The Market Monitor Minding the Nation's Business
Washington—China’s slowdown, volatile financial markets and tumbling prices of raw materials have raised the risks to economic growth around the world, the International Monetary Fund (IMF) reported last Wednesday (last Thursday in Manila).
In an assessment of threats published as top finance ministers and central bankers meet this week in Turkey, the IMF warned that the problems could lead to “a much weaker outlook” for global growth.
It urged wealthy countries to continue easy-money policies and “growth-friendly” tax and spending programs. Some emerging-market countries, meanwhile, should let their currencies fall substantially to support their exporters and economic growth, while also enacting reforms to make their economies more efficient, it added.
The Chinese economic slowdown, though long anticipated, “appears to have larger-than-previously-envisaged” repercussions in other countries, the IMF said.
China’s troubles have sent the prices of raw materials, such as oil and copper, into a freefall, pinching Brazil, Russia and other commodity exporters.
The report did not revise the fund’s economic forecasts for this year, last updated in July, though it concluded that “downside risks have risen.”
The IMF expects the global economy to grow 3.3 percent this year, little-changed from 3.4 percent in 2014; the US economy to grow 2.5 percent, versus 2.4 percent in 2014; the 19-country eurozone to grow 1.5 percent, nearly double 2014’s 0.8 percent; and China to grow 6.8 percent, down from 7.4 percent last year.
Some economists expect Chinese growth to decelerate even more—to below 6 percent. The Chinese stock market has been falling since mid-June, and on August 11 Chinese authorities unexpectedly devalued China’s currency, the yuan. They said they were responding to signals from investors that the currency was overvalued.
But skeptics feared it was a desperation move to give Chinese exporters a competitive advantage—and a sign the economy was weaker than anybody realized.
In an interview with CNBC, US Treasury Secretary Jacob Lew warned China against manipulating its currency to give its exporters an unfair advantage.
“We are going to hold them accountable,” he said.
The IMF is also worried about the potential fallout if the US Federal Reserve (the Fed) decides this year to raise the short-term interest rate it controls, pinned near zero for seven years. Higher US rates would likely lure investment out of emerging markets to America and drive up the value of the US dollar. That could shake up global markets.
It could also squeeze emerging-market companies that have borrowed in US dollars and would have to scrounge up more money in their local currencies to meet the payments.
In June, IMF Managing Director Christine Lagarde advised the Fed to delay a rate hike until 2016. She argued that the risk of raising rates prematurely—and damaging the US and global economies—outweighed the risk of waiting too long and allowing inflation to creep up.
Finance ministers and central bankers from the Group of 20 major economies were to meet last Friday and Saturday in the Turkish capital Ankara. AP