The International Monetary Fund has warned that global economic growth could be derailed if key challenges are not overcome, adding to concern about the slowdown in the Chinese economy.
The warning has potential implications for Ireland’s recovery as the pace at which the Irish economy grows is assumed to track global rates on a one-for-one basis.
Department of Finance calculations assume a permanent 1 per cent decrease in global output would reduce Irish GDP by 1 per cent.
New data
As new data from Beijing showed the expansion of the Chinese economy has slowed to rates not seen for 25 years, the IMF’s intervention came as it pared back global growth forecasts for the third time in less than a year.
Citing the Chinese slowdown and weak prices for commodities such as oil, the Washington-based institution said the world’s economy would grow by 3.4 per cent in 2016 and 3.6 per cent in 2017. The forecasts were down 0.2 percentage points in each year from the previous IMF assessment in October. Analysts are concerned about the slowdown in China’s growth as its economy is the world’s second-largest. A sustained downturn could damage the Irish outlook by curtailing the performance Ireland’s major trading partners, which have a big trade dependence on China.
Amid slower investment, high debt levels, weaker exports and a sluggish property market, new Chinese data added to a picture of weakening growth. The pace of growth was 6.9 per cent in 2015, the lowest since 1990 but just shy of office forecasts for 7 per cent growth. The 2014 growth rate was 7 per cent.
‘New normal’
The data is seen to reflect an adjustment characterised by Beijing as a “new normal”. After years of double-digit expansion, the moderation in growth has led to growing pressure on President Xi Jinping’s government to implement reforms.
Julian Evans-Pritchard, China economist at Capital Economics, warned against taking official GDP figures at face value but argued that growth appeared to have been broadly stable in the final quarter of 2015..
“Meanwhile, the December data, although mixed, don’t suggest that China is now entering a deeper economic crisis,” he said. “On the contrary, with the tailwinds from recent policy stimulus still gathering we expect the data to gradually turn more upbeat over the next few months.”
In its latest global assessment, however, the IMF said “key transitions” in the world economy must be successfully navigated to ensure world economic growth is not derailed.
While the fund maintained previous Chinese forecasts of 6.3 per cent growth in 2016 and 6.0 per cent in 2017, these point to a sharp slowdown from 2015.
“We don’t see a big change in the fundamentals in China compared to what we saw six months ago, but the markets are certainly very spooked by small events there that they find hard to interpret,” IMF economic counsellor Maurice Obstfeld said in a statement.
While he said financial markets seemed to be overreacting to falling oil prices and the risk of a sharp downturn in China, the IMF said downside risks were particularly prominent for emerging market and developing economies.
