World Economic Outlook (WEO) Update by IMF reports weakening worldwide recovery but retains growth forecast for India

Global growth is projected to remain modest in 2016, at 3.2 percent, before picking up to 3.5 percent in 2017. However, emerging market and developing economies will still account for the lion’s share of world growth in 2016. However, oil-importing emerging market economies are benefiting from terms-of-trade gains, but in some instances are facing tighter financing conditions and weakness in external demand, which counter the positive terms-of-trade impact on domestic demand and growth.

According to the IMF’s latest World Economic Outlook (WEO) Update, April 2016, Global growth is projected to remain modest in 2016, at 3.2 percent, before picking up to 3.5 percent in 2017. The outlook is weaker than that in the January 2016 WEO Update for both advanced economies and emerging markets.

Modest acceleration of growth in advanced economies

Growth in advanced economies is projected to remain at about 2 percent as output gaps close and then slow owing to diminished growth in the labor force as populations continue to age. Among the advanced economies, growth is projected to continue in the United States at a moderate pace, supported by strengthening balance sheets, no further fiscal drag in 2016, and an improving housing market. In the euro area, recovery is projected to continue in 2016–17, with weakening external demand outweighed by the favorable effects of lower energy prices, a modest fiscal expansion, and supportive financial conditions. Growth in Japan is projected to remain at 0.5 percent in 2016, before turning slightly negative to –0.1 percent in 2017 as the scheduled increase in the consumption tax rate (of 2 percentage points) goes into effect

Activity remains robust in emerging and developing Asia

Emerging market and developing economies will still account for the lion’s share of world growth in 2016, yet their growth rate is projected to increase only modestly relative to 2015, remaining 2 percentage points below the average of the past decade. Growth is projected to increase from 4% in 2015, the lowest rate since the 2008–09 financial crisis to 4.1 and 4.6% in 2016 and 2017, respectively.

On the positive side, growth in India is projected to notch up to 7.5 percent in 2016–17, as forecast in October. Growth will continue to be driven by private consumption, which has benefited from lower energy prices and higher real incomes. With the revival of sentiment and pickup in industrial activity, a recovery of private investment is expected to further strengthen growth. Among the ASEAN-5 economies (Indonesia, Malaysia, Philippines, Thailand, Vietnam), growth will ease in 2016 in Malaysia and Vietnam (to 4.4 percent and 6.3 percent, respectively) but increase moderately in Indonesia, the Philippines, and Thailand (to 4.9 percent, 6.0 percent, and 3.0 percent, respectively).

Overview of the World Economic Outlook Projections

Source: PHD Research Bureau, compiled from IMF

Looking beyond the short-run forecasts, there are immediate challenges facing policymakers, which are particularly prominent for emerging market and developing economies. Common challenges center on dealing with slowing growth and increased vulnerabilities after a decade or so of buoyant activity, facilitated in many cases by rapid credit expansion. Priorities range from ensuring a successful rebalancing of the Chinese economy and managing the cross-border spillovers of the slowdown in China to containing the vulnerabilities associated with tighter financial conditions and declining capital inflows as growth softens, and adjusting to lower commodity prices.

Further, countries that are enjoying terms-of-trade gains from lower commodity prices should use the windfall to rebuild buffers. These near-term challenges notwithstanding, policymakers in emerging market economies also should act to lift medium-term growth, to safeguard hard-won gains in living standards and ensure continued convergence toward advanced economy income levels.

In this global environment, with the continued weakness of growth and shrinking macroeconomic policy space in many economies, the WEO emphasizes a three-pronged approach of mutually reinforcing policy levers. These include (1) structural reforms, (2) fiscal support, with growth-friendly composition of revenue and spending, and fiscal stimulus where there is a need and where fiscal space allows, and (3) monetary policy measures.