IMF slashes growth forecast as Chinas slowing GDP juggernaut hits 25-year lows

Posted on

If you needed any more proof that the world economy is slowing, then look to the latest growth report on the worlds second-largest economy, China. The International Monetary Fund already has, and its cutting its global GDP outlook for the third time in a year.

Chinas GDP for 2015 came in at 6.9% for the year down from the 7.3% gained in 2014 and 6.8% for the fourth quarter. The numbers verify that Chinas economy is growing at its slowest pace in 25 years.

This soft GDP announcement compounds to the recent data from China which has followed a negative trajectory and has consequently intensified the mounting anxieties around the slowing pace of growth in the worlds second largest economy, wrote Lukman Otunuga of FXTM. With China GDP growth below the golden 7% yearly target, the visible economic slowdown may have further elevated investors fears toward the failure of a series of aggressive measures by Beijing to revive growth and as such may reinforce the bearish sentiment toward the Chinese economy, Otunuga said.


Dr. Doom says China even worse off: Indeed, the Peoples Bank of China also announced Tuesday that it will inject more than 600 billion yuan ($91.22 billion) into the economy to help ease liquidity concerns before the Lunar New Year holiday on Feb. 8. Wall Street stocks bounced Tuesday on hopes of continuing Chinese stimulus.

But dont go believing everything the Chinese government tells you about its economy, contrarian economist Marc Faber said. My sense is that at very best, the economy is growing at around 4% per annum, but it could be lower, he told CNBC. We have this colossal debt bubble in China, and in my opinion this will have to be deflated through either huge losses in the banking sector or losses in the bond market for investors. In addition to that, we have essentially a stock market bubble, which now is being deflated.

Downside risks running high: As a result of Chinas woes, the IMF has now cut its growth forecasts for both 2016 and 2017, saying: Risks to the global outlook remain tilted to the downside and relate to ongoing adjustments in the global economy.

It cut its global GDP target for this year to 3.4% from a projected 3.6% in October, while also lowering hopes for 2017 by cutting its 3.8% target from 3.8% to 3.6%. The downgrades follow a 2015 that saw the global economy grow at its weakest pace since 2009 (at 3.1%).

This coming year is going to be a year of great challenges and policymakers should be thinking about short-term resilience and the ways they can bolster it, but also about the longer-term growth prospects,IMF chief economistMauriceObstfeldwarned. Unless the key transitions in the world economy are successfully navigated, global growth could be derailed.

Feds rate hike causing turbulence: The IMF cited three major factors for its gloom: the emerging-market slowdown, Chinas shift to growth driven less by exports and manufacturing, and the Federal Reserves gradual exit from ultra-low interest rates, Bloomberg noted.

Although the IMF is relatively confident about the U.S. economy, others are not so sure. The latest sign that the U.S. is slowing down can be seen in 10-year Treasury bond yields, which fell to around 2% this month. Deutsche Bank has even issued a forecast for sub-2% yields, down to 1.75%.

The American economy has lost its animal spirits, Hideaki Kuriki of Sumitomo Mitsui Trust Asset Management told Bloomberg. The potential growth rate of the American economy is going down. Longer term, yields may go down.

The odds of the Federal Reserve raising interest rates again this year after December 2015s landmark hike have fallen to 69% from 93% at the start of the year, according to the same Bloomberg report.

The bottom line on all this slowing growth is that central banks around the world, particularly the Fed, will be hard-pressed to raise rates and in fact will be forced to further devalue their currencies in order to revive their economies and stoke growth. Just look to Canada, which increasingly seems to be considering imposing negative rates to lift itself out of its oil-crunch-induced depression. The current landscape remains highly favorable for precious metals such as gold and silver.