IMF Downgrades Global Economic Outlook Again
October 06 2015 - 10:40AM
Dow Jones News
LIMA, Peru—A slowdown in emerging markets is pushing the world
economy into its weakest expansion since the financial crisis, the
International Monetary Fund said Tuesday as it once again
downgraded its outlook for global growth.
China's deceleration and the subsequent plummet in commodity
prices revealed a developing world that overinvested, borrowed
excessively and exhausted its ability to expand without major
economic overhauls. The IMF cut its forecast for emerging markets
to 4% this year, down 0.2 percentage point from its last update in
July. That marks the fifth consecutive year of declining growth and
a level nearly half the rate the IMF recorded six years ago.
Modest growth in the U.S. and a meager recovery in the eurozone,
meanwhile, haven't been able to offset falling output in emerging
markets. The IMF cut its projections for global growth to 3.1% this
year from its previous forecast of 3.3%. Souring emerging-market
prospects also are muting next year's rebound: The IMF reduced its
prediction for global growth in 2016 by the same amount to
3.6%.
The IMF's increasingly dour outlook sets a gloomy tone for the
fund's annual meeting of finance ministers and central bankers in
Peru this week.
"Six years after the world economy emerged from its broadest and
deepest postwar recession, a return to robust and synchronized
global expansion remains elusive," Maurice Obstfeld, the IMF's new
chief economist, said in the foreword to the fund's latest World
Economic Outlook.
Besides a broad-based downgrade in growth around the world,
"downside risks to the world economy appear more pronounced than
they did just a few months ago," he said.
As growth prospects deteriorate in emerging markets, investors
are pulling their cash out en masse. The Institute of International
Finance, an industry group, estimates this year will mark the first
net exodus of capital out of emerging markets in 27 years, with
more than a trillion dollars fleeing countries such as Brazil,
Turkey and South Africa.
China's slowdown drastically reshaped demand for the global
commodities many developing economies rely on to drive growth. Many
economists now forecast years of soft prices for metal and energy
products. Investors are also increasingly worried China's economy
could nosedive if credit-fueled bubbles in the real estate,
construction and manufacturing sectors pop.
The IMF kept its forecast for China's growth to slow to 6.3% in
2016 from 6.8% this year as fund officials say fears of a hard
landing are overblown.
After years of stellar growth, many emerging markets have
reached their ability to expand without major revamp of their
economies to make them more competitive, innovative, efficient and
diverse.
Adding to their problems, emerging markets bulked up on debt to
expand production capacity, often borrowing in dollars. The Federal
Reserve's plans to raise rates and a stronger dollar are putting
pressure on both corporate and national balance sheets.
The IMF and the IIF warn that developing economies face a coming
wave of corporate defaults. Firms in those countries swelled their
debt levels by 30% of gross domestic product over the last five
years, fueled by cheap central-bank cash.
That toxic mix of threats is creating a damaging feedback loop
between growth prospects, credit, investment and markets.
Brazil is a prime example: The country, which relies heavily on
exports to China, has failed to overhaul its economy, and many of
its companies are struggling with heavy debt loads. The IMF slashed
the Latin American giant's growth forecast for this year and next
by around 1.5 percentage points. It now expects a 3% contraction in
2015 and a 1% shrinkage next year.
Write to Ian Talley at ian.talley@wsj.com
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(END) Dow Jones Newswires
October 06, 2015 10:25 ET (14:25 GMT)
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