IMF Downgrades Global Growth

October 10th, 2014
The International Monetary Fund (IMF) has downgraded its forecast for global economic growth, noting geopolitical worries, housing concerns in China, equity price corrections, and falling industrial production in Germany. The IMF now expect the world economy to grow by 3.8 percent next year, a revised figure from the 4 percent growth forecast back in July.

According to the IMF's chief economist Olivier Blanchard, the world economy is still struggling to recover from the global financial crisis of six years ago: ; "The recovery continues, but it is weak and it is uneven. So we forecast world growth to be 3.3 per cent in 2014, this is down 0.1 per cent from our July forecast, and 3.8 per cent in 2015, which is down 0.2 per cent from our July forecast... ; Now these are small revisions, but they are small revisions starting with already fairly low numbers."

When releasing the revised figures, Blanchard spoke of the geopolitical unrest taking place in Ukraine, Iraq, Syria, and Hong Kong, along with the concerning spread of Ebola. ; IMF's managing director Christine Lagarde added to the cautious outlook, saying the world should expect a "new mediocre" in growth rather than a "new normal".

Along with growing political unrest, the IMF also mentioned a possible major correction to financial markets. ; While the fund did not name any particular market, Wall Street reacted to the news as the Dow Jones Industrial Average dived and closed 272 points, or 1.6 percent, weaker. ; The risks of an equity price correction have risen this year according to the IMF, with the global growth downgrade a direct result of rising concerns over unsustainable market conditions.

Housing concerns in China also influenced the IMF downgrade, with the real estate market slowing down so much in recent months that a crash can't be ruled out. ; According to the report, "The most notable case is China, where the challenge is to allow for the necessary correction in real estate markets while preventing an excessively sharp slowdown... ; In larger cities in China, house prices show signs of over valuation relative to fundamentals despite measures aimed at restricting speculative demand."

The other major factor prevalent in the report was gloomy news about the state of industrial production in Germany, which has dropped by 4 percent in August. ; This decline has caught many people off-guard, as Germany copes with its biggest lull in production since the global financial crisis of 2009. ; With European growth still flat-lining as a result of the eurozone debt crisis, there is a lot of pressure on Germany to underwrite the Euro as markets in other countries continue to recover.

The forecast for Australian growth didn't change in reaction to the IMF report, with Treasury forecasting 2.8 percent growth this year and 2.9 percent in 2015. ; The IMF also spoke about housing prices in Australia, saying 'boom' conditions have been restricted to Sydney, Melbourne, and Perth to some extent. ; While there is still significant price growth in the Sydney and Melbourne markets, and low supply is a big issue, according to the IMF, most of the country has been flat for some time.