Cheap oil will soften what would otherwise be a hard slowdown in the global economic recovery, according to the International Monetary Fund (IMF). In its quarterly World Economic Output report, the IMF revised its growth forecasts for 2015 and 2016 down 0.3%, to 3.5% and 3.7% respectively.
Though the pessimists out there will point out this is its steepest downgrade in three years, it still means growth is accelerating – in 2013 and 2014, the world's economy expanded only 3.3%. The recovery’s still gathering pace then, just less than previously expected.
The picture is not a uniform one, if the IMF has its models right. Broadly speaking, the developed world is likely to be on track with 2.4% growth for the next two years, helped by a robust American recovery and the oil price plunge. On the other hand, the latter will hit oil exporters, which is expected to contribute to emerging market growth being slashed 0.6% to a relatively lowly 4.3% this year, and by 0.5% to 4.7% next year.
Here’s a breakdown of the winners and the losers in the IMF report.
USA – Winner
America will surge thanks to cheap oil boosting real consumer income and an ‘accommodative monetary policy’. Despite the likelihood of an interest rate hike, US growth has been revised up 0.5% this year to 3.6% and by 0.3% next year to 3.3%. This represents a fairly sharp upturn – last year the American economy grew 2.4%.
Eurozone – Loser
The IMF obviously isn’t expecting a QE miracle any time soon. The Eurozone’s stagnation is expected to continue, with growth revised down 0.2% for 2015 to 1.2%, and by 0.3% in 2016 to 1.4%. The IMF blames ‘weaker investment prospects’, reflecting a general pessimism on the continent.
China – Somewhere in between
China’s growth forecast has been revised down 0.3% to 6.8% this year and 0.5% next year, to 6.3%. This is clearly a lot worse than in recent years, but it’s still too strong to count the world’s second largest economy as a loser.
Official figures from China showed that this year the economy grew 7.4%, narrowly missing the government’s target. Property investment slowed dramatically, with growth of only 10.5% compared to 19.8% two years ago, but the retail consumption and factory output rose 11.9% and 7.9% respectively.
This will please China-watchers, as it signals an increasing shift away from an investment economy towards a more stable consumption-led economy. Though that can bring its own boom and bust risks, the IMF seems fairly optimistic. ‘The authorities are now expected to put greater weight on reducing vulnerabilities from recent rapid credit and investment growth’, it said.
Japan – Loser
Although Japan’s growth forecasts have been revised down 0.2% and 0.1% for the next two years to a measly 0.6% and 0.8% respectively, the IMF seems to believe Abenomics is working. ‘Policy responses’, the report said, ‘together with the oil price boost and yen depreciation, are expected to strengthen growth in 2015–16’. Last year, Japan expanded only 0.1%, having been in recession in the third quarter.
Russia – Massive loser
Unsurprisingly, IMF predictions for Russia aren’t full of optimism. The triple whammy of the standoff in the Ukraine, Western sanctions and the oil price collapse have already smashed the rouble and sent Russia into a recession. This year, it’s not expected to do better, with growth forecasts revised from 0.5% to -3%. Next year the outlook’s not much better, at -1%.
The rest of the developing world – Somewhere in between
Low commodity and oil prices are hurting large swathes of the developing world, particularly those which depend on exporting to the US, where the dollar surges. Forecasts for the Middle East, sub-Saharan Africa and Latin America are all down between half a percent and percentage point for this year, to 3.3%, 4.9% and 1.3% respectively.
India, on the other hand, is staying strong at 6.3% (-0.1%) for this year and 6.5% for next (no change).
The UK – Winner?
In a world where more or less everyone else is predicted to do worse than expectations, staying level is a plus. Britain’s economy is predicted to expand 2.7% this year (no change) and 2.4% next (-0.1%), due to (you guessed it) cheap oil and growing confidence.
Don’t get out the party poppers and begin framing that portrait of George Osborne just yet, however. IMF chief economist Olivier Blanchard said that the Eurozone slowdown could act as a ‘brake’ on Britain’s recovery. You win some, you lose some.