IMF: Impact of China slowdown larger than expected

GMT 03:28 2015 Thursday ,03 September

Arab Today, arab today IMF: Impact of China slowdown larger than expected

China's economic slowdown
Washington - AFP

China's economic slowdown is having a broader impact on the global economy than originally expected, especially on emerging markets, the International Monetary Fund said late on Wednesday.

In a report for Group of 20 finance chiefs meeting this week in Ankara, the IMF said the turmoil in China and other factors like capital flow reversals were increasing the risks to economic growth around the world.

It warned that advanced and emerging economies need to continue to support demand with reforms and investment to ensure that the turbulence in markets and China's troubles do not stall economic activity in the rest of the world.

"China's transition to a lower growth, while broadly in line with forecasts, appears to have larger-than-previously-envisaged cross-border repercussions, reflected in weakening commodity prices and stock prices," the Fund said.

Especially, "near-term downside risks for emerging economies have increased" from China-related fallout, sinking commodity prices, the strong US dollar, and sharp reversals in financial markets, it said.

The report, which will be used for discussion at the meeting on Friday and Saturday of the finance ministers and central bankers from the G20 leading economies, did not revise the IMF's previous estimate for global growth this year of 3.3 percent.

But earlier this week IMF Managing Director Christine Lagarde said in Indonesia that global growth would be "likely weaker" than forecast.

"Now the situation is changing yet again, and we are all feeling the impact of China's rebalancing and moving to a revised business model," she said.

The report expressed continued confidence that growth is picking up "modestly" in advanced economies in the second half of 2015 and in 2016, helped by the impact of cheaper oil.

But the oil price plunge, along with other commodities, is hurting emerging market economies, and they are also being buffeted by the impact on their currencies of China's renminbi devaluation and the strong dollar.

The dollar's strength, the Fund warned, could take a toll on companies with dollar liabilities.

The Fund highlighted an increase in risks to overall global growth: that China would not confront its slowdown with growth-supporting policies; that commodity prices would slide further; that the US dollar would continue to rise; and that companies would suffer from higher debts.

"Simultaneous materialization of some of these risks would imply a much weaker outlook," the Fund said.

It recommended that advanced countries stick to very loose monetary policies and maintain "growth-friendly" fiscal policies.

It also stressed structural reforms that would free up various markets and encourage investment and consumption.

In emerging economies, choices are tougher, and leaders "need to strike an appropriate balance between fostering growth and managing vulnerabilities."

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