Oil and China slump drives gloomy IMF outlook

Photo / Bloomberg

The International Monetary Fund has lowered its forecast of global economic growth over the next two years amid the deepening slowdown in emerging markets and a continued slump in oil prices.

The IMF projects the world economy will grow 3.4 percent this year and 3.6 percent in 2017. That pace would be faster than last year, but the projections are 0.2 percentage points lower than the IMF estimated in the fall - a sign that the global recovery is still struggling to build momentum.

"Growth expectations seem to fall consistently," said Maury Obstfeld, economic counselor at the IMF. "I think the year coming is going to be a year of great challenges."

Fears that the outlook could be even gloomier have roiled financial markets during the first few weeks of the year. China officially entered a bear market. It also announced late Monday that its growth rate had slowed to 6.9 percent in 2015, the slowest pace in a quarter-century.

US stock markets closed basically flat Tuesday, with two of the major indexes notching minor gains after an earlier rally lost steam. The Dow Jones industrial average rose 0.2 percent.

The Standard &Poor's 500-stock index, a broader measure of large companies, was up 0.1 percent. The tech-heavy Nasdaq composite index, the only one to register a slight loss, fell 0.3 percent.

The mixed performance could be a sign that many investors are skittish after watching U.S. markets dive last week, closing their worst-ever two-week start to a year.

"People are trying to time this market, and they don't want to buy in when stocks are falling," said David Kelly, chief global strategist for JPMorgan Funds.

I think there's a lot of nervousness about getting in too early when markets could correct some more.

In its outlook, the IMF forecast that growth in China will further slow this year, to 6.3 percent, and fall to 6 percent in 2017 - below Beijing's official target for the pace of expansion. Many analysts are skeptical of the country's estimates of growth, and some fear its economy is in much worse shape than officials are willing to acknowledge.

China's boom had been built on exporting its low-priced goods around the world, driving domestic investment in factories, equipment and infrastructure. China's seemingly insatiable demand for raw materials also helped buoy resource-rich countries such as Brazil and Zambia.

Now the tide is turning.

Chinese exports face stiff price competition from other Asian countries at the same time that worldwide demand is sagging. Beijing is attempting to shift the country's economic engine from manufacturing and trade to consumer spending, but the adjustment is slow and painful. And lately, investors have begun to question whether officials are up to the challenge.

"We don't see a big change in fundamentals in China . . . but the markets are certainly very spooked by small events that they find very hard to interpret," Obstfeld said.

The slowdown in China is spilling over to several key emerging markets, which had ridden Beijing's coattails to prosperity during the boom. The IMF pointed to political upheaval and a sharper contraction than expected in Brazil as a key factor behind the downgraded global forecast.

Meanwhile, the IMF said it expects oil prices to remain "low for long." The price of Brent crude oil on international markets recently fell below $30 a barrel, a psychologically important benchmark. Many analysts expect Iran to ramp up production now that US sanctions have been lifted, adding to the global supply glut and holding back prices.

We don't see a big change in fundamentals in China . . . but the markets are certainly very spooked by small events that they find very hard to interpret.

Emerging markets had supported much of the growth in the world economy following the 2008 financial crisis. But as they slow down, countries such as the United States and those in Europe lack the momentum to pick up the slack. The IMF estimates that advanced economies will grow a modest 2.1 percent this year, compared with the 4.3 percent rate of growth in emerging markets.

Even that may prove optimistic. Standard & Poor's cut Poland's credit rating last week over concerns that its new national ruling party could interfere with its central bank and other key government institutions. Poland has boasted one of the strongest economies in the European Union, but its currency plunged following the downgrade.

The IMF also reduced its estimate for US growth, projecting it will plateau over the next two years at 2.6 percent. The Federal Reserve recently began withdrawing its support for the U.S. economy by raising interest rates. The move was intended to signal the central bank's confidence in the resilience of the recovery, but the IMF suggested that the economy may not be as robust as hoped.

We're not as optimistic about a pickup in U.S. growth.

Obstfeld

For investors in the United States, the uncertainty over global growth raises questions about whether the Federal Reserve acted too soon late last year when it raised short-term rates for the first time in nearly a decade.

When Fed officials meet next week, some investors may be looking for reassurance that the central bank will move cautiously in the wake of the increased volatility, said Phil Orlando, chief equity market strategist for Federated Investors. "Investors have to know that the Fed is not going to blindly hike rates in this environment," he said.

Investors will be scouring corporate balance sheets for hints on whether the domestic economy may be able to stand on its own even as growth slows in China. Bank of America and Morgan Stanley reported fourth-quarter profits Tuesday morning, contributing to the initial rally.