India drags down IMF global economic growth forecast

Negative surprises, primarily in India, and rising social unrest behind IMF’s reduced economic growth forecasts.

India Rupees
India saw the IMF's biggest markdown for any emerging market, due to a domestic credit crunch [File: Amit Dave/Reuters]

The International Monetary Fund (IMF) on Monday trimmed its 2020 global growth forecasts – a revision it credits mostly to a sharper-than-expected slowdown in India, and, in certain cases, intensifying social unrest.

On a more optimistic note, the international crisis lender says overall risks are less tilted to the downside compared to October, thanks to tentative signs that a slowdown in manufacturing activity is bottoming out, a shift by central banks to lower borrowing costs (which is growth-boosting) and sporadic “favorable” news on negotiations to resolve the trade war between the United States and China.

The IMF said global growth would reach 3.3 percent in 2020, compared to 2.9 percent in 2019, which was the slowest pace since the financial crisis a decade ago. Estimates for both years were cut by 0.1 percentage point from forecasts made in October.

Growth will improve slightly to 3.4 percent in 2021, but that estimate, too, was cut by 0.2 percentage point from October, said the Washington-based international crisis lender.

The reductions reflect the IMF’s reassessment of economic prospects for a number of major emerging markets, notably India, where domestic demand has slowed more sharply than expected amid a contraction of credit and stress in the shadow banking sector.

The IMF also said it marked down growth forecasts for Chile due to social unrest and for Mexico, due to a continued weakness in investment.

The Fund said that an easing of tensions between the US and China, which had stunted economic growth in 2019, had boosted market sentiment, amid “tentative” signs that trade and manufacturing activity were bottoming out.

“These early signs of stabilization could persist and eventually reinforce the link between still-resilient consumer spending and improved business spending,” the IMF said. The fund has cited uncertainty over tariffs and its negative effects on business investment as the biggest factor in limiting growth.

“However, few signs of turning points are yet visible in global macroeconomic data,” the Fund added.

US-Iran tensions

The Fund’s cautious outlook assumes that there are no additional flare-ups in US-China trade tensions, and that the United Kingdom executes an orderly exit from the European Union at the end of January.

The IMF upgraded China’s 2020 growth forecast by 0.2 percentage point to 6.0 percent because the phase one trade deal between Washington and Beijing included a partial tariff reduction and cancelled levies on Chinese consumer goods that had been scheduled for December. These tariffs had been built into the IMF’s previous forecasts.

But the Fund did not give a boost to its US growth forecast despite China’s pledges to increase purchases of US goods and services by $200bn over two years. Instead, the IMF said 2020 US growth would be 0.1 percentage point lower than forecast in October, at 2.0 percent because of the fading stimulus effects from US President Donald Trump’s 2017 tax cuts and the Federal Reserve’s monetary easing.

Eurozone growth also was marked down 0.1 percentage point from October, to 1.3 percent for 2020, largely due to a manufacturing contraction in Germany and decelerating domestic demand in Spain.

India saw a sharp, 1.2 percentage point cut to its 2020 growth forecast to 5.8 percent, the IMF’s biggest markdown for any emerging market, because of the domestic credit crunch. Monetary and fiscal stimulus is expected to lift India’s growth rate back to 6.5 percent in 2021, although this is still 0.9 percentage point lower than forecast in October.

Other emerging markets saw forecast downgrades, the IMF said, including Chile, which has been hit by social unrest. Mexico is predicted to grow just 1.0 percent in 2020, down from 1.3 percent forecast in October.

Although downside risks had diminished in the wake of the US-China trade deal, the IMF said they were still considerable.

“Rising geopolitical tensions, notably between the United States and Iran, could disrupt global oil supply, hurt sentiment and weaken already tentative business investment,” the IMF said. “Moreover, intensifying social unrest across many countries – reflecting in some cases, the erosion of trust in established institutions and lack of representation in governance structures – could disrupt activity, complicate reform efforts and weaken sentiment, dragging growth lower than projected.”

Source: Reuters