Robust global expansion still elusive

Global growth remains very much sub-par. In its latest World Economic Outlook published earlier this month, the IMF laments that global economic growth has been too slow for too long. 

It is now seven years since the world economy emerged from the deepest recession of the post-war era.

Yet, a broad-based and robust global expansion remains elusive.

World growth is put at around 3% in 2015, the weakest rate since the end of the economic crisis of 2008-2009.

Both the IMF and OECD are forecasting a similarly subdued performance in 2016 and only slightly stronger growth in 2017.

The IMF warns that persistent low growth can have damaging side-effects, particularly on investment, which reduces potential output.

Lower growth also reduces the capacity of the world economy to absorb shocks that could send it into recession.

Hence, both the IMF and OECD have called for a stronger collective policy response to strengthen economic growth.

They both advocate a three-pronged approach of “mutually reinforcing policy levers”, comprising structural reforms, supportive fiscal measures and continuing loose monetary conditions.

Activity in advanced economies has gained momentum in the past couple of years, with GDP growth picking up to close on 2% in 2014-15 from 1.2% in 2012-13.

This is largely attributable to a strengthening of activity in the eurozone.

Growth in the US and UK has been solid enough in recent years.

However, Japanese growth remains erratic and sluggish, despite an ultra-loose monetary policy and a big decline in the yen.

Growth in emerging economies, though, has lost considerable momentum in recent years. It is put at 4% in 2015, down from 4.7% in 2014 and 5% in 2013.

Indeed, activity in emerging economies has been weakening since 2010, when it stood at 7.5%. Most notably, GDP growth in China slowed from 10.4% in 2010 to 6.9% last year.

Meanwhile, some large emerging economies like Brazil and Russia have gone into deep recessions.

The collapse in commodity prices over the past couple of years has hit many developing economies quite hard. There are concerns that the weakening of activity in emerging economies could yet derail the recovery in advanced economies.

It is worth noting, though, that the recovery in advanced economies has largely remained on track to date, despite the slowdown in developing economies.

The IMF and OECD expect that advanced economies will continue to register moderate growth of close to 2% in 2016 and 2017. There are a number of factors supporting growth.

The sharp decline in oil and other commodity prices has seen inflation fall to very low levels, thus boosting real incomes and spending power.

Meanwhile, monetary policy remains very loose, with low interest rates everywhere.

Indeed, policy continues to be loosened in some major economies. Fiscal policy is also turning less restrictive in most advanced economies.

Labour markets also continue to strengthen. However, downside risks remain for the world economy.

A protracted period of very low commodity prices, further exchange rate depreciations and financial turmoil in emerging market economies, or a deepening of the slowdown in China, would all pose risks to global growth prospects, especially for developing economies.

Somewhat worryingly, the Global Composite PMI, a key leading indicator for the world economy, has dropped to around 51 in the past couple of months, its lowest level in over three years.

A close eye needs to be kept on leading indicators in the months ahead, as if they continue to weaken, it would be a sign that growth in the world economy is slowing further.

There have been some positive developments, though, recently. Financial markets have become more stable, with stock markets recovering the ground lost earlier in the year.

There has also been a recovery in commodity prices.

The developments support the view of the IMF and OECD that the global economy will continue to expand, albeit at a very moderate pace.