The International Monetary Fund yesterday released its latest quarterly World Economic Outlook (WEO) Update, in which it projected the global economy will grow 3.4 percent this year, down from its October projection of 3.6 percent.
The International Monetary Fund has joined the chorus of analysts and economists projecting gloom and doom for the worldwide economy in the coming year.
Concerns over a slump in commodity prices, particularly crude oil, which has fallen to 12-year lows in recent weeks, an economic slowdown in China and recession in Brazil have taken their toll on financial markets in early 2016 and there looks to be little relief in sight. So far this year, the Dow Jones Industrial Average and the S&P 500, two of the leading U.S. stock market indicators, are off to their worst start ever, down around 9.5 percent and 9 percent, respectively.
Transportation and logistics stocks have fared even worse early in 2016. The Dow Jones Transportation Average, a U.S. stock market index that calculates the running average of the share prices of 20 major shipping companies and the most widely recognized gauge of the American transportation sector, has fallen 11.76 percent year-to-date. The DJTA closed at 6,625.53 yesterday, down 883.18 points from a closing price of 7,508.71 on Dec. 31, 2015.
The IMF yesterday released its latest quarterly World Economic Outlook (WEO) Update for 2016, aptly titled “Subdued Demand, Diminished Prospects.” In the report, the fund projected the global economy will grow 3.4 percent this year, down from its October projection of 3.6 percent.
“This coming year is going to be a year of great challenges and policy makers should be thinking about short-term resilience and the ways they can bolster it, but also about the longer-term growth prospects,” IMF chief economist Maurice Obstfeld said in a statement.
The IMF estimates the global economy grew 3.1 percent last year, the slowest rate since the height of the global recession in 2009. Growth in emerging markets and developing nations slowed for the fifth straight year, according to the report.
But Paul Donovan, global economist with UBS, downplayed the importance of the downgrade in the IMF’s global economic growth forecast in an interview with Bloomberg TV, calling the move “largely nonsensical.”
First, said Donovan, “If you ever talk about IMF forecasts you can automatically assume they’re about six to 12 months behind the times, always. And for crying out loud, it’s 3.6 percent to 3.4 percent – 0.2 is the shift. This is a rounding error. I don’t think any economist on the planet believes that economic data is accurate enough to give you a 0.5 percent range for GDP.
“This is just the IMF going for headlines,” he added. “It’s largely nonsensical.”
“As far as China is concerned,” he cautioned, however, “I think China does have a problem in that its economy is overheating.”
The Chinese government recently reported its gross domestic product (GDP), the broadest measure of an individual country’s economy, grew 6.9 percent in 2015, down from 7.3 percent in 2014 and the lowest in 25 years. Donovan predicted we will see China’s economic growth rate will continue to reach new lows for each of the next several years as the country attempts to grow the consumer side of its economy to offset dwindling industrial demand.
“China’s growth rate must, absolutely must go down from where it is today…It needs to come down to its trend rate of 5 to 5.5 percent over the next couple of years.”
Donovan pegged trend growth in the United States at around 2.75 percent, slightly higher than the Commerce Department’s latest projection of a 2.0 percent annualized growth rate during the third quarter of 2015, and in Europe at 1.25 percent to 1.5 percent.
“They’re not moving away from manufacturing, what they’re trying to do is raise the consumer portion of GDP,” Donovan said of China’s reported shift from a manufacturing economy to a consumer-based one.
He also addressed reports of China deliberately devaluing its currency in an attempt to boost its export market share by making its own products less expensive abroad, saying that “a weaker renminbi won’t do any good at all to the Chinese economy.”
“The problem is that currencies don’t work the way that they worked 40 years ago,” said Donovan. “Forty years ago, if you depreciated your currency, your exports got cheaper, but that’s not the way the world works today. We’ve now got far more complicated global supply chains and generally speaking if you weaken your currency you don’t then end up with lower export prices and you don’t then end up with an increase in export market share.”
The downward movement in the renminbi, according to Donovan, cannot be considered a competitive devaluation because it’s not being reflected in export prices and, therefore, there is no competitive advantage.
A downturn in global economic growth rates could compound issues for the ocean shipping industry, which has already seen slews of analysts predict persistent overcapacity and tepid trade growth will continue to drive rates downward and could push carriers deep into the red in 2016. London-based shipping consultants Drewry predicted in its latest Container Forecaster publication container carrier losses will exceed $5 billion in 2016.
China’s economic growth is of particular importance both to the container and bulk shipping sectors as the world’s largest exporter of the former and a major importer of raw commodities like iron ore, steel and coal for manufacturing.
IMF downgrades 2016 global growth forecast
