São Paulo – The International Monetary Fund (IMF) has revised down its world economic growth forecast by 0.3% for this year. As per an update of the World Economic Outlook (WEO) report, the global economy is expected to grow by 3.4%. According to the IMF, the revision stems from subpar performance in Q1 this year, especially in the United States, and from less optimistic expectations for several emerging countries, Brazil included.
For 2015, the global Gross Domestic Product (GDP) forecast has been kept at 4%.
According to the document, international economic activity has slowed down more than expected, from 3.75% in Q1 2013 to 2.75% in the same period of 2014. The increase was 0.5% lower than previously estimated by the Fund.
The IMF reports that inventory overhang in the United States in late 2013 exceeded expectations, since demand declined due to a harsh winter, exports dropped significantly in Q1 this year from Q4 2013, and production decreased.
In China, domestic demand also slowed down more than expected, due to local government intervention to reign in credit expansion and “correct” real estate activity. In Russia, demand dropped as a consequence of “geopolitical tensions,” particularly the crisis with Ukraine, and affected growth significantly.
In other emerging countries, according to the IMF, economic growth was lower than expected as a result of lower external demand, mostly from the United States and China, and in many cases due to weakening domestic consumption and investment.
According to the Fund, however, international financial conditions have eased since April, when the first version of the WEO report was released. Long term interest rates in developed countries have dropped even further, price volatility expectations have diminished and equity prices have strengthened.
This scenario led to a recovery of capital flows to emerging markets, whose bond spreads also declined, and exchange rates and equity prices have stabilized or even strengthened in some of these economies.
Therefore, the IMF believes that performance improved in Q2 from Q1 2014. “This is consistent with the view that the unexpected weakness in the first quarter was in large part temporary,” according to the update.
However, some of these “weaknesses” are likely to persist, hence the downward revision of global growth projections for 2014.
Brazil and the Arabs
Also regarding emerging economies, the IMF expects 4.6% growth this year, down 0.2% from the April forecast, and 5.2% in 2015, down 0.1%.
In Brazil, the Fund believes tighter financial conditions and continued weakness in business and consumer confidence are holding back investment and dampening consumption growth.
The revised Brazilian economic growth forecast is 1.3% for 2014, down 0.6% from April, and 2% for 2015, also down 0.6%. This week, the Brazilian government itself has revised down its GDP growth estimate for this year from 2.5% to 1.8%.
For the Middle East and North Africa, plus Afghanistan and Pakistan, the Fund forecasts 3.1% growth this year, down 0.2% from April, and 4.8% in 2015, up 2%. This bloc comprises the Arab countries.
Concerning the Middle East, the Fund warns of issues affecting the region that may negatively influence the world economy as a whole. “Geopolitical risks have risen relative to April: risks of an oil price spike are higher due to recent developments in the Middle East while those related to Ukraine are still present.”
Since the original report was released in April, violence has escalated in Libya and Iraq, in addition to Israel’s attack on Gaza that has caused over 700 casualties. It is worth noting that the former two countries are major oil producers and exporters.
*Translated by Gabriel Pomerancblum
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