The six-year-old global recovery is showing some rust.
The International Monetary Fund cut its world growth outlook, as the commodities slump and political gridlock push Brazil deeper into recession, plunging oil prices hobble Mideast crude producers, and the rising dollar curbs U.S. prospects.
The global economy will expand 3.4 percent this year, down from a projected 3.6 percent in October, the IMF said Tuesday in a quarterly update to its World Economic Outlook. The Washington-based fund also cut its forecast for growth in 2017 to 3.6 percent, down from 3.8 percent three months ago.
The fund’s forecast offers little solace amid a gloomy start to 2016 for financial markets. The Standard & Poor’s 500 Index of stocks is off to its worst start to a year on record, as the plunge in oil prices and tightening U.S. monetary policy drive flight from riskier assets around the world.
“This coming year is going to be a year of great challenges and policy makers should be thinking about short-term resilience and the ways they can bolster it, but also about the longer-term growth prospects,” IMF chief economist Maurice Obstfeld said in a fund article accompanying the forecast.
The IMF estimates the global economy grew 3.1 percent last year, the weakest pace since the 2009 recession. Growth in emerging markets and developing nations slowed for the fifth straight year.
The fund said risks to the global outlook remain tilted to the downside, with the world facing three big adjustments: the emerging-market slowdown, China’s shift to growth driven less by exports and manufacturing, and the Federal Reserve’s gradual exit from ultra-low interest rates. Global growth could be derailed if these challenges aren’t managed, the IMF warned.
The downbeat outlook and market turmoil cloud the picture for IMF Managing Director Christine Lagarde and more than 2,500 policy makers, corporate executives, investors and academics heading to Davos, Switzerland, for this week’s annual meeting of the World Economic Forum. Among those attending are European Central Bank President Mario Draghi, Bank of Japan Governor Haruhiko Kuroda and Reserve Bank of India Governor Raghuram Rajan.
“I can’t imagine Davos won’t be talking a whole lot about the state of the world economy,” said Nobel economics laureate Edmund Phelps, who teaches at Columbia University in New York and will be at the conference.
Downward revisions to forecast growth in emerging markets is a big reason behind the fund’s dimmer outlook. The IMF marked down its forecast for emerging and developing economies to 4.3 percent this year, from a projection of 4.5 percent in October, compared with 4 percent in 2015.
“We may be in for a bumpy ride this year, especially in the emerging and developing world,” Obstfeld said.
IMF researchers left their estimate for China’s growth this year unchanged at 6.3 percent. However, they downgraded their forecast for Brazil by 2.5 percentage points to a contraction of 3.5 percent in 2016. They now expect Russia’s economy to shrink 1 percent this year, compared with an expected contraction of 0.6 percent in October.
In advanced economies, the IMF expects a “modest and uneven” recovery to continue. The fund reduced its forecast for U.S. growth this year to 2.6 percent, from 2.8 percent in October. While the economy remains “resilient” overall, the strong dollar is weighing on manufacturing, and low oil prices are curtailing capital investment, it said.
The IMF raised its projection for euro-area growth in 2016 to 1.7 percent, up 0.1 percentage point from three months ago. The fund left its estimate of Japan’s growth this year unchanged from October, at 1 percent. IMF officials predict 2.2 percent growth in the U.K. in 2016, also unchanged.
The fund reiterated its call for monetary policy to remain loose in the advanced world, with countries ramping up public spending where possible and pushing ahead with structural reforms.
Amid the tide of refugees from Syria, it’s critical that European countries help migrants integrate into their economies, to “allay concerns about social exclusion and long-term fiscal costs, and unlock the potential long-term economic benefits of the refugee inflow,” the IMF said.
In emerging markets, policy makers need to “rebuild resilience against potential shocks while lifting growth,” the fund said.