The International Monetary Fund just cut its expectations for global output by 0.2 percentage points for both 2016 (now 3.4%) and 2017 (now 3.6%). It’s the third time the IMF has cut its forecast in less than a year.
As it turns out, folks in DC are worrying about the same issues troubling Wall Street (paywall): A heady combination of fears over slowing growth in China, continued declines in oil prices, and a dissolving consensus on global monetary policy.
China
The world’s second-largest economy just reported that its economy grew slower in 2015 (6.9%) than it had in 25 years, and the IMF maintains doubts that the country will be able to hit its 6.5% growth target this year (6.3% GDP growth expected) or next year (6% growth).
Overall growth in China is evolving broadly as envisaged, but with a faster-than-expected slowdown in imports and exports, in part reflecting weaker investment and manufacturing activity. These developments, together with market concerns about the future performance of the Chinese economy, are having spillovers to other economies through trade channels and weaker commodity prices, as well as through diminishing confidence and increasing volatility in financial markets.
Oil
Although low oil prices are generally good for developed economies because households can then spend their money in other ways, crude’s decline ends up hurting a lot of emerging market economies (from Saudi Arabia to Nigeria) because so much of their exports are petroleum-based. And for the non-oil exporters, the IMF says oil declines aren’t getting passed through to consumers like they used to.
Monetary policy
The Fed raised interest rates in December like everyone knew it would, but there are growing doubts that was the right move. Just look at Britain, where the Bank of England has backed away from raising rates this year despite the UK economy being in similar shape to the US.
Prospects of a gradual increase in policy interest rates in the United States as well as bouts of financial volatility amid concerns about emerging market growth prospects have contributed to tighter external financial conditions, declining capital flows, and further currency depreciations in many emerging market economies.