Behind the Risks Affecting Global Economic Growth

In its October 2016 WEO (World Economic Outlook), the IMF (International Monetary Fund) projected that global growth is expected to slow down. These forecasts depend on the following assumptions:

• The economies currently under stress will see a gradual normalization in conditions.
• China’s economy will witness a gradual slowdown and rebalancing and will experience a growth of ~6% in the medium term—a rate that would be higher than emerging markets and developing economies.
• Other emerging markets and developing economies will continue to witness resilient growth.

But even in its revised growth estimates for 2016 and 2017, the IMF cited risks due to the following factors:

• political discord and inward-looking policies
• stagnation in advanced economies
• China’s ongoing adjustment and associated spillovers
• financial conditions in emerging markets (EEMV)

The IMF cited the “fraying consensus about the benefits of cross-border economic integration” visible in the UK’s “leave” vote in its Brexit (EWU) referendum and the ongoing debate in the upcoming US Presidential election (SPY) (IVV) as examples of political discord and inward-looking policies. Foreigners competing for local jobs has been a focal point as well, and the increase in the number of people seeking protectionist policies could, of course, impact global trade negatively.

Worries about an extended period of low growth and inflation becoming permanent, meanwhile, has become a vital point of stagnation in advanced economies as well. (We’ll explore this closely in the next part of the series.)

Notably, we’ve seen the other two above risks in previous WEOs. The IMF notes that though views regarding China (ASHR) are not as weak now as they were at the beginning of 2016, China’s ongoing adjustment and associated spillovers remain pertinent. China’s focus on growth from within can have implications for commodity and machinery exporters.

Finally, the October WEO notes that though financial conditions in emerging markets have improved recently, “underlying vulnerabilities remain among some large emerging market economies.”

Now let’s take a closer look at why the IMF foresees slow growth for advanced economies.