News Focus: IMF forecasts better global growth

02 May 2014 10:06 Source:ICIS Chemical Business

Recovery to continue in mature economies whilst emerging regions face headwinds. Ukraine remains a risk

The global economy is poised for better growth this year on the strength of continuing recoveries in advanced economies, an International Monetary Fund (IMF) forecast says, with overall worldwide advances expected despite subdued expansion in developing nations.

In its regional outlook for the western hemisphere, the IMF also cautioned that its forecasts for the world’s economic development this year and next may be threatened because of “more prominent geopolitical risks”, apparently a reference to the building East-West crisis over Ukraine.

“Global economic activity strengthened in the second half of 2013 and is expected to pick up further in 2014,” the IMF report said, “led by a faster recovery in the advanced economies.”

“World output growth is projected to increase from 3% in 2013 to slightly above 3.5% in 2014 and nearly 4% in 2015,” the report said.

“Activity in the advanced economies will be driven by a reduction of fiscal headwinds and still highly accommodative monetary conditions”, the analysis said, such as the continuing record-low US Federal Reserve Board interest rates of 0%-0.25%.

The Fed has indicated that it does not anticipate raising that rock-bottom interest rate for “a considerable time”.

But growth in developed nations will be offset in part by lower expansion rates among developing nations, the IMF said.

“Meanwhile, the momentum of growth in emerging market economies is likely to remain subdued, reflecting tighter financial conditions and homemade weaknesses in some cases,” the report said.

However, in the overall global economic outlook, the IMF cautioned that while recessionary challenges have subsided somewhat, risks “remain tilted to the downside, including because of more prominent geopolitical risks”.

That apparently is a reference to the ongoing crisis in Ukraine and US and other western nations’ response to Moscow’s perceived intervention in that country.

For the western hemisphere, the IMF said that the faster recovery in the US and other advanced economies “is expected to bolster export growth, but flat or lower world commodity prices and rising global funding costs are set to weigh on domestic demand”.

“On balance, regional growth [in the western hemisphere] is projected at 2.5% in 2014, down from 2.75% in 2013 and well below the relatively high 
growth rates of 2010-2012,” the analysis said.

“A modest pickup, to 3%, is projected for 2015,” the IMF said.

“Growth in Mexico is expected to rebound on the back of a stronger US recovery and normalisation of domestic factors,” the analysis declared.

“In Brazil, activity is expected to remain subdued, as weak business confidence continues to weigh on private investment,” the IMF said, adding: “Argentina and Venezuela are facing a difficult growth outlook, linked to significant macroeconomic imbalances and distortionary policies.”

For the region at large, the IMF said that “the outlook remains clouded by downside risks, including renewed bouts of financial market volatility and a sharper-than-expected decline in commodity prices”.

“Weak fiscal positions represent an important domestic vulnerability in many economies, especially in Central America and the Caribbean,” the IMF said.

For the US, however, the IMF expects that real output growth this year and next “is projected to be above trend, supported by a slower pace of fiscal consolidation, still highly accommodative monetary policy, and a continued recovery of household balance sheets and the housing sector”.

What economists call “trend growth” for the US is 3% to 3.5% annually, the pace at which the US economy has expanded, on average, since the end of World War II.

“Overall, the balance of risks to the outlook for global growth has improved,” the fund said, “on account of lower risks to the outlook for the advanced economies.”

“Still, risks remain tilted to the downside,” the analysis noted, again seeming to cite the building crisis in the Ukraine and US and Russian posturing over that disputed country.

Those concerns aside, the IMF said that for the US “there were clear signs of a firming recovery, with accommodative monetary policy and favourable financial conditions playing their part”.

“Increases in house and stock prices supported the pickup in consumer spending while household deleveraging progressed, with household debt as a share of disposable income continuing its decline,” the report said.

Real US GDP growth “is projected to rise in 2014 and 2015, despite the drag from the harsher-than-usual weather in early 2014”, the IMF said.

“Residential investment is projected to contribute significantly, as household formation returns to normal, boosting housing starts,” the report added, noting that while “gains in house values are expected to moderate [they will nonetheless] further bolster household balance sheets”.

“Consumer spending will remain solid and non-residential fixed investment growth will pick up as consumer and business confidence improves,” the report concluded.

By Joe Kamalick