Optimistic IMF forecasts could be undone by financial woes
The Fund's forecasts look more bullish than those of other analysts
By Y.Y. and J.W. | LONDON
THE developing world is catching up with advanced economies, but no longer as quickly as anyone would like. That has spooked investors. The slump in commodity prices and fears of an increase in interest rates in America has made 2015 the first year since 1988 in which there will be a net capital ouflow from emerging markets.
The IMF’s new World Economic Outlook, published yesterday, offers little comfort. Some of the IMF’s headline projections seem relatively chirpy. Despite deepening recessions in Brazil and Russia, the BRICS economies as a whole are still growing at a decent speed of 4.8% this year, and growth is projected to rise to nearly 6% in 2020. Last month Citi warned that a global recession led by an emerging-market slowdown is on the way; the IMF is positively bullish by contrast. In 2016 the IMF expects China to steam ahead at 6.3% growth, and India at a snappy 7.5%.
But the IMF has been accused of over-optimism in the past, and even it admits that there are some big risks. One its report highlights is the risk of a slowdown in emerging markets, coupled with investor panic. The IMF's charts (see below) suggest what might happen in this scenario. A four percentage-point drop in investment would slash growth in the BRICS economies (Brazil, Russia, India, China and South Africa) from 6% to 4% by 2020. The IMF expects that the effects would spill over to the advanced economies, cutting growth by the end of the decade from 1.9% to 1.6%.
If investors yank their capital from emerging markets along with the slowdown, then, as shown in the chart by the difference between the orange and red lines, the IMF thinks that in the very short run everyone would suffer even more. In other words, an emerging-market slowdown will be uncomfortable. And if financial-market panic about the slowdown increases, things will be much worse.
