There’s no room for mistakes if the global economy is in as much trouble as the IMF thinks

The cherry blossom may be out in Washington DC. But the economists at the International Monetary Fund, which is based in the US capital, haven’t allowed that to lighten their mood or stop them delivering one of its most pessimistic assessments of the global economy since 2009.

The IMF has downgraded its outlook for global growth in 2016 from 3.4pc to 3.2pc in its latest World Economic Outlook. Maurice Obstfeld, the Fund’s chief economist, said the performance of the world economy had been “too slow for too long” and the IMF is concerned that the prolonged period of lacklustre output is having a “scarring effect”.

The downgrade, the latest in a series of progressively more pessimistic assessments, suggests global growth risks dipping dangerously close to the 3pc level some economists believe constitutes a global recession. It may be the IMF’s spring meeting but it looks like the world remains in hibernation.

True, the market turmoil at the beginning of the year has abated, oil prices have picked themselves off the floor, and the economic picture in China – arguably the nexus of concerns – is looking slightly rosier. But the IMF is worried that the global economy’s pulse is weak and thready. It has increased its expectations of a recession in almost every region in the world, with a 20pc chance of a contraction in the US this year and a roughly 35pc chance of one in the eurozone.

One worry is that investors have had enough after five years of economic contraction in emerging markets and are starting to pull out their money. This is one of the many regular instances where it is unhelpful to use the catch-all “emerging markets” label. Some countries are doing relatively well – the IMF highlights India as a particular bright spot and, in one of the most important forecasts in the report, has upgraded its prediction for Chinese growth for both this year and in 2017.

But the outlook in Russia, Brazil and sub-Saharan Africa (in particular Nigeria) is horrific. They are now hugely vulnerable to investor sentiment: the worse things get, the more money will be pulled out of their economies.

Capital outflows have already hit many emerging market currencies, making it harder for local companies and governments to service their dollar-denominated debt. The emerging market currency index has dropped around 17pc from its previous high. Emerging market equities are off by nearly 40pc.

The IMF may have upgraded its outlook for China’s economy but its second worry is the ramifications of the shift from manufacturing and investment to services and consumption as the Communist leadership struggles to adopt a more market-based approach.

Obstfeld said he believes the Chinese government’s stimulus measures will work, boosting growth in the near term. But he added a warning that it might come off the back of rising debt levels and support for unproductive sectors, raising questions about the quality (and hence sustainability) of that growth.

The cherry blossom may be out in Washington DC. But the economists at the International Monetary Fund, which is based in the US capital, haven’t allowed that to lighten their mood or stop them delivering one of its most pessimistic assessments of the global economy since 2009.

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The IMF has downgraded its outlook for global growth in 2016 from 3.4pc to 3.2pc in its latest World Economic Outlook. Maurice Obstfeld, the Fund’s chief economist, said the performance of the world economy had been “too slow for too long” and the IMF is concerned that the prolonged period of lacklustre output is having a “scarring effect”.

The downgrade, the latest in a series of progressively more pessimistic assessments, suggests global growth risks dipping dangerously close to the 3pc level some economists believe constitutes a global recession. It may be the IMF’s spring meeting but it looks like the world remains in hibernation.

True, the market turmoil at the beginning of the year has abated, oil prices have picked themselves off the floor, and the economic picture in China – arguably the nexus of concerns – is looking slightly rosier. But the IMF is worried that the global economy’s pulse is weak and thready. It has increased its expectations of a recession in almost every region in the world, with a 20pc chance of a contraction in the US this year and a roughly 35pc chance of one in the eurozone.

One worry is that investors have had enough after five years of economic contraction in emerging markets and are starting to pull out their money. This is one of the many regular instances where it is unhelpful to use the catch-all “emerging markets” label. Some countries are doing relatively well – the IMF highlights India as a particular bright spot and, in one of the most important forecasts in the report, has upgraded its prediction for Chinese growth for both this year and in 2017.

But the outlook in Russia, Brazil and sub-Saharan Africa (in particular Nigeria) is horrific. They are now hugely vulnerable to investor sentiment: the worse things get, the more money will be pulled out of their economies.

Capital outflows have already hit many emerging market currencies, making it harder for local companies and governments to service their dollar-denominated debt. The emerging market currency index has dropped around 17pc from its previous high. Emerging market equities are off by nearly 40pc.

The IMF may have upgraded its outlook for China’s economy but its second worry is the ramifications of the shift from manufacturing and investment to services and consumption as the Communist leadership struggles to adopt a more market-based approach.

Obstfeld said he believes the Chinese government’s stimulus measures will work, boosting growth in the near term. But he added a warning that it might come off the back of rising debt levels and support for unproductive sectors, raising questions about the quality (and hence sustainability) of that growth.

A further concern for the IMF is that the recessions in some emerging markets could last much longer than originally expected. You don’t have to look hard for the reason behind this clear dichotomy in the fortunes of emerging market economies: the commodity producers are hurting while the commodity consumers are benefiting.

Earlier today, Fitch cut Saudi Arabia’s credit rating over worries that the continued low price of oil is ruining the kingdom’s finances. On the flip side, China’s services sector may be growing, but the country still has a massive manufacturing base and, as a big net oil importer, is benefiting from the recent rout in crude prices.

By contrast, the equities market sell-off in the last month of 2015 and the first two months of this year was an unalloyed concern. Any repeat risks starving companies of capital and resulting in cessation of much-needed investment.

This is happening against a backdrop of increased geopolitical tension. The IMF highlights events in Africa, the Middle East and Ukraine, along with the refugee crisis in Europe, which are all hampering trade and investment flows, fuelling scepticism about economic integration and tying policymakers’ hands.

The final rotten cherry on this gloomy gateau is, in the IMF’s opinion, the risk of a Brexit, which, it says, could “pose major challenges for the [UK] and the rest of Europe”. The fund worries that the negotiations that followed a Brexit vote would be protracted and “would also likely disrupt and reduce mutual trade and financial flows, curtailing key benefits from economic cooperation and integration”. The UK suffered one of the biggest IMF downgrades of any advanced economy.

But listing these risks creates the illusion that they are neat and containable. The real uncertainty lies in how they might interrelate and feed off each other. Then there is the question of how much room for manoeuvre global governments and central banks have when the next crisis hits. Obstfeld laid out a doom-loop scenario in which ever-weaker growth increases the likelihood of the threats that the IMF has identified and the global economy goes into a stall. This would give rise to even more people feeling that they are being left behind, fuelling the rise of inward-looking nationalism that retards cross-border trade.

The IMF’s top economist said the world economy faces the risk of “going into doldrums that could be politically perilous” raising the possibility of the last, long economic winter seamlessly merging with the next.

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