China’s slowdown and a host of other downside risks threaten to push the global economy into much deeper trouble without concerted action by the world’s largest economies, the International Monetary Fund warned Wednesday.
“Risks are tilted to the downside, and a simultaneous realization of some of these risks would imply a much weaker outlook,” the IMF said in a report on the state of the global economy ahead of a meeting of top finance officials from the Group of 20 biggest economies.
“Strong mutual policy action is needed to raise growth and mitigate risks,” the IMF told the G-20.
IMF Managing Director Christine Lagarde on Tuesday said the fund plans to downgrade its global growth forecast again, putting the fund’s latest outlook due in October below what was already the weakest since the financial crisis. Stock market routs and a series of weak data out of China are fueling concerns that China’s economy is nose-diving—and the government won’t be able to pull back the throttle, triggering selloffs in markets around the globe.
But China isn’t the only concern. With growth slowing in many corners of the world and the U.S. economy strengthening, investors have plowed back into the U.S., pushing the value of the dollar up against most major currencies. That is a problem for many countries and corporations that have borrowed heavily in dollars but whose income is denominated in local currencies. And with the U.S. Federal Reserve preparing to raise interest rates, weak growth prospects and heavy debt loads are a toxic mix for many companies and economies, especially in industrializing nations.
“Near-term downside risks for emerging economies have increased,” the IMF warned.
The fund’s prescription for the global economy hasn’t changed much over the past several years, but politics have hindered G-20 efforts to bolster global growth. The IMF has urged both emerging and developed nations to overhaul their economies to make them more competitive. It has long cautioned developing nations to get their fiscal houses in order. The IMF has backed more central bank easing—including by the Federal Reserve and the European Central Bank—to spur growth. And the fund has pushed for more infrastructure investment as a way to boost global demand.
While central banks have eased, other policy makers have struggled to push through deep, meaningful economic overhauls. Now that borrowing costs are rising and growth in many of the world’s largest emerging markets slowing, prospects for many economies are dimming even further. Those factors have fueled equity, currency and bond market selloffs world-wide.
As the world’s No. 2 economy, if China sputters, it slows economies across the globe. Brazil is a prime example: Slumping commodity prices and trade from China have compounded the government’s struggle to pull the country out of recession.
The World Bank estimates that a 1 percentage-point decline in China’s growth shaves a half percentage-point off global growth. That means if forecasters such as Lombard Street Research, whose projection for the year is more than 3 percentage points below Beijing’s official rate of 7%, are right, a Chinese nosedive would ax 1.5 percentage points off global growth.
With the IMF estimating global growth of 3.5% this year, the world economy can ill afford such a decline.
The U.S. hopes that recent market turmoil could spur stronger action.
“What gives me hope now…is the recent volatility in global markets, which I really look at as being a signal that we need more global demand,” a senior U.S. Treasury official said Tuesday.
This story originally appeared in The Wall Street Journal by Ian Talley. View article here.