Emerging and Developing Asia bright spots in a global adjustment

The International Monetary Fund’s (IMF) most recent World Economic Outlook Update (WEO) is now projecting that the world economy will likely grow at 3.5% in 2019 and 3.6% in 2020, 0.2 and 0.1 percentage points respectively below 2018 projections:

‘The global growth forecast for 2019 and 2020 had already been revised downward in the last WEO, partly because of the negative effects of tariff increases enacted in the United States and China earlier that year.’

The IMF stressed that despite fiscal stimulus, China’s real GDP growth is expected to soften. This is largely due to the combined influence of needed financial regulatory tightening and trade tensions with the US. The IMF is projecting China’s expansion to decelerate to 6.2% in both 2019 and 2020 after a 6.6% growth rate in 2018.

The growth forecast for the US remains unchanged at 2.5% in 2019 and 1.8% in 2020, with the unwinding of fiscal stimulus and the federal funds rate temporarily overshooting the neutral rate of interest.

Overall, the IMF has revised projections down slightly for advanced economies to 2% and 1.7% in 2019 and 2020 respectively. The countries expected to experience major impacts on their economies in 2019 are Germany (due to soft private consumption, weak industrial production following the introduction of revised auto emission standards, and subdued foreign demand); Italy (due to weak domestic demand and higher borrowing costs as sovereign yields remain elevated); and France (due to the negative impact of street protests and industrial action).

In addition, the IMF has expressed concerns about the baseline projection of about 1.5% growth for the UK in 2019–20, which ‘assumes that a Brexit deal is reached in 2019 and that the UK transitions gradually to the new regime. However, as of mid-January, the shape that Brexit will ultimately take remains highly uncertain.’

However, the IMF is slightly more optimistic about Japan, with the country’s economy expected to grow by 1.1% in 2019 (0.2 percentage point higher than in the October WEO). This revision mainly reflects additional fiscal support to the economy in 2019. Growth is forecast to soften to 0.5% in 2020 (0.2 percentage point higher than the previous forecast).

The IMF is also predicting that the average growth rate of other advanced economies (excluding the Group of Seven and Euro Area economies) will likely remain unchanged at 2.5% a year in both 2019 and 2020. Within this group, Australia’s economy is projected to expand solidly at 2.8% in 2019 and 2.7% in 2020, following an average growth rate of 2.6% a year from 2014 to 2018.[1]

More positively, the IMF said India would remain the fastest growing major economy in the world: ‘India’s economy is poised to pick up in 2019, benefiting from lower oil prices and a slower pace of monetary tightening than previously expected, as inflation pressures ease.’ The Fund announced India’s growth rate in 2018 was 7.3%. It has been projected to grow solidly at 7.5% in 2019, a marginal 0.1% above its previous forecast.

Overall, the IMF is maintaining its projections of Emerging and Developing Asia at 6.3% and 6.4% in 2019 and 2020 respectively (see table below).

Overview of the world economic outlook projections

[1]  Australia’s real GDP growth rates were sourced from the IMF WEO October 2018 as the IMF has not released Australia’s figures in its latest January Update.