IMF Sees Emerging Markets Still Losing Steam, Cautious on Euro Zone
Paris/Brussels. Growth in emerging markets will slow for a fifth consecutive year, the IMF said on Tuesday, as exchange rate swings and oil prices plunge, and China’s economic growth slows.
The International Monetary Fund said on Tuesday it expected the emerging markets to post growth of 4.3 percent in 2015, down from 4.6 percent in 2014 and 5.0 percent in 2013.
“In emerging markets, negative growth surprises for the past four years have led to diminished expectations regarding medium-term growth prospects,” the IMF said.
The slowdown, if not outright contractions, is evident in most of the major emerging markets, known as the BRICS.
Only India and South Africa are expected to see growth increase this year. Brazil and Russia are to contract.
Meanwhile growth is to slow in China, which has been the driver of global growth in recent years.
The IMF expects the expansion of the Chinese economy to slow from 7.4 percent last year to 6.8 percent this year and 6.3 percent next year.
“The gradual slowdown in China and the partly related decline in commodity prices [which also reflected a sizable supply response] weakened the growth momentum to some extent in commodity-exporting countries and others with close trade links to China,” the Fund said.
Oil, greenback big risks
Although the IMF, which is holding its twice-annual meeting this week in Washington, expects emerging market growth to rebound to 4.7 percent next year, it remains concerned about the risks that sharp changes in currency exchange rates and oil prices could act as a drag.
While oil prices have fallen by around half since hitting a peak last June, that is not universally good news for emerging countries, particularly oil exporters facing other economic difficulties like Russia and Venezuela.
The drop in other commodity prices will hurt in particular Latin America and the Caribbean region, which is heavily dependent on exports of raw materials. The IMF now expects the region will muster only 0.9 percent growth this year, down from the 1.2 percent growth it had forecasted in January.
The rise of the dollar against emerging market currencies complicates the situation as many have debts denominated in dollars.
“There are balance sheet and funding risks, especially in emerging market economies, if dollar appreciation continues,” the IMF report said.
Another worry is US monetary policy. The US Federal Reserve is nearing a first hike in policy interest rates from the near zero levels they have been stuck at for years. Market interest rates have been increasing in expectation, which could provoke a shift of investment funds.
“Emerging market economies are particularly exposed: they could face a reversal in capital flows, particularly if US long-term interest rates increase rapidly, as they did during May-August 2013” when several countries faced difficulties, the Fund said.
This time around, with the sharp fall in oil prices, oil exporters are more vulnerable while importers have better buffers.
IMF wants reforms
“Several years of downgraded medium-term growth prospects suggest that it is also time for major emerging market economies to turn to important structural reforms to raise productivity and growth in a lasting way,” said the Fund, which has regularly called on countries to take steps to improve performance.
The IMF identified three priority areas: improving infrastructure, notably to remove bottlenecks in the power sector; easing limits on trade and investment and improving business conditions; and raising competitiveness and productivity through reforms to education, labor and product markets.
“In India, the post-election recovery of confidence and lower oil prices offer an opportunity to pursue such structural reforms,” the IMF said.
It upgraded its forecasts for India, which it now sees expanding by 7.5 percent this year and next, after having grown by 7.2 percent last year.
South Africa’s growth is expected to pick up from 1.5 percent last year to 2.0 percent, but that forecast has been trimmed by 0.1 percentage points from the last forecasts in January.
The IMF said it sees Russia’s economy, hit hard by the fall in oil prices and Western sanctions over the Ukraine crisis, contracting by 3.8 percent this year, worse than the 3.0 percent it forecast in January.
The Fund also switched its forecast for commodity exporter Brazil from growth to a contraction of 1.0 percent this year.
Euro zone
The IMF hiked its euro zone growth forecasts on Tuesday but warned the outlook was fragile, with the Ukraine crisis and uncertainty over Greece’s future in the single currency bloc adding to concerns.
“A Greek crisis cannot be ruled out, an event that could unsettle financial markets,” IMF chief economist Olivier Blanchard warned.
But while “an exit from the euro would be extremely costly for Greece, extremely painful ... the rest of the euro zone is in a better position to deal with a Greek exit.”
“It would still not be smooth sailing but it could probably be done,” he said, noting economy and governance reforms adopted since the debt crisis to put the euro on a sounder base.
The 19-nation bloc is meanwhile getting a boost from lower oil prices, record low interest rates and the European Central Bank’s massive stimulus program, the International Monetary Fund said in its latest World Economic Outlook report.
“There are signs of a pickup and some positive momentum in the euro area, reflecting lower oil prices and supportive financial conditions but risks of prolonged low growth and low inflation remain,” the IMF said.
The euro zone should grow 1.5 percent this year, up from the 1.2 percent estimated in January, gaining 1.6 percent in 2016, up from 1.4 percent.
This is a solid improvement but still well short of the IMF’s global growth estimate of 3.5 percent for this year and 3.8 percent next.
Consumer prices, meanwhile, are expected to edge up a minimal 0.1 percent this year and by a still historically low 1.0 percent in 2016, the IMF said.
The ECB has an annual inflation target of just under 2.0 percent.
The economy grew 0.9 percent in 2014, recovering in the last quarter from a soft patch which had stoked fears of deflation — when prices fall outright prompting consumers to put off purchases, which in turn weakens demand and undercuts activity.
“The priority is to boost growth and inflation through a comprehensive approach,” the IMF said, citing the ECB’s stimulus measures, changes in tax policy to favor investment, structural reforms and strengthening the banks to put the economy back on track after the upheavals of the debt crisis.
The focus has to be on investment and jobs in an effort to get the economy growing, it said.
Investment, jobs priority
The ECB has cut interest rates to record lows but the banks remain reluctant to lend to business, preferring instead to repair the debt crisis damage to their balance sheets as the authorities press them to bolster their capital reserves.
The ECB has also begun a “quantitative easing” program to pump more than 1.0 trillion euros ($1.1 trillion) into the economy through to next year to stimulate credit and demand.
The IMF said the QE program was “decisive,” larger than expected and a welcome stimulus given the wider weaknesses in the economy.
“Both core and headline inflation have been well below the ECB’s medium-term [target] for some time, with headline inflation turning negative in December,” the IMF said, although the move appears to have “stalled the decline in inflation expectations.”
Additionally, it has weakened the euro which should boost exports if for the moment there is little prospect of a strong turnaround.
“The medium-term outlook of modest growth and subdued inflation in the euro area is driven largely by crisis legacies, notwithstanding the positive effects of the ECB’s actions,” the IMF said.
“High real debt burdens, impaired balance sheets, high unemployment and investor pessimism about prospects for a robust recovery will continue to weigh on demand.”
“Uncertainty and pessimism regarding the euro area’s resolve to address its economic challenges are likely to dampen confidence,” it said.
The continued crisis in Ukraine plus an agonizing renegotiation of Greece’s debt rescue program will weigh on sentiment too, adding to the downside risks posed by persistently low inflation.
“Economic shocks — from slower global growth, geopolitical events, faltering euro area reforms, political and policy uncertainty, and policy reversals — could lower inflation expectations and trigger a debt deflation dynamic,” the IMF said.
Agence France-Presse
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