The International Monetary Fund has again cut its forecast for both global and Canadian economic growth, as the plunge in oil prices widens the rifts in the world economy.
The IMF's World Economic Outlook Update (WEO), unveiled in Beijing on Tuesday morning local time, forecast global growth of 3.5 per cent in 2015 – slightly higher than last year's modest 3.3-per-cent expansion, but down from 3.8 per cent in the IMF's previous outlook in October. It reduced its 2016 forecast by the same amount, to 3.7 per cent from October's 4 per cent.
This is the third successive quarterly report in which the IMF trimmed its global growth forecast for the current year.
The international financial body cut its forecast for every major economy except one: The United States. It raised its 2015 forecast for U.S. growth to 3.6 per cent from its October forecast of 3.1 per cent and up strongly from 2014's 2.4 per cent. It raised its 2016 U.S. forecast to 3.3 per cent from 3.0 per cent.
The IMF's growth forecast for Canada is now 2.3 per cent in 2015 and 2.1 per cent in 2016, down from its previous call of 2.4 per cent in both years. Canada's 2014 growth was estimated at 2.4 per cent.
The report said the dramatic drop in oil prices should be a net positive for the world economy. However, exporters of oil and other commodities will be slowed by the sharp price declines – including many emerging-market regions that had been relied upon for strong contributions to global growth.
"Developments since the release of the October WEO have conflicting implications for the growth forecasts. On the upside, the decline in oil prices driven by supply factors … will boost global growth over the next two years or so by lifting purchasing power and private demand in oil importers," the report said. "However, the boost from lower oil prices is expected to be more than offset by an adjustment to lower medium-term growth in most major economies other than the United States."
"Our forecasts reflect the increasing divergence between the United States on one hand and the euro area and Japan on the other," Olivier Blanchard, IMF economic counsellor and director of research, said in remarks prepared for a press conference in conjunction with the report's release. The IMF noted that this divergence is widening interest rate and currency spreads (in particular, driving up the U.S. dollar and depressing the euro and Japanese yen), further complicating the economic landscape for many countries.
"At the country level, the cross currents make for a complicated picture," he said.
The IMF projected euro zone growth of just 1.2 per cent in 2015, down from 1.4 per cent in the October forecast, although up from 2014's 0.8 per cent. For 2016, the IMF forecast growth at 1.4 per cent, down from 1.7 per cent in the earlier projection.
The agency predicted that Japan, which slipped into recession in the 2014 third quarter, would see growth of just 0.6 per cent in 2015, down from its earlier forecast of 0.8 per cent. It trimmed its 2016 forecast slightly, to 0.8 per cent.
The IMF also warned of slower growth in China, where the government is seeking to reduce the economy's credit exposure and reorient toward consumer growth. The agency now sees China's growth slowing to 6.8 per cent this year (down from the previously forecast 7.1 per cent) and 6.3 per cent next year (down from 6.8 per cent), compared with 7.4 per cent in 2014.
Mr. Blanchard did allow that the net benefit of lower oil prices could prove a stronger global economic stimulant than the IMF is currently anticipating.
"This decline may turn out to be a stronger 'shot in the arm' than is implicit in our forecasts," he said. "Our forecasts may turn out to have been a bit too pessimistic. I very much hope so."