Downgrade for global economic growth

(Transcript from SBS World News Radio)

The crises in the Middle East and Ukraine could hamper already weak global economic recovery.


That’s the warning from the International Monetary Fund, which has just issued a new forecast for global economic growth.

Greg Dyett has the details.

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In an update to its World Economic Outlook report, the IMF says the global economy should expand by 3.4 percent throughout this year.

That’s slightly below what it predicted in April. 

The IMF is still predicting that growth should speed up to 4 percent next year.

But it cautions that there’s no assurance yet of a robust global recovery from the deep financial troubles that ended in 2009.

The IMF’s chief economist, Olivier Blanchard, says more countries need to embark upon structural reforms to avoid stagnation.

“In a number of countries such as Brazil or South Africa, the investment rate is very low and clearly due to structural impediments. Now the good news here is that some countries, and here I must mention Mexico which clearly is at the forefront here, have taken or are embarking on a set of very ambitious structural reforms. We think that these reforms will help lift both investment and growth.”

Central banks in the United States, Japan, the Euro zone and Britain have all sharply lowered rates to boost economic growth, and pledged to keep them there for longer to let the recovery take hold.

Mr Blanchard says interest rates may have to stay low for longer.

“We came to a conclusion that there are a number of factors which suggest that indeed the interest rate needed to sustain demand may be very low. It’s very hard to be sure of anything but there are a number of factors that play in that dimension. We know, for example, that investment post-financial crisis tends to be very low so the demands for funds are very low. It is quite possible that saving as a result of a crisis may be fairly high. Both of them will imply a low equilibrium rate.”

The IMF says bright spots in the global economy include growth pick-ups in Japan, Germany, Spain and Britain.

But it says they were overshadowed by weak growth in the world’s two biggest economies – the United States and China.

Russia also dragged down the overall forecasts, with its economy expected to grow just 0.2 percent this year due to sanctions and other impacts of the Ukraine crisis. 

Mr Blanchard says the Russian economy could be pushed into recession.

“What does this reflect? For the moment it reflects a deterioration of business confidence. There is nearly a freeze in investment decisions by domestic investors. There is a near freeze in terms of FDI (Foreign Direct Investment). There are large capital outflows. All this I think is easily explained by the geopolitical uncertainty which affects Russia at this point.”

Meanwhile, the World Bank has announced a commitment to help India to achieve higher economic growth rates.

Bank President Jim Yong Kim, says that’s the goal of the new Indian Prime Minister, Narendra Modi.

“The new government would like India to return to growth rates of nine percent a year. The World Bank fully supports this goals. It’s vital that India achieve these levels of growth to reduce poverty more quickly and to boost shared prosperity among its people.”

The World Bank President has also welcomed the $100 billion development bank just formed by India and the other so-called BRICS nations – Brazil, Russia, China, and South Africa.

The new BRICS bank was created in part as a challenge to the global financial order created by Western powers after the Second World War, revolving around the World Bank and the IMF.

But World Bank President Jim Yong Kim, has played down the challenge.

“For us, we feel that the only competition we have is with poverty and with the lack of shared of prosperity. So, any bank or any group of institutions that are trying to tackle the problem of infrastructural investment to fight poverty, we will welcome them, and that we will be very happy to provide technical assistance.”