International Monetary Fund Economic Counsellor and Director of Research Department Olivier Blanchard
Olivier Blanchard will step down from his role as IMF chief economist later this year © AFP

The global economy was more likely to enjoy a reasonable recovery over the next two years benefiting from recent falls in energy prices and exchange rate movements, the International Monetary Fund said on Tuesday.

The twice-yearly forecasts show India is expected to outperform China in growth for the first time in 16 years.

Although the fund has recently told countries they “could do better” to improve medium-term prospects, the World Economic Outlook is the first since 2011 to suggest economies are putting the 2009 financial crisis behind them.

Speaking to the Financial Times ahead of publication, Olivier Blanchard, IMF chief economist, said: “I sense the macro risks are smaller than in October — there is no reason for doom and gloom.”

Since October, the fund documented divergent trends in economic performance across the world with strength in the US and UK and greater weakness in the eurozone, China and Latin America. Inflation has fallen everywhere and the outlook for many emerging economies, with the important exception of India, has deteriorated.

But it said that, despite this uneven progress in economic data, the fall in energy prices would boost growth in oil importing countries. It estimated that the full effect of falling oil prices would increase global output by 0.5 per cent to 1 per cent in 2016.

The rise in the US dollar and Chinese renminbi against the Japanese yen and the euro would help boost growth further, the IMF predicted. It will help exports and growth countries struggling with deficient demand where monetary policy cannot easily be loosened further. The appreciation of the US and Chinese currencies need not damage their growth prospects because these economies can keep interest rates lower for longer to offset any deterioration in their trade performance.

The outlook said: “The decline in oil prices and the real exchange rate changes occurring in recent months have been supportive of the recovery.”

Translating this assessment into hard numbers, the IMF forecasts 3.5 per cent global growth in 2015, up on the 3.4 per cent recorded last year and improving further to 3.8 per cent in 2016.

Among advanced economies, the US is expected to lead the pack, growing 3.1 per cent in both years. Among large European economies, the UK and Spain have the best prospects. The eurozone economy is expected to grow 1.5 per cent this year, having expanded 0.9 per cent last.

Chart: Major economies real GDP growth

The IMF expects China’s slowdown to continue with growth of 6.8 per cent this year and 6.3 per cent in 2016, considerably slower than India, which is expected to expand by 7.5 per cent in both years, marking an important moment in the momentum of two of the world’s largest three economies, measured by purchasing power parity.

With the IMF having lowered its view of the medium-term strength of the global economy in January, it sees the risks around its forecasts as balanced rather than weighted towards bad outcomes.

Mr Blanchard said: “We estimate that the probability of a eurozone recession this year has declined, from about 40 per cent in October to about 25 per cent today.”

It also cut the likelihood that the eurozone or Japan would get stuck in a deflationary cycle over the next two years.


global growth in 2015, improving to 3.8 per cent in 2016, forecast by the IMF

“There is, as always, a list of downside risks,” he added. “This time, from China slowing, to financial turmoil associated diverging monetary policies, to an intensification of the Greek crisis to other geopolitical risks. None seems likely to be systemic at this time.”

Instead, the fund’s chief economist was more concerned that the IMF had underestimated the likely boost from cheap oil. “The main question [about oil] is how much of the increase in consumption [we have seen] is due to oil and how much more is to come,” he said.

The fund is, however, more gloomy about medium-term growth prospects, noting that economies do not seem likely to return growth rates that previously were considered normal. Ageing populations and weak productivity growth are set to lower rates of expansion.

Chart: Potential impact of oil price fall on global growth

With a weaker medium-term outlook in mind, Christine Lagarde, the IMF’s head, has warned about a “new mediocre” and the World Economic Outlook urged countries to improve prospects with policies designed to boost investment.

“In advanced economies, monetary policy has done almost everything it can do. The ECB’s actions have worked better than anyone had any reason to expect,” Mr Blanchard said. “With interest rates below growth rates and clear infrastructure needs in many countries, infrastructure investment makes sense even if it means more public debt.”

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