The International Monetary Fund has cut its forecast on the world’s economic growth for 2015 after low fuel prices and a steadily improving US economy fail to boost the Chinese and European economies.
IMF Cuts Global Growth Outlook, Urges For Structural Reforms
The world’s monetary fund downgraded the forecast from 3.4% down to 3%. This points to the growing differences in the performance of the US economy and other major economies, putting a dump on hopes that low oil prices would boost economic performance.
The IMF report further indicted that low input in China and Europe place a significant risk on global recovery. The world economy could face imminent danger unless governments embrace tighter monetary policies and structural reforms.
Imminent risk include prolonged low input in Japan, China and the Euro region, increased financial volatility and the possibility of more geopolitical conflicts.
According to Kaushik Basu, the World Bank Chief Economist, the rest of the world is lagging behind and is literally being pulled along by the recovering US economy. This scenario undermines the economic performance for the world at large.
The World Bank promoted the outlook for the growth of the US economy from 3 % up to 3.2 %. At the same time, it degraded its forecast for Japan and the Euro region because of the lingering effects of the 2008 financial crisis.
China’s forecast was also lowered citing a managed slowdown by the country’s government. The forecast for other emerging economies including Saudi Arabia, India, Brazil, Nigeria and Russia was also degraded as result of the drop in oil prices.
According to Olivier Blanchard, the IMF's chief economist, “It is expected that the decrease in oil prices will be quite persistent. We are expecting some return or increases but not as high as the prices were, say, six months ago.”
The monetary fund further predicts that authorities in China are less likely to adopt any policies to mitigate the slowdown. The Chinese government is more focused on investment growth and rapid credit as it steers the economy away from shadow banking and real estate toward domestic consumption.
Market impact of slow global growth
· The low oil prices and strengthening US dollar have different impacts on the different players involved. This scenario is good for importers and bad for exporters. It is also good news for countries that are linked to the weak euro and the Japanese yen, and bad news for those that are linked to the strong dollar.
· As a result of low oil prices, central banks in emerging economies will delay to raise interest rates. However, these same countries will also be promoted to reform policies on taxes and subsidies on energy.
· To depreciate their currencies and to mitigate the effects of low oil prices, oil exporters will most certainly use the funds they had acquired when the oil prices were high.
· Investors should keep an eye on the U.S. interest rates that are expected to rise this year, as announced by the U.S. Federal Reserve.
· It is also important to watch the performance of the Yen and Euro, as the Japanese and European region economies are expected to witness a prolonged period of low inflation and weak growth.
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