Why the economy is slowing down, according to the IMF

A “challenging” global economic scenario. Last week, Christine Lagarde, director of the International Monetary Fund (IMF), spoke about the threats that Gross Domestic Product (GDP) growth is facing on a global scale. Demographic aging, the end of fiscal stimulus policies and the deceleration of investment are some of the shadows that plan for the future of advanced economies.

In the latest edition of the World Economic Outlook report, the IMF revised downwards the global growth forecasts and those of key global economies. In his speech last week, Lagarde spoke of “rough waters” in the world economy, while encouraging the different central banks to continue building fiscal and monetary barriers for the risks of the future. “It's time to buckle up ... It’s not the right time to say, ‘Okay, let’s relax and slow down the reforms,’” Lagarde said after meetings between the IMF and the World Bank in Bali, Indonesia.

The IMF estimates that growth of both emerging and mature economies will slow down in the coming years, especially for the latter. The block of developed countries will grow 2.4% in 2018 and 2.1% in 2019. In 2023, the advance will decrease to 1.5%, according to the latest forecasts.

The IMF has warned since last year of the ever-increasing threats for global economic growth

The agency argues several reasons to justify the lower economic boost registered in advanced economies. In the first place, the IMF warns of a slowdown of labour force growth in these countries as a result of demographic aging, which can’t be offset by the slight increase in productivity expected in the coming years.

In parallel, the expansive fiscal policy that has characterized the economy of many developed countries, with the United States as the maximum exponent, remains in 2018 but tends to relax gradually from 2020 onwards, “when the monetary adjustment cycle is expected to reach its peak”, according to the IMF. This will cause the growth of the US economy to slow down thereafter.

The end of the fiscal stimulus policy in the US is another factor that will have a negative impact on growth

Emerging countries, the wage gap continues

For the emerging economies block, the IMF also foresees that the increase in GDP will lose steam in the coming years, although it’s a much more slight moderation than in the case of developed countries. The organism estimates that, of the 6.5% growth forecast for this year, the economy of the emerging markets will advance 6.3% in 2019 and 6.1% in 2023.

Despite its lower exposure to factors such as an investment slowdown, the IMF does warn of other risks for its growth. In particular, the agency sees perspectives “weaker than in the past” so that developing countries reduce the existing wage gap with advanced economies. The IMF argues that some 45 emerging markets and developing economies account for only 10% of world GDP under equal purchasing power conditions.

Likewise, the body led by Lagarde points towards a lower growth in the price of commodities such as oil prices due to higher production in the United States and in the countries of the Organization of Petroleum Exporting Countries (OPEC). Due to this, the IMF highlights the difficulties that exporters of raw materials, mostly emerging countries, will face due to the lower income derived from these goods and services, for which “they will require a greater diversification of their economies and a mobilization of their income pathways not dependent on commodities to finance their development.”

The gap between emerging and mature countries grows

IMF forecasts for next year and the following ones show how the growth gap between mature and emerging economies will be enlarged. In 2023, the last year on which it released forecasts, the authority estimates that advanced countries raise their GDP by only 1.5%, compared to an increase of 6.1% in the emerging block.

The gap of 4.6 percentage points will be the largest since the beginning of the new century. Between 2000 and 2009, advanced economies grew 1.8% year-on-year on average, compared to increases of 6.1% recorded by emerging economies in the same period. The gap between the two blocks was 4.3 percentage points and, in 2018, the difference will be 3.7 percentage points.