Why Did IMF Downgrade Global Economic Growth for Consecutive Years?

  • Jan 25, 2020 AEDT
  • Team Kalkine
Why Did IMF Downgrade Global Economic Growth for Consecutive Years?

With the global economy not showing any signs of immediate optimism, the International Monetary Fund (IMF) has slashed down global growth forecast in 2019 and 2020 by 0.1 per cent each, a slight downward revision to its previous World Economic Outlook (WEO). By this international organisation of 189 countries, global growth for 2021 has been revised down as well, by 0.2 per cent.

IMF’s World Economic Outlook

IMF’s WEO reports are well-pursued across the globe for its in-depth analysis of economic forecasts and events that linger over countries alike. They for a robust basis for companies, economies and industry experts to formulate their respective reports.

Let us browse through the global growth forecasts made by IMF in the last few (and latest) WEO reports and decipher the improvisations (downward or upward):

Global Growth Forecasts by IMF

What Does IMF’s Recent WEO Say?

As per IMF’s Gita Gopinath, the predicted recovery for international development continues to be doubtful.

In the latest IMF Blog released on 20 January 2020, the organisation’s Economic Counsellor and Director of the Research Department, Gita Gopinath informed about the slight downward revision in the global growth for three consecutive years.

According to Ms Gopinath, global growth is likely to increase modestly from 2.9% in 2019 to 3.3% this year and 3.4 per cent next year. This depicts a downward revision of 0.1% each for 2019 and 2020, and 0.2 % for the year 2021.

Further, she discussed the on-going prolonged trade war between two of the world’s biggest economies, US and China. Interestingly, the recent WEO was released four days after both the economies finally signed the Phase I Trade deal, that suggests some signs of health in the heated war. IMF believes that the US-China Phase I deal, can alone reduce the cumulative negative impact of trade tensions on global GDP from 0.8 per cent to 0.5 per cent by end 2020, if it is durable.

Let us take a look at few other forecasts made in this recent WEO release-

  • There are initial signs that the decline in manufacturing and trade may be bottoming out
  • The service sector remains in the expansionary territory, with robust consumer spending backed by sustained wage growth
  • Growth in advanced economies is projected to slow slightly from 1.7 per cent in 2019 to 1.6 per cent each in 2020 and 2021
  • The US growth is forecasted to slow down
  • China’s growth has been revised upward by 0.2 percent to 6 percent for 2020
  • There will be a pickup in growth from 3.7 per cent in 2019 to 4.4 per cent in 2020 and 4.6 per cent in 2021 for emerging market and developing economies (a downward revision of 0.2 per cent for all years)
  • Risks to the global economy remain on the downside
  • The interest rates are expected to stay low for long period
  • The global outlook remains sluggish and there are no clear signs of a turning point

Events that Propelled IMF to Downgrade Global Economic Growth

To understand the reasons of IMF’s recently downgraded global growth forecast, it is vital to acquaint ourselves with the economic events that encircled us in 2019-

The year 2019 presented a roller coaster ride for the global economy. In a nutshell, trade war continued to create further doubt for policymakers and businesses.

Trading goods across borders remained tensed, especially driven by the US China trade war and tariff constraints. In the Eurozone, uncertainty associated with global trade tensions and Brexit continued to make businesses and share markets nervous. This consequently had an impact on other economies, given the interdependency of businesses across the world.

Countries faced the need to control debt levels and emerging market currencies were constantly under periodic pressure. Moreover, Labour markets in advanced economies continued to tighten with slow job creation. Unemployment was a trigger that worried economies alike. This was linked to population- which evidently continues to grow.

Coming to another factor which is feared by every economy pertains to climate change. 2019 was perhaps the one of the ten hottest years ever recorded in history, an issue published by PricewaterhouseCoopers International Limited stated. Global greenhouse gas emissions are producing record-breaking soaring temperatures. The consequence of climatic imbalance and degradation was seen in the beginning of this new decade, wherein the unprecedented bushfires claimed human lives, destroyed structures and killed millions of animals in Australia.

Why Did the IMF Downgrade Global Economic Growth?

Tentative stabilisation and sluggish recovery was predicted by the IMF at the back of the events mentioned above. But why? Let’s find out-

  • As per the IMF, the chief contributor to the revision is India, where growth has slowed due to a stressed nonbank financial sector and weak rural income growth;
  • The IMF predicts the possibility of new trade tensions that might crop up between the US and the European Union. Moreover, one should not conclude that the signing of the Phase I Trade Deal is an end to the severe trade war, as tensions could return;
  • There are rising geopolitical risks and intensifying social unrest which adversely impact financing conditions, expose financial vulnerabilities, and severely disrupt growth;
  • Climatic concerns have been showing no signs of easing in the near-term, which directly impact international trade.

What Should Economies Do?

The IMF does acknowledge the fact that some global risks have partially receded with possibility of a no-deal Brexit and signing of the Phase I trade deal. Central banks are on their feet to adhere to comforting monetary policy to support growth. But with recovery for global growth uncertain, what should economies focus on?

  • To revive investment, policymakers should further reduce policy uncertainty, both domestic and international
  • Given that interest rates might remain at low levels in the long-term, macroprudential tools should be used to avert build-up of financial risks
  • Countries with fiscal space should invest in human capital and climate-welcoming infrastructure to lift potential output
  • Economies with unsustainable debt levels will need to consolidate (via effective revenue mobilisation)
  • Countries should prepare contingent measures beforehand and improve automatic stabilisers
  • Fiscal response should be adhered to, with the intent of improving effectiveness of individual measures
  • Across the globe, structural reforms should be implemented, and inclusiveness should be welcomed. Further safety nets to protect the vulnerable should be made available
  • Climatic concern should be prioritised to lessen and eventually eradicate impacts of weather-related natural disasters
  • International taxation regime should be in place to adapt to the growing digital economy and to limit tax avoidance and evasion

Even though the global outlook remains sluggish, the signs of stabilisation should be maintained and eventually lifted to make businesses and economies prosper. Multilateral cooperation and national-level policies, if in place, can boost global economic growth.

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