IMF World Growth Forecast

The International Monetary Fund (IMF), a heavyweight Washington based institution comprising of 188 countries, with its publicized benign goal of maintaining financial stability, fostering international trade, employment and eradicating poverty, has previously been criticized in some circles for being overly optimistic in its forecasts and getting it wrong. The Greek media recently reported quoting Monetary Fund Chief Christine Lagarde as describing 2011 as “a lost year,” partly because of the IMF’s mistakes. The IMF had publicly admitted that it had wrongly gauged the detrimental impact that austerity would have on the Greek and other stricken states of Europe. 

Credit needs to be given where it is deserved, for at least the IMF has publicly admitted that it
underestimated the effects of austerity in parts of Europe. The economic and social consequences of fiscal consolidation, austerity, are now well documented, suicide rates doubling in Greece, social deprivation on the rise. Austerity may have provided a quick fix, short to medium term solution to financial stability but it has come at a huge social and political cost with chronic mass unemployment in the peripheral states of Europe and a corresponding widening income gap. Moreover, austerity is testing political legitimacy to the maximum in Europe. Certainly, advocating austerity and underestimating its effects has been at complete odds with the IMF’s supposed goal of increasing employment and eradicating poverty.

So what should we now make of the latest July IMF global growth forecast? They don’t make entirely upbeat reading, and that’s a surprise for an institution that has been criticized for making overly optimistic forecasts. Global growth has been revised down to 3.4 percent this year from 3.7 in April, according to the latest IMF report. There are four unforeseen risks in recent months, which have already had an adverse impact on the global economy, resulting in the IMF slashing its growth forecast this year by 0.3 percent. The main culprits are the US, China, Russia and the emerging markets. 

In the US, over capacity in the economy in the final quarter of 2013 has been underestimated and is providing unwelcome headwinds. This implies the likelihood of stronger correction when it comes, according to the July IMF report. Additionally, a hasher winter, apparently dampened demand as shoppers stayed at home. With respect to US exports, they have also declined sharply in the first quarter on 2014, but this did follow a strong fourth quarter in 2013. US output also contracted in the first quarter of 2014. US economic output has been slashed to 1.7 percent for the year, down from 2 percent, previously forecasted by the IMF.

Over to the Far East, in China there’s no cheer either. The Chinese economy is now forecasted to decelerate at a faster rate. The People’s Bank of China, China’s central bank responsible for controlling monetary policy has problems of its own making to contend with. The recent boom in the Chinese real estate, fuelled by loose monetary policy, has spurred on construction without limits with the undesired consequence of creating unaffordable housing and ghost urbanizations. So the People’s Bank of China is on a mission to cool down the red hot economy and tackle inflation by tightening monetary policy. Nevertheless, China is expected to grow 7.4 percent in 2014 down from the 7.7 percent last year.

Moreover, no rave in Russia also, the Russian economy is decelerating sharply as capital outflows gather pace, in light of the growing Ukraine tensions, according to the IMF report. Russian economy is now expected to grow just 0.2 percent. 

With respect to other emerging markets economies the falling demand for their exports, notably from China and the US is having a knock on effect on their projected economic growth for 2014. Economic growth for emerging economies has been revised down to 4.6 percent for this year, down from previous estimate of 4.8 percent.

However, one relatively bright spot is Britain. Growth forecast figures have been revised upwards for 2014 to 3.2 percent, which is up from 1.7 percent a year earlier. The latest April-June Gross Domestic Product (GDP) figures were also relatively cheerful showing GDP expanding by 0.8 percent during that period. The countries service sector expanded by 1 percent in the second quarter of the previous three months. However, manufacturing barely registered an increase to just 0.2 percent and construction activity fell to 0.5 percent during the period April to June. While Britain’s economy is now larger than it was when 2008 financial crisis hit industrial output and construction are both still 10 percent smaller.

The recent IMF report recommends that advanced economies should not rush with monetary restrictive policies, the economic recovery if any is still too fragile. Moreover, the report highlights the fact that geopolitical concerns are more prevalent now than back in April. Particular reference is made to the Ukraine crisis and tensions in the Middle East that could have adverse knock on effects on energy input costs.

Overall the July IMF World Output report errs on the side of caution, underscoring potential black swans in the economy. For Britain the IMF report is flattering, but whether this upward trajectory in the economy can be maintained remains to be seen. If the IMF forecast is accurate, then there is likely to be little upside for British exporters. Additionally, domestic demand is expected to remain sluggish, in a climate of stagnant/falling real wages. How this all pans out is anyone guess, but it does feel like this calm in the markets won’t last for long and being on the right side of the volatility is what it’s all about.