World economic growth at six-year low

The world economy is expected to expand at its slowest rate since the financial crisis, according to new forecasts from the International Monetary Fund (IMF) released today. Global growth of 3.1% is now anticipated for 2015, down from the 3.5% forecast in April.

The downgrade is due to weaker growth in emerging economies, who make up over half of world GDP and have underpinned world growth in recent years. Growth in emerging economies is now forecast to slow to 4.0% in 2015 – lowest rate of expansion since 2009.

Advanced economies – dominated by the US, UK, Eurozone and Japan – are not growing as fast as emerging economies, but are expecting to see growth improve in 2015 compared with 2014.

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Major factors influencing the world economy

The IMF cited three major forces currently affecting the world economy:

  • China’s economy moving away from its investment- and export-led growth model towards one where the services sector and consumer spending are more prominent. China’s growth is forecast to slow to 6.8% in 2015, its slowest rate since 1990.
  • Falls in commodity prices. This is related to the growth slowdown in China. China has been a dominant consumer in many commodity markets ranging from metals to natural resources such as coal and iron ore. Countries that are large commodity exporters, many of whom are emerging economies, are therefore experiencing negative shocks to their growth outlook.151006 world ec2
  • Expected increase in US interest rates. The US central bank, the Federal Reserve, have signalled that they intend to increase official interest rates from their current rate (close to 0%) in the near future. Possible negative effects from this include money being moved from emerging economies to the US (as relative financial returns improve), and rising debt service costs to many non-US companies that have borrowed in US dollars in recent years. One estimate puts outstanding US dollar debt held by non-US companies at over $9 trillion.

The IMF said that risks to the world economy related to the factors above have increased in recent months. Despite these warnings, the IMF’s central forecast is for global growth to rebound to 3.6% in 2016 from 3.1% in 2015, supported by stronger growth in North America and improved growth in emerging economies.

 

Picture Credit: Global Finance by Lawrence OP, Creative Commons Attribution 2.0 Generic (CC by 2.0)