The International Monetary Fund’s April 2014 World Economic Update has an upbeat tone compared to its continuous gloomy outlooks in recent years – especially when it comes to advanced economies. The IMF forecasts global growth to average 3.6% in 2014 – up from 3% in 2013 – and to rise to 3.9% in 2015. There are, however, reasons to be cautious. Downside risks remain widespread, with already-apparent one still present and new ones looking more threatening. Here is a list of risk highlights from the economic outlook:
- Danger of low inflation
The risk from persistently low inflation is today at the forefront of issues concerning advanced economies. The euro zone is perhaps most threatened by this. European Central Bank President Mario Draghi responded last week to the IMF by saying that he expects low inflation for longer, but is ready to act if it falls to deflationary levels – a possibility that is increasing by the hour. Euro zone annual inflation ticked down to 0.5% in March, its lowest since the economy was deep in recession in 2009. “Inflation is projected to remain below target for some time,” says the report, “as growth is not expected to be high enough for economic slack to decline rapidly. Longer-term inflation expectations are then more likely to drift down in response, and risks of lower-than-expected inflation, or even deflation, will increase, because interest rates are already close to zero and only limited options remain for using monetary policy to respond.”
- Emerging market risks
Tighter financial conditions and the resulting higher cost of capital could lead to a larger-than-projected slowdown in investment and durables consumption in emerging markets, and thereby weigh on growth. Even if policy measures across global economies vary, it’s important to set a series of goals and coordinated responses because what matters for them increasingly matters for the global outlook. Chapter 4 of the report focuses on how external factors have driven growth in emerging market economies in the past 15 years. The analysis suggests that emerging market growth, while still strong, has been slowing in the last two years driven as much by domestic conditions as by external circumstances.
- Geopolitical risks
Recent developments in Ukraine have increased geopolitical risks but these is still less on the radar since they have not yet led to global macroeconomic repercussions. Greater dangers to activity beyond neighboring trading partners could emerge if further turmoil leads to a renewed bout of increased risk-aversion in global financial markets, or from disruptions to trade and finance from intensified sanctions and counter-sanctions.