IMF Sees Global Growth Weakest Since Crisis

By Ian Talley 

        WASHINGTON--Global growth is set to slow this year to its weakest pace since the financial crisis as mounting threats from China to the eurozone add to a long list of forces restraining the world economy.
        China's recent stock-market turbulence is fueling investor worries about deepening economic problems there, while Greece's long-festering debt woes threaten once again to damp the eurozone's nascent recovery.
        The two regions--home to crises shaking markets in recent days--are among the trouble spots that the International Monetary Fund listed as it downgraded its global economic outlook Thursday. The fund lowered its forecast for global growth in 2015 by 0.2 percentage point to 3.3%, down from last year and the weakest clip since the world economy contracted in 2009.
        "We have entered a period of low growth," IMF chief economist Olivier Blanchard said.
        While the IMF expects global growth to pick up again next year, the bouts of turmoil underscore the fragility in the world's economy, where anemic output in one region risks dragging down others across the globe. Policy makers have fewer options left to respond to downside surprises, the IMF said. Governments have pushed debt to dangerously high levels and central banks are constrained by the lower limits of rate reductions.
        Weak growth, mountains of debt, stubbornly high unemployment and limited policy options are setting the stage for more market volatility ahead, including in China. "The post-crisis world is one of high debt and it doesn't take much with these debt dynamics to go wrong," Mr. Blanchard said. "We have to be ready to see other episodes of that kind."
        The IMF still sees the global economy picking up next year, expanding to its fastest pace in five years, at 3.8%. But that assumes a wobbly global economy isn't knocked off course by more market meltdowns, geopolitical turmoil or even softer growth in the world's largest economies.
        Growth has repeatedly disappointed. Europe has only just narrowly avoided a third recession in five years, and emerging markets are on course for their sixth straight year of slowing growth rates.
        Europe has built up its bailout funds since the last time Greece's potential euro exit pulled the region into a growth quagmire, depressed investment and sparked debt worries about some of its other weak economies. The European Central Bank has also proved to markets it's ready to use its substantial monetary arsenal to douse financial fires.
        "Nevertheless, recent increases in sovereign bond yields in some euro area economies reduce upside risks to activity in these economies, and some risks of a re-emergence of financial stress remain," the IMF warned.
        Together with aging workforces and deteriorating productivity levels around the world, the global economy faces a bleak, low-growth outlook through the rest of the decade.
        While the turbulence in financial markets may not create the type of global economic contractions seen in the wake of the 2008-2009 financial crisis, Mr. Blanchard said "it will clearly lead to some uncertainty for a period of time."
        In a world of weak growth, the U.S. risks serving as the leading driver of the global economy. But U.S. prospects also have been downgraded. A 20% surge in the dollar's value over the last year has weighed on exports as trouble overseas and the expectation for the Federal Reserve's first interest-rate rise in a decade pulled investors out of emerging markets, back into America.
        Those factors, along with bad weather in the first quarter and a collapse in oil-sector investment, have sapped momentum for job creation and expansion. A 5% further appreciation of the dollar could cut a half percentage-point off growth, the IMF estimates.
        The strong dollar, in turn, has caused trouble for many emerging-market economies and companies that borrowed heavily in greenback-debt. The prospect of higher interest rates amid weak growth is fostering investor concerns about the ability of many corporations and governments to pay back their obligations. That fuels capital flows back to the states, bolstering the dollar and again amplifying problems overseas.
        Adding to the world's headaches are falling commodity prices. Major exporters such as Canada, Mexico and Nigeria are seeing their growth rates slashed as prices continue to slump.
        Among advanced economies, Canada sustained the biggest downgrade, with the IMF now expecting the country's economy to expand 1.5% this year, down from its previous 2.2% call. The sharp drop in the price of crude oil, Canada's biggest export, has hurt capital spending and dealt a blow to overall growth.
        Strength in domestic consumption has failed to offset a slowdown in the energy sector, which accounts for 10% of Canada's gross domestic product and over a quarter of all business investment. Gross domestic product shrank 0.6% on an annualized basis in the first quarter. Many economists believe Canada fell into recession in the first half of 2015, and expect the Bank of Canada to cut its key interest rate next week for the second time this year to offset the negative impact of lower commodity prices.
        China's slowdown is also feeding downgrades for a host of developing countries with strong market ties to the Asian powerhouse.
        Brazil, for example, is expected to contract by 1.5% this year, a half-percentage-point lower than the IMF predicted in April in part because China's appetite is dwindling for major commodities such as soybeans and natural resources such as copper.
        Brazilian exports to China fell 11.8% in 2014 from a peak of $46 billion in 2013. Brazil ran a $4 billion trade deficit in 2014, its first deficit since 2000.
        Mr. Blanchard warned that across the globe, anemic potential growth, together with increasing income inequality, "is a recipe for social, political, fiscal problems which may well have dire implications."
        Paul Vieira in Ottawa and Marla Dickerson in Sao Paulo contributed to this article.
        Write to Ian Talley at ian.talley@wsj.com
        (END) Dow Jones Newswires

        July 09, 2015 19:42 ET (23:42 GMT)

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