Oliver Mangan: Global economy set to struggle for real growth

The global economy continues to struggle for upward momentum, with growth very much underperforming.

Recent reports from both the OECD and IMF have seen a downgrade of forecasts for this year and next.

The OECD notes that eight years after the financial crisis, global activity remains disappointingly weak, with the world economy seemingly caught in a low growth trap.

World growth was 3.1% in 2015, the weakest rate since the end of the economic crisis of 2008-2009, reflecting slower growth in emerging economies in particular.

The OECD is forecasting that global growth will slow even further this year to 2.9% and pick up only marginally to 3.2% in 2017.

There has been a marked slowing in growth in some of the main advanced economies this year. Last week’s report from the IMF estimates that growth in advanced economies will decelerate to 1.6% this year from 2.1% in 2015, and pick up only slightly to 1.8% in 2017.

Most notably, US growth slowed sharply in the opening half of 2016 due to weak business investment, a poor external trade performance and less inventory building. However, the US economy appears to have regained some momentum in the second half of the year.

Meantime, growth in both the eurozone and UK economies has also moderated this year, while the expansion in Japan remains anaemic, with GDP expanding by around 0.5%. Growth in emerging economies lost considerable momentum so far in this decade.

It is estimated by the IMF at 4% for 2015, down from 4.7% in 2014 and 5% in 2013. This compares with a growth rate by these economies of 7.5% back in 2010. Most notably, GDP growth in China slowed from 10.4% in 2010 to 6.9% in 2015.

Emerging economies have had to deal with many challenges including adjusting to a protracted period of weak commodity prices, as well as very weak growth in international trade.

This has seen the likes of Brazil and Russia going into recession. The IMF sees growth in emerging economies picking up slightly to 4.2% in 2016 and 4.6% in 2017, helped by the modest recovery in commodity prices this year and economies such as Brazil and Russia coming out of deep recession.

However, downside risks remain for the world economy. The Global Composite PMI has dropped to below 52 in the past few months, its lowest level in over three years.

In particular, the still low level of commodity prices, weak international trade, high private sector debt levels, a need for sizeable fiscal tightening in some countries and reliance on capital inflows are all downside risks to the recovery prospects for emerging economies.

Meanwhile, the Brexit vote in the UK has cast a further shadow over the global economy and heralded in a period of political, economic and currency uncertainty. The UK’s trading relations with the EU are now under a cloud.

A deceleration in the growth rate of the UK economy is expected over the next couple of years. The IMF sees UK GDP expanding by 1.1% in 2017, with the OECD forecasting 1% growth, down from well above 2% in recent years.

The recovery in the world economy has lost momentum in 2015 and 2016, reflecting slower growth in both emerging and advanced economies.

Central banks have been busy loosening policy to try and lift both weak world growth and very low inflation. As the OECD points out, though, it is largely adverse supply-side factors that are holding back the world economy right now, with weakness in world trade, investment, and productivity all contributing to low growth.

Global growth may strengthen somewhat in 2017 but until these supply-side factors are overcome, the performance of the world economy will remain sub-par and downside risks will persist.

The IMF warns that continuing weak growth, particularly in advanced economies, could further fuel populist calls for restrictions on trade and immigration.

It argues that such restrictions would hamper productivity and innovation, and damage the prospects for a return to stronger global growth.

Oliver Mangan, chief economist, AIB.


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