy) which many other countries in the region export to China (Figure 2). This more positive impact will outweigh the negative impacts via some other economies in the region.

Table 1: NZ’s trading partner growth (TPG)
annual growth (%)
Country/Grouping Weight 2015 2016 2017 2020
China 24.0% 6.9 6.5 6.2 6.0
Australia 22.1% 2.5 2.5 3.0 2.8
United States 12.5% 2.4 2.4 2.5 2.0
NIEs1 11.3% 2.0 2.1 2.5 2.9
ASEAN-42 8.4% 4.6 4.5 4.8 5.1
Euro area 7.3% 1.6 1.5 1.6 1.6
Japan 7.2% 0.5 0.5 -0.1 0.7
United Kingdom 3.9% 2.2 1.9 2.2 2.1
India 1.7% 7.3 7.5 7.5 7.7
Canada 1.5% 1.2 1.5 1.9 2.0
NZ's TPG 100.0% 3.5 3.4 3.6 3.7
World growth (PPP) 3.1 3.2 3.5 3.8
New Zealand 2.2 2.4 2.4 2.5
  1. Korea, Singapore, Taiwan, Hong Kong
  2. Malaysia, Indonesia, Thailand, Philippines

Source:  IMF, April 2016 WEO

Figure 2: Impact of China’s rebalancing
Figure 2: Impact of China’s rebalancing.
Source: IMF, Asia-Pacific Regional Economic Outlook, May 2016

The global economic environment impinges on the New Zealand economy in many other ways apart from demand for export goods and services.  Slowing global growth and low commodity prices have brought weak tradables inflation as import prices remain low; low oil prices have provided some offset to the falls in dairy prices for New Zealand’s terms of trade, but low global interest rates relative to New Zealand’s have maintained demand for financial assets, keeping upward pressure on the NZ dollar. However, New Zealand has more monetary policy room to respond to any further downturn in activity.

Treasury officials who attended the IMF spring meeting reported that the general mood amongst participants was consistent with the tone of the IMF’s forecasts.  However, there was a sense of relative optimism in some quarters stemming from the improvement in market sentiment that has occurred since the first quarter of 2016 when the forecasts were developed and concern about the outlook for the global economy was at its height.

Since then, financial market volatility has subsided and concerns about a global recession have reduced.  Monetary policy has become more accommodative in the major developed economies, economic data have improved slightly (particularly in China, where there has also been a reduction in capital outflows and a slight appreciation of the yuan), exchange rates have stabilised somewhat and commodity prices have strengthened.  However, the negative risks to the outlook remain, especially in the medium term.

Notes

 

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