The International Monetary Fund (IMF), in its October World Economic Outlook (WEO) issue titled subdued demand symptoms and remedies projected that global growth is expected to slow to 3,1 percent in 2016 before recovering to 3,4 percent in 2017.The forecast, revised down by 0,1 percentage point for 2016 and 2017 relative to April, reflects a more subdued outlook for advanced economies following the June United Kingdom’s vote in favour of leaving the European Union (Brexit) and weaker-than-expected growth in the United States.
These developments have put further downward pressure on global interest rates, as monetary policy is now expected to remain accommodative for longer. Although the market reaction to the Brexit shock was reassuringly orderly, the ultimate impact, according to the IMF, remains very unclear, as the fate of institutional and trade arrangements between the United Kingdom and the European Union is uncertain.
Financial market sentiment toward emerging market economies has improved with expectations of lower interest rates in advanced economies, reduced concern about China’s near-term prospects following policy support to growth,and some firming of commodity prices. But prospects differ sharply across countries and regions, with emerging Asia in general and India in particular showing robust growth and sub-Saharan Africa experiencing a sharp slowdown.
In advanced economies, a subdued outlook subject to sizable uncertainty and downside risks may fuel further political discontent, with anti -integration policy platforms gaining more traction.
Several emerging market and developing economies still face daunting policy challenges in adjusting to weaker commodity prices.The IMF notes that these worrisome prospects make the need for a broad-based policy response to raise growth and manage vulnerabilities more urgent than ever.
The current outlook is shaped by a complex confluence of ongoing realignments, long-term trends,and new shocks. These factors imply a generally subdued baseline for growth, but also substantial uncertainty about future economic prospects. The main unforeseen development in recent months was the UK vote in favour of leaving the European Union.
Brexit is very much an unfolding event – the long-term shape of relations between the UK and the European Union, and the extent to which their mutual trade and financial flows will be curtailed, will likely become clear only after several years.
Adding to the uncertainty is the impact of the referendum results on political sentiment in other EU members, as well as on global pressure to adopt populist, inward-looking policies.
Important ongoing realignments, particularly salient for emerging market and developing economies, that is, include rebalancing in China and the macro economic and structural adjustment of commodity exporters to a long-term decline in their terms of trade.
Slow-moving changes that are playing an important role in the outlook for advanced economies(as well as for some emerging market economies)include demographic and labour-market trends,but also an ill-understood protracted slowdown in productivity, which is hampering income growth and contributing to political discontent especially in developed countries.
As a result, the 2016 growth forecast for advanced economies has been marked down to 1,6 percentGrowth in emerging market and developing economies is expected to strengthen slightly in 2016to 4.2 percent after five consecutive years of decline,accounting for over three-quarters of projected world growth this year.
However, the outlook for these economies is uneven and generally weaker than in the past. While external financing conditions have eased with expectations of lower interest rates in advanced economies, other factors are weighing on activity.
These include a slowdown in China, whose spill overs are magnified by its lower reliance on import – and resource-intensive investment; commodity exporters’ continued adjustment to lower revenues; spill overs from persistently weak demand in advanced economies;and domestic strife, political discord, and geopolitical tensions in several countries.
While growth in emerging Asia and especially India continues to be resilient, the largest economies in sub-Saharan Africa (Nigeria, South Africa and Angola) are experiencing sharp slowdowns or recessions as lower commodity prices interact with difficult domestic political and economic conditions.
For Zimbabwe, in particular, the IMF projected that the economy will grow by -0,3 percent and -2,5 percent in 2016 and 2017, respectively. This means that we will be in recession.Brazil and Russia continue to face challenging macro economic conditions, but their outlook has strengthened somewhat relative to last April.
The recovery is projected to pick up in 2017 as the outlook improves for emerging market and developing economies and the US economy regains some momentum, with a fading drag from inventories and a recovery in investment.
Although longer-term prospects for advanced economies remain muted,given demographic headwinds (especially the aging population and immigrants’ crisis) and weak productivity growth, the forecast envisages a further strengthening of growth in emerging market and developing economies over the medium term.
But as noted in previous WEOs, this forecast depends on a number of important assumptions:
◆ A gradual normalisation of conditions in economies currently under stress, with a general pickup in growth in commodity exporters, albeit to levels more modest than in the past;
◆ A gradual slowdown and rebalancing of China’s economy with medium-term growth rates that – at close to 6 percent – remain higher than the average for emerging market and developing economies;
◆ Resilient growth in other emerging market and developing economies
The IMF notes that both economic and non-economic factors threaten to keep these assumptions from being realised and imperil the baseline outlook more generally. In particular,some risks flagged in recent WEOs have become more prominent in recent months.
The first is political discord and inward-looking policies. The Brexit vote and the ongoing US presidential election campaign have highlighted a fraying consensus about the benefits of cross-border economic integration.
Concerns about the impact of foreign competition on jobs and wages in a context of weak growth have enhanced the appeal of protectionist policy approaches, with potential ramifications for global trade flows and integration more broadly. Concerns about unequal (and widening)income distribution are rising, fuelled by weak income growth as productivity dynamics remain disappointing.
Uncertainty about the evolution of these trends may lead firms to defer investment and hiring decisions,thus slowing near-term activity, while an inward-looking policy shift could also stoke further cross border political discord.
Going forward, a second risk, according to the IMFis stagnation in advanced economies. As global growth remains sluggish, the prospect of an extended shortfall in private demand leading to permanently lower growth and low inflation becomes ever more tangible, particularly in some advanced economies where balance sheets remain impaired.
At the same time, a protracted period of weak inflation in advanced economies risks unmooring inflation expectations,causing expected real interest rates to rise and spending to decline, eventually feeding back to even weaker overall growth and inflation. A range of additional non-economic factors continues to influence the outlook in various regions, according to the IMF include the protracted effects of a drought in eastern and southern Africa; civil war and domestic effort must proceed simultaneously on a number of fronts.
In dealing with these vulnerabilities, the IMF recommends that policymakers must address the backlash against global trade by refocusing the discussion on the long-term benefits of economic integration and ensuring that well-targeted social initiatives help those who are adversely affected and facilitate, through retraining,their absorption into expanding sectors.
This is however, hard to sell after Brexit. Brexit set a serious precedence that free trade does not work. This is of course need debate for another day.
Effective banking resolution frameworks, both national and international,are vital, and emerging risks from non-bank intermediaries must be addressed.
A stronger global safety net is more important than ever to protect economies with robust fundamentals that may nevertheless be vulnerable to cross-border contagion and spill overs,including strains that are not economic. In dealing with vulnerabilities of commodity prices, the IMF called for value addition of exported products.
For Zimbabwe, the main take away from this report is that the unfolding events in the country, from the economy front, are largely exogenous (external). So, as we work hard in resuscitating the economy, we need to work extra mile in dealing with these external factors such possible impact of Brexit on Zimbabwe, Chinese rebalancing model (switch from export and investment driven economy to services) which has seen world prices plummeting due to loss of appetite by the Chinese.
For example, we are driving the look east policy and we hope that China will help us in the exploitation of our minerals since it is the world biggest consumer of base metals but its appetite is down should we keep on with the same strategy?
- The Herald