World economic outlook looks grim: IMF

World economic outlook looks grim: IMF

By SHAILENDRA TYAGI | NEW DELHI | 23 July, 2016

The unfolding uncertainties unleashed by the Brexit vote implies an important downside risk for the world economy, according to the World Economic Outlook (WEO) released this week by the International Monetary Fund (IMF). Such downside risks have forced the Fund to cut its forecast for global economic growth for the current and the next year. The IMF foresees global growth to remain at 3.1% this year followed by 3.4% in 2017. The projections for both years are 0.1% less than what was estimated by IMF in April this year (without the Brexit vote). The prospects for India’s growth have also been revised down by 0.1% to 7.4% for both 2016 and the following year. “In India, (although the) economic activity remains buoyant, the growth forecast for 2016-17 was trimmed slightly, reflecting a more sluggish investment recovery.” The depressed global outlook might further dilute India’s already subdued exports performance, the IHS Markit report has predicted. “Since a sizable share of (India’s) exports go to the EU, weaker European demand would exacerbate and prolong the ongoing exports contraction, also constraining (it’s) growth.”  With downside risks intensifying, IHS Global Insight has also lowered its outlook for India’s growth to 7.5% from 7.7% for the current financial year. It, however, adds that given the strong fundamentals and reliance on domestic demand, the impact of Brexit on India’s growth should be fairly limited and will depend on the extent of prevailing uncertainty in the markets, which would affect the rupee value, investment, and credit conditions. The Brexit vote implies a substantial increase in economic, political, and institutional uncertainty, which is projected to have negative macroeconomic consequences. The other important risk underlined by the WEO update is the likely meltdown of the European banking system which, economists feel, would send a much deeper financial shock far and wide. Since the Brexit shock occurs amid unresolved legacy issues in the European banking system, in particular in Italian and Portuguese banks, the fund cautions that the “protracted financial market turbulence and rising global risk aversion could have severe macroeconomic repercussions, including through the intensification of bank distress, particularly in vulnerable economies”. The IMF feels that emerging economies need to bolster their growth prospects through structural reforms. Analysts feel that India is keeping its promised pace with structural reforms with the ongoing rationalisation of fuel subsidies being lauded the most.

 

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