China Risks Trigger IMF Downgrade of Global GDP

The International Monetary Fund (IMF) has cut its forecasts for global gross domestic product improvement to 3.4% this year and 3.6% in 2017. The downgrade is largely due to a slowing Chinese economy. Its GDP report confirmed the IMF worry, as the number for 2015 was 6.9%, the lowest since 1990.

To make matters worse, many economists believe that China over-reports its GDP figure, and the improvement may have been as low as 5% last year. The IMF uses China’s official number. Based on that figure, China’s 6.9% growth will drop to 6.3% this year and 6.0% in 2017. Its period as the engine of the global economy has ended.

Two major economies that have lagged over the course of the recession recovery will continue to do so. The European Union GDP improvement was 1.5% last year and will be flat at 1.7% in 2016 and 2017. Japan will barely grow. After an improvement of 0.6% in 2015, it will be 1.0% this year and up 0.2% in 2017, according to the IMF forecast

With the exception of India, the world’s other large emerging economies will struggle. The IMF forecasts India’s GDP will rise by 7.5% this year and next. However, its GDP is not large enough to come close to offsetting problems in those other large emerging nations.
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Ironically, the U.S. economy will be a foundation of global growth in the next two years. America’s economy was supposed to drag on global GDP. After a 2.5% improvement in 2015, the IMF forecasts 2.6% in 2016 and 2017.

The IMF’s conclusion:

Looking beyond the short-run forecasts, there are important risks to the outlook, which are particularly prominent for emerging market and developing economies and could stall global recovery.

These risks relate mostly to the ongoing adjustments of the global economy, namely China’s rebalancing, lower commodity prices, and the prospects for the progressive increase in interest rates in the United States.

In other words, the IMF hints that its GDP numbers may be too high.