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IMF: Markets are 'over-reacting'
REUTERS/Eddie Keogh
The International Monetary Fund cut its global growth forecasts for the third time in less than a year on Tuesday, but its chief economist says markets are "over-reacting" to the world's economic woes.
In its January World Economic Outlook update, the IMF cited a sharp slowdown in Chinese trade and weak commodity prices — which it says are crushing Brazil and other emerging market economies — as reasons for cutting its forecasts.
The Fund’s latest predictions are that the world economy will grow at 3.4% in 2016 and 3.6% in 2017, both years down 0.2% from the previous estimates made in October 2015.
But chief economist Maurice Obstfeld says: "It's not a stretch to suggest that (markets) may be reacting very strongly to rather small bits of evidence in an environment of volatility and risk aversion."
In a video statement released alongside the new forecasts, Obstfeld said: "The oil price puts stresses on oil exporters... but there is a silver lining for consumers worldwide, so it's not an unmitigated negative."
Obstfeld also told the Financial Times that "financial markets are over-reacting, seeing lots of scary things,” especially in China.
Basically, the IMF recognises that things aren’t great in the global economy right now, but reckons that stock markets are making out that things are way worse than they are.
Global financial markets have been crushed so far in 2016 thanks to China's slowdown and plummeting oil prices. The S&P 500 in the US has suffered its worst ever start to the year.
Alongside its predictions for the global economy, the IMF’s report includes data on countries and economies across the world. Here are some of the highlights:
China’s growth will hit 6.3% in 2016 and 6.0% in 2017, down significantly from 6.9% in 2015 and 7.3% in 2014. The fund says that steeper slowing of demand in China remains a risk to global growth and that weaker-than-expected Chinese imports and exports are weighing heavily on other emerging markets and commodity exporters.
Market upheaval could drag growth down if it leads to major risk aversion and currency depreciations in emerging markets. It said other risks included further dollar appreciation and an escalation of geopolitical tensions.
The likelihood of increasing US output is getting smaller as the strength of the dollar weighs on manufacturing and lower oil prices push down investment in energy. The IMF now predicts US economic growth of 2.6% for both 2016 and 2017, down 0.2% in both years from the October forecast.
The report also argues that Brazil's recession will continue for the entirety of 2016, with output contracting 3.5%, a 2.5% downward shift from the previous forecast. In 2017, there will be virtually no growth in the country, it said.
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