The IMF cut its forecast for global growth to 3.1 percent for 2013, after projecting a 3.3 percent expansion in April, and lowered its forecast for 2014 to 3.8 percent, after previously predicting a 4 percent expansion.
It pointed to three major factors as being responsible for the slowdown: disappointing growth in emerging market economies, a deeper than expected recession in the euro area as a result of low demand and depressed confidence, and slower than expected growth in the US economy, due to cuts in government spending.
The update noted that while “old risks” to global growth remain “new risks have emerged, including the possibility of a longer growth slowdown in emerging market economies.” In other words, there is no prospect of growth in these economies compensating for the low growth in the United States and the continued recession in Europe. The euro area is expected to contract by 0.6 percent in 2013 and grow by just 1 percent in 2013.
The contraction in Europe is not only the product of the slump in the so-called periphery countries. IMF chief economist Olivier Blanchard said that even in the core economies of France and Germany “there seems to be a general lack of confidence in the future”—a remark that was borne out the next day when German industrial output fell by 1 percent in May, twice the expected drop.
Blanchard noted that while there were specific reasons for lower growth in China, Brazil and India, there was an underlying slowdown in the overall trend, not just in the cyclical component. “It is clear that these countries are not going to grow as fast as they did before the crisis,” he said.
Immediately following the update, data on China’s trade showed that exports in June fell 3.1 percent compared with a year earlier, after increasing by 10.4 percent on average for the first part of 2013.
The notion that somehow China and other so-called “emerging markets” were going to provide a new foundation for the expansion of the world economy was always a fiction, given their dependence on the US and Europe as their major export markets. But it was able to be maintained for a period due to extraordinary financial and fiscal measures undertaken in the aftermath of the financial crisis, especially by the Chinese government.
Authorities launched a stimulus package of some $500 billion and unleashed an expansion of credit in order to fuel the financing of investment projects, especially by local government authorities. As a result, the ratio of total credit to gross domestic product in the Chinese economy rose from around 115 percent in 2008 to an estimated 173 percent. At the same time, the share of investment rose from 42 percent of GDP in 2007 to 47 percent in 2013.
The stimulus measures were predicated on the assumption that eventually Europe and the US would recover, bringing a renewed expansion of exports. But the stagnation in the US economy and the contraction in Europe have meant that the expansionary credit policies in China can no longer be sustained. They have now been replaced by the imposition of a clampdown.
The overall significance of the IMF update is that it makes clear there is no area of the world economy that can provide the basis for a general expansion and no prospect of such a development in the future.