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IMF Reduces Global GDP Growth Forecast; Points To US
Aspire, Investments | 02 February 2015
By: Lim Si Jie
Articles (169) Profile

Global growth was projected to be between 3.8 and 4.1 percent during the October 2014 World Economic Outlook (WEO). According to the IMF, the global GDP figure is expected to “receive a boost” from lower oil prices. However, the IMF also forecasts that this boost is to be “more than offset by negative factors”, including weakness in investments as many advanced and emerging market economies “adjust to diminished expectations about medium-term growth”.

The recent “sharp drop in oil prices” sparked off a revision in reassessing global growth prospects in China, Russia, Euro zone and Japan. The IMF has since re-projected global growth in 2015-16 at 3.5 percent and 3.7 percent.

Falling Oil Prices Shook The Market
Oil prices in U.S. dollars have fallen by about 55 percent since September. The decline is partly due to what the IMF deems as “unexpected demand weakness in some major economies, in particular, emerging market economies”.

But the major contribution to the decline in oil prices suggests an important contribution of oil supply factors, i.e. the decision of the Organization of the Petroleum Exporting Countries (OPEC) to “maintain current production levels” despite the “steady rise in production” from non-OPEC producers, especially the United States.

Slowing Growth In China Worries The World
Investment growth in China declined in the third quarter of 2014 with leading indicators pointing to a further slowdown. The IMF notes that the “slower growth in China” will have rippling regional effects, which partly explains the downward revisions to growth in much of emerging Asia. The Chinese government is expected to put greater weight on reducing what the IMF terms as “vulnerabilities from recent rapid credit and investment growth”.

Sentiments Remain Positive On US
The US remains the “only major economy for which growth projections have been raised” by the IMF. The US economy contracted in the first quarter of 2014 with unemployment declining further and inflationary pressure staying “muted”.

Despite that, the IMF notes that growth in the US “rebounded ahead of expectations”. Growth is projected to exceed 3 percent in 2015–16, the IMF notes that this increased projection will be backed by domestic demand. Domestic demand will, according to the IMF, be buoyed by “lower oil prices, more moderate fiscal adjustment, and continued support from an accommodating monetary policy stance, despite the projected gradual rise in interest rates”.

Source: IMF World Economic Outlook Update

What Does Our Global Economy Need
The weaker projected global growth for 2015–16 further underlines the importance of “raising actual and potential output” as a policy priority in most economies, writes the IMF.

There is an urgent need for structural reforms in both emerging and advanced economies, while their macroeconomic policy priorities differ. In most advanced economies, “output gaps are still substantial, inflation is below target”, while monetary policy remains constrained by the zero lower bound.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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