The International Monetary Fund is trimming its 2016 forecast for global economic growth, the latest sign that a slowdown in China and other emerging markets is taking a toll.
The lender's outlook for global growth is projected at 3.4 percent this year and 3.6 percent in 2017, down 0.2 percentage points for both 2016 and 2017 from its October estimate, the IMF said in update of its World Economic Outlook update, released Tuesday. It expects the U.S. to expand this year and next at an annual rate of 2.6 percent, compared with 2.8 percent for both years in the earlier forecast.
The IMF is not alone in ratcheting down its growth forecast. The World Bank earlier this month cut its outlook for 2016 growth to 2.9 percent, from 3.3 percent projection in June. And Goldman Sachs (GS) in late September forecast global gross domestic product growth this year of 3.7 percent, down from a previous forecast of 4.3 percent.
Global economic activity was muted in 2015, with growth in emerging markets falling for a fifth straight year even as a modest recovery continued in advanced countries, the IMF stated.
The revisions in the IMF's outlook come largely as a result of a softer-than-anticipated pickup in emerging economies than forecast in October, with a recession and political uncertainty in Brazil a factor, and prospects in the Middle East hurt by dramatically lower oil prices, the outlook found.
Several factors continue to affect the global outlook, starting with the gradual slowdown and transition of economic activity in China from investment and manufacturing to consumption and services. Other catalysts are lower prices for energy and other commodities and gradual tightening of monetary policy in the U.S. as other advanced nations head in the opposite direction.
"We still expect pretty strong U.S. growth, but we're not as optimistic about a pickup in U.S. growth as we would have been in October," said Marty Obstfeld, economic counsellor and director of the IMF's research department, in a video released with the updated projections. "The U.S. is facing challenges due to the dollar strength, which is causing its manufacturing sector to shrink marginally, and its having an effect on its trade balance."
The slowdown in China's economy has long been anticipated, yet the ongoing uncertainty over the bumpiness of that ride is rattling markets as "the spillovers from China to the rest of the world has been quite significant," said Obstfeld, who advised investment in building and roads as one step to deflect some of the impact.
Headline inflation has mostly moved sideways in most countries, yet ongoing declines in commodity prices and weakness in global manufacturing likely means prices will soften further, with core inflation rates "well below" target in advanced economies, the IMF report stated.
Obstfeld sounded a note of caution, pointing to "serious concern about deflationary pressures that goes beyond falling commodity prices." Central bankers around the globe must be vigilant, he said, and "not fall into the deflationary trap."