IMF predicts pick-up in global economy despite market turmoil

Global economic activity remains on an uneven but gradually improving trend despite the turmoil in financial markets, the International Monetary Fund said on Tuesday as it trimmed its forecasts again.

Downplaying the worst start to the year on record in US equity markets, the fund thinks financial markets are “overreacting” and expects rich and poor countries alike to enjoy faster growth rates in 2016 than in 2015.

But it warns that if the gloomy mood seen so far this January continues, there is a risk that the world could plunge into the third leg of a global financial crisis, with “broader contagion effects” darkening the outlook worldwide.

In an update to the fund’s economic forecasts, the international organisation said that global growth was likely to pick up from 3.1 per cent in 2015 to 3.4 per cent this year and 3.6 per cent in 2017. Both forecasts for this year and next were revised down 0.2 percentage points.

The pick-up in activity is expected in advanced economies and emerging markets, although Chinese growth is expected to slow from 6.9 per cent in 2015 to 6.3 per cent in 2016.

Many financial market participants are much more downbeat about China’s prospects, but Maurice Obstfeld, IMF chief economist, told the FT the fund was “sticking to its guns”.

He urged Beijing, which published a growth figure of 6.9 per cent for 2015 on Tuesday morning, to be open about the authorities’ intentions for the renminbi, which has fallen against the US dollar this year. Financial market participants are concerned Chinese economic activity might be sliding to a halt and that the government is seeking to manipulate the currency in a bid to return the country to export-led growth.

“The recommendation to the Chinese authorities is that they clarify their intentions. China needs clear and credible communication with the markets,” Mr Obstfeld said. This was necessary because “financial markets are overreacting, seeing lots of scary things”, he said.

With advanced economy consumers benefiting from lower oil prices, the IMF also forecasts a pick-up in emerging market growth on the assumption that recessions in Brazil and China moderate while growth accelerates in large economies such as India.

While the IMF report acknowledges the risk that depreciations against the dollar could weaken many emerging market companies that borrowed in the US currency, Mr Obstfeld said he did not expect a renewed financial crisis.

“Clearly there is a difficult adjustment ahead in emerging markets and they will have to upgrade their economic models and policy frameworks to return to robust potential growth, but this need not involve a crisis,” he said.

The fund expects the sharp drop in oil prices to boost global consumption and growth, but said these positive effects were smaller than normal because oil exporters were suffering such budgetary strain they were not able to adjust smoothly, investment by oil companies had dropped sharply and weaker household finances damped the normal pick-up in consumption among users of oil.

In response to the weaker recovery expected, the IMF recommended continued loose monetary policy and “supportive” fiscal policy in countries with strong public finances. In emerging economies, it recommended efforts to manage vulnerabilities and rebuild resilience against shocks.