IMF paints a bleak picture of global growth outlook…

The IMF has lowered its global projections for the world economy by 20 basis points for the years 2016 and 2017. Thus the estimated 2016 growth now stands lower at 3.1% as against an earlier estimate of 3.3%. Similarly, the projected growth rate for 2017 stands reduced from 3.8% to 3.6%. So what has driven this deceleration in growth?

Blame it on China…

For starters, two things are likely to drive slower growth in the next two years. Firstly, emerging markets, which were the engine of global growth, are likely to grow slower. China is a case in point where growth has actually slowed from 10% to below 7%. In fact, unofficial estimates put the actual Chinese growth rate at below 6%, but the moral of the story is that being a $10 trillion economy, China accounts for a substantial part of the fall in growth. China’s growth is critical for the world economy because it has strong externalities. For most major countries, China is the consumer of last resort.

The commodities syndrome…

The second factor driving growth lower is low price of commodities. Take the case of oil. Crude has fallen from $114 / barrel last year to below $50 / barrel in the current year. This has strong implications for countries in the Middle East, Africa, Latin America, and Russia and for developed nations like Norway. Crude is one side of the story! The other side is industrial commodities. Most of the key industrial commodities like iron ore, zinc, aluminium and others have seen a sharp fall in price in the last one year. This fall in prices of industrial commodities has been largely driven by a slowdown in Chinese demand. This has impacted growth in nations like Australia, Canada, South Africa, Brazil and many other African countries. Weak commodity prices are the second reason for the fall in global growth numbers.

Watch out for the US Fed...

The IMF sees the US Fed action as a key risk to growth. The US being the only major developed nations that is growing is closer to a rate hike than ever before. If the US hikes rates then a risk-off trade could force portfolio outflows from emerging markets into the US. But the bigger impact could be on US global companies. A rate hike will result in a strong dollar. That is not great news for global corporations for whom a strong dollar translates directly into lower earnings. That is likely to worsen the growth for US companies and have its larger impact on global growth.

Don’t forget the risk of Chinese devaluation…

We have already seen a bout of Yuan devaluation by China in August and that had serious repercussions on many emerging markets. While minor devaluations may actually benefit exports, an outright currency war will leave all nations poorer with larger implications for global growth. Secondly, devaluation only benefits nations which are net exporters. For countries like India that run fairly large trade deficits, a devaluation of the rupee is a direct impact on growth of corporate profits and therefore on the GDP growth.

In a nutshell, the IMF may have been a little conservative in downgrading the growth by a mere 20 basis points. Let us not forget that China itself is likely to see a 50-60 basis points fall in growth as a result of its economic slowdown. Considering that the EU and Japan are also not showing any growth traction, the actual global growth may be slightly lower than the revised estimates. But the IMF growth warning should serve as a signal that a Chinese slowdown will hardly be easy for the global economy to absorb.

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