For the fifth consecutive year, the International Monetary Fund (IMF) has lowered (if only slightly) its forecasts for the growth of emergent countries, whose GDP expansion rate should be around 4 percent for the current year, one third of a percent down from the forecast in April.
The aggregate predictions reflect decreases in Latin America, the Middle East, the Russian Commonwealth (CIS) and in Asia’s emerging economics, with the exception of China. For the latter, the IMF confirms its April estimates of 6.8 percent for the current year with a decrease to 6.3 percent in 2016.
There are various reasons to explain the compression of forecasts for emergent economies. Some, in Africa and Latin America, are negatively affected by the low prices of raw materials for which they are net exporters. Others, such as China, are venturing through a delicate process of transition and rebalancing of the sources of growth from exports to internal demand, from manufacturing to the services sector.
In terms of the advanced economies, eight years after the beginning of the great financial crisis, this year will finally register a 2 percent growth. This figure, which reflects a decrease of four tenths of a percent compared to the April forecasts, is influenced by a revision of the forecasts for the North American and Japanese economies.
But the most relevant element from the battery of forecasts released by the IMF is the stability of the growth perspectives for the euro zone, which should expand at a rate of 1.5 percent this year. The figure reflects the apparently favored dynamic of the German economy (1.5), the acceleration of the the Spanish economy (3.1), the constancy of the French (1.2), and the increase in for Italy’s GDP forecast (0.8).
However, one should be cautious when evaluating these figures, especially pertaining to Europe. Firstly, the forecast battery largely reflects the analytic work carried out by IMF staff this summer, based on the scrutiny of the data available at that time. As such, it does not adequately capture the dynamics observed during recent weeks, especially in Germany, where the most recent data indicates that industrial orders decreased by nearly 2 percent in August. The figure could be idiosyncratic because orders were on the rise in preceding months, but the recent decrease in metal prices strengthens the forecasts of a significant slowdown of German exports towards the Chinese giant. And, naturally, the IMF forecasts do not yet take into account the Volkswagen scandal that erupted in the second half of September, and the repercussions it will have on the entire supply chain. The other element to take into account is that internal demand still remains relatively weak in advanced economies, especially in the euro zone. Years of weak growth, if not of contraction as was the case for Italy, have significantly weakened investments, whose unfavorable dynamic ended up feeding that very same low growth rate. And, naturally, the hope of compensating weak internal demand with the growth in exports grows smaller as the Chinese giant slows along with (probably) Germany—one of the main exporters to China. In order to contrast this trend, the IMF once again highlights the need for more investments, especially in infrastructure. As part of the aggregate demand, they can revitalize internal demand in those countries where it is lacking—such as Italy—and contrast the reduction in exports towards emergent economies. Naturally, investments broaden the aggregate offer and thereby constitute an important policy lever in those countries that are currently at full employment—such as Germany. Finally, in the measure that they increase productivity, investments represent an important chapter in the structural reform agenda, especially in Italy, whose productivity remains one of the lowest in the euro zone.