Economic traction still elusive as growth slows

The IMF published its biannual World Economic Outlook last week and it makes for rather disappointing reading. Yet again, expectations that there would be a pick-up in the pace of global growth have failed to be realised.

Economic traction still elusive as growth slows

Indeed, the IMF has cut its projection for global growth this year to 3.1%, which would be the weakest rate since the world economy hit recession in 2008-09. It also lowered its growth forecast for next year.

As the IMF itself remarked, six years after the world economy emerged from the deepest recession of the post- war era, “the holy grail of a robust and synchronised global expansion remains elusive”.

The modest pick-up in growth in advanced or developed economies is gaining a bit of momentum, with output expected to expand by 2% this year after 1.8% in 2014 and 1.4% in 2013.

This largely reflects a strengthening of activity in the eurozone, with the US and UK economies continuing to do quite well. However, this represents quite a moderate rate of expansion by developed economies.

The reason why the IMF has lowered its growth forecast is a weaker-than-expected performance by emerging or developing economies.

Growth in these economies is estimated at 4% this year, down from 4.6% in 2014. This is the fifth straight year of slower growth by emerging economies. In 2010, they grew by 7.5%.

A slowdown in the pace of growth in China is having a major impact elsewhere. It has contributed to a sharp fall in world commodity prices, which has hit many commodity producing economies quite hard.

There has also been a fall-off in import demand from China, especially for raw materials, which has had a major impact on some emerging economies.

The IMF admits that, while the slowdown in China was largely foreseen, the knock-on effects on other economies appear to be larger than previously envisaged.

Indeed, some large emerging economies have entered deep recessions, with GDP forecast to contract by 3% in Brazil this year. The Russian economy is expected to shrink by 3.8%, although there are other factors at work here, as well as lower commodity prices.

Not only is growth weaker than expected, but the IMF says the downside risks for the global economy have also increased. Surprisingly, the IMF did not lower its growth projections for China, even though the economy is clearly slowing.

The IMF does warn, though, about the risk to the world economy from a sharper-than-expected slowdown in China, should its rebalancing towards a more market-based and consumption-driven economy prove difficult to achieve.

We have particular concerns about the rapid build-up of debt in China in recent years, which could yet result in widespread defaults as the economy slows, with knock-on effects for financial markets.

One thing which indicates all is not well in the global economy is that, six years from the end of the 2008-09 recession, interest rates are still at 0% in many countries.

Indeed, monetary policy continues to be loosened, with the OECD estimating that more than half of the world economy has seen more monetary easing this year, including in major economies such as the eurozone, China, and Japan.

Meanwhile, expected rate increases in countries such as the US and UK have not materialised as central banks judge that very accommodative monetary policies are still required to help sustain upturns even in economies that are doing quite well.

One has to wonder, at this stage, if more needs to be done to boost global growth than just relying on very loose monetary policy.

Should governments not be looking to fiscal policy to boost demand, especially when borrowing costs are so low? More spending on public investment would be an obvious place to start.

Oliver Mangan is chief economist at AIB

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