IMF cuts global growth forecast on back of EM challenges

The International Monetary Fund cuts its global growth forecasts today (January 19). It still expects growth to pick up over the next two years, but at a "more gradual" pace than anticipated in October. Inflation, meanwhile, is on the up in some quarters.

Its new forecasts see global growth rising from 3.1% last year to 3.4% in 2016 and 3.6% in 2017. Both figures have been cut by 20bp since its October projections. Maurice Obstfeld, the IMF chief economist, said emerging markets and developing countries account for more than two-thirds of the revisions.

Speaking in a press conference at the Bank of England, Obstfeld noted the averages masked the considerable disparities among countries. Downward revisions in Brazil, the Middle East and the US account for most of the decline.

The IMF said the recession in Brazil was "proving to be deeper and more protracted" than previously thought. It now expects the economy to contract by 3.5% this year - some 250bp more than its earlier projections.

Brazil is also suffering from high inflation, with the annual rate hitting 10.67% in December. The Central Bank of Brazil's monetary policy committee (MPC) meets today and tomorrow, and is expected to hike its key rate, currently at 14.25%, in response.

In the Middle East, the fund noted, the outlook is suffering as a result of lower oil prices, which have slid even further since the forecasts were formulated, Obstfeld noted. Saudi Arabia's growth forecast was cut by 100bp both this year and next, to 1.2% and 1.9% respectively.

The picture in the US remains fairly positive, but the IMF says "growth momentum is now expected to hold steady, rather than gather further steam". This translates to a projection of 2.6% growth in both 2016 and 2017.

Inflation remains a problem. Headline figures are "likely to soften again" in many countries, the fund said, adding that accommodative monetary policy "remains essential" in advanced economies, where its forecasts are little changed.

Things are more complicated in emerging markets and developing countries. Commodity-importing countries are seeing inflationary pressures ease on account of falling prices, the fund said. However, capital inflows are weakening some of their currencies, which could "limit the scope for monetary policy easing to support demand", the fund added.

This warning follows concern in the World Bank's annual Global Economic Prospects report, published January 8, that some commodity-exporting countries were running out of policy space, on account of tightening rates to head off inflation and stability risks.

The IMF now forecasts a slight increase in inflation in emerging markets and developing countries to 5.6% in 2016, before a larger jump to 5.9% in 2017. These figures are 50bp and 100bp higher than in October.

The IMF identified four ‘downside risks' to its forecasts. These included a "sharper-than-expected slowdown along China's needed transition to more balanced growth" and funding challenges related to tighter global financing conditions as the US Federal Reserve Board continues to tighten policy.

Moreover, a "sudden rise" in global risk aversion, leading to "sharp further depreciations" could cause problems, as could their "broader contagion effects". The final risk, it said, was an "escalation" of ongoing geopolitical tensions.