Recession in Russia and slowdown in China will outweigh global benefits of lower oil prices, fund update says

The International Monetary Fund has cut its growth forecasts for the global economy on the back of a slowdown in China, looming recession in Russia and continuing weakness in the eurozone.

The Washington-based fund warns that the boost from lower oil prices is being outweighed by a host of negative factors and it now expects global growth to edge up only slightly from 3.3% last year to 3.5% this year. That is down from a 3.8% forecast for 2015 in its World Economic Outlook published in October. It forecasts growth picking up only slightly next year and cut its 2016 forecasts from 4% to 3.7%.

The gloomier outlook comes as business people and world leaders gather in the Swiss mountain resort of Davos for this year’s World Economic Forum meeting. The IMF has plenty for policymakers at the summit to consider, including pleas to boost growth with more infrastructure projects, keeping interest rates low to ward off deflation and making the most of cheaper oil to shake up energy subsidies.

The US is the only major economy where the IMF has raised growth forecasts for the next two years. It sees a boost from lower oil prices and strong domestic demand helping the US economy to grow 3.6% this year, up markedly from a 3.1% forecast made in October.

Worldwide, the net benefit of the “plunge” in oil prices, which have more than halved since last June, has been more than offset by adverse factors, the IMF said. It cites weaker prospects for China, Russia, the eurozone and Japan as well as a slowdown in some major oil exporters because of the sharp drop in crude prices.

“New factors supporting growth – lower oil prices, but also depreciation of euro and yen – are more than offset by persistent negative forces, including the lingering legacies of the crisis and lower potential growth in many countries,” says Olivier Blanchard, IMF director of research.

“This makes for a complicated mosaic ... good news for oil importers, bad news for oil exporters. Good news for commodity importers, bad news for exporters. Continuing struggles for the countries which show scars of the crisis, and not so for others. Good news for countries more linked to the euro and the yen, bad news for those more linked to the dollar.”

The IMF left its UK forecasts largely the same, continuing to project growth of 2.7% this year.

Chancellor George Osborne said: “Today’s IMF forecast shows that Britain is pulling ahead, while the global economy is being downgraded. There’s confirmation that we grew faster than any other major economy last year, and we’re set to grow faster this year.

“But there are risks out there in the global economy and it’s a timely reminder that we’ve got to go on working through our long-term economic plan if we want to stay ahead.”

Britain is expected to lose its place as the fastest-growing major economy to the US this year, with UK growth forecast at 2.7% and the US at 3.6%.

For the eurozone, the fund expects a drag from weaker investment prospects, particularly thanks to a knock-on effect on exporters from an emerging markets slowdown. That is predicted to offset support from lower oil prices, the recent euro depreciation, an easing in austerity programmes and more monetary policy support, which many economists expect to be unveiled this week after the European Central Bank’s (ECB) latest meeting.

The IMF, which has repeatedly urged the ECB to consider quantitative easing in the face of worryingly low inflation, again flags the threat of deflation in its latest update and appears to rebuke the slow reaction from policymakers.

Highlighting the currency bloc’s prospects among key risks to the outlook, the IMF report says: “In the euro area, inflation has declined further, and adverse shocks – domestic or external – could lead to persistently lower inflation or price declines, as monetary policy remains slow to respond.”

The fund predicts eurozone growth of 1.2% this year, down from 1.3% in October. It has also cut its 2016 forecast to 1.4% from 1.7%.

Forecasts have also been cut for emerging and developing economies based on three factors: lower growth in China; a “much weaker outlook in Russia”; and pressure on oil exporters from lower oil prices.

In China, growth is now expected to come in below 7% this year after 7.4% in 2014. The IMF cut its 2015 forecast to 6.8% from 7.1% and it cut its 2016 forecast to 6.3% from 6.8%. It warns the lower growth is already affecting the rest of Asia.

Russia is now viewed as being in outright recession this year, as falling oil prices and sanctions imposed by western governments take their toll.

The sharp downgrade in the IMF’s outlook to a 3% contraction in 2015 from modest growth of 0.5% forecast back in October, follows official figures showing the Russian economy contracted for the first time in five years in November.

Lower oil prices have prompted the fund to cut its outlook for big oil exporters, including Nigeria and Saudi Arabia. But it says the fall in the oil price, which for Brent crude is now below $50 per barrel, also presents opportunities to reform energy subsidies and taxes in both oil exporters and importers.

“In oil importers, the saving from the removal of general energy subsidies should be used toward more targeted transfers, to lower budget deficits where relevant, and to increase public infrastructure if conditions are right,” the IMF says in its update.