TOO SLOW FOR TOO LONG: The International Monetary Fund’s April 2016 World Economic Outlook

Charles Simkins looks at the the IMF's April 2016 World Economic Outlook and where this leaves South Africa, both now and in the years to come.

Eight years after the onset of the financial crisis, the IMF April 2016 World Economic Outlook finds a subdued outlook for the world economy, worse than it had projected six months earlier, and subject to downside risks.  This economic situation is coupled with geopolitical tensions and political discord.

Source:  IMF World Economic Outlook, April 2016, Data base

Why?  There are two main reasons: slow growth in advanced economies and a mixed picture in emerging and developing markets.  China and most of emerging Asia are doing well, but conditions are severe in Brazil, Russia and a number of other commodity exporters.  Political conflict has lowered growth in a number of countries and has led to outright contraction in Ukraine, Libya and Yemen.  Global investment and global trade is depressed.  There have been bouts of financial instability in the last six months.  A number of emerging and developing countries are in macroeconomic difficulties, including Brazil, Russia, and some countries in Latin America and the Middle East.

Advanced economies still produce most of the world’s output, but their share is declining.  It was 79.7% in 2000, 76.2% in 2005, 65.5% in 2010, 60.7% in 2015 and is projected at 56.4% in 2021.  The graph shows consistently higher growth rates in emerging and developing countries than in advanced countries.  Moreover, the projection is that emerging and developing countries will account for 64% of all the growth in world output between 2015 and 2020. 


In its medium term projection, the IMF assumptions for emerging and developing market economies are:

A gradual normalization of conditions in several economies under stress

A successful rebalancing of China’s economy, with trend growth rates that – while lower than those in the past two decades – remain high

A pickup in activity in commodity exporters, albeit with growth rates more modest than in the past.


But the IMF points out that downside risks have risen.  The risks they identify are:

1. Financial stability risks in emerging markets.  A flight from risk could spark disruptive declines in asset prices and currency values, generating contagion across countries.  The countries most vulnerable are those with higher financing needs and weaker net international investment positions.

2. A further decline in oil prices.  This would require oil exporters to adjust monetary and fiscal policy in a contractionary direction.

3. Asset price deflation.  Through the wealth effect, this would weaken global demand.

4. Delays in the recovery of Brazil and Russia.  Between them, they account for 6% of world output based on purchasing power parity exchange rates.

5. Geopolitical strife.  Political instability in parts of Africa and the Middle East and in Ukraine threaten economic disruption.  The surge of refugees into Europe is challenging labour markets and raising scepticism about economic integration and EU governance.

6. Brexit, inducing disruption of trade and financial flows and an extended period of heightened economic uncertainty.

7. Secular stagnation in advanced economies.  ‘Secular stagnation’ refers to a chronic shortfall in domestic demand a resulting risk of deflation.  It lowers output and hence the demand for exports from emerging and developing countries.    


The IMF advocates three growth promoting policies:

1. Continuing monetary policy accommodation, implying low nominal interest rates.

2. Fiscal support, where needed and where fiscal space allows.

3. Structural reforms on the supply side, including labour market reforms, promotion of greater competition among enterprises, productivity-enhancing reforms.


Where does all this leave South Africa?

South Africa is not projected to have a negative annual growth rate in any year. But since 2013, our population has been growing faster than the economy.  This will change in 2018, but we shall not reach the 2013 level of real per capita income again until 2020, as the graph below indicates.

Source:  IMF World Economic Outlook, April 2016, Data base

Seven years of stagnation!  What can we do about it?

1. Monetary policy.  South Africa’s key short term rate – the repo rate – is currently at 7%, little higher than the inflation rate of 6.3%.  Monetary policy is already accommodative, and the inflation rate is likely to exceed the policy limit of 6% in the short term.  If the US puts up short term interest rates, there will be pressure on us to follow suit.  Fortunately, US rates are unlikely to increase by much.  We have no room for an easier monetary policy.

2. Fiscal policy.  The 2016 Budget projects stabilisation of the public debt at 46.2% of GDP in 2017/2018, just below the prudent limit of 50% in emerging and developing economies.  Even so, interest payments on the public debt are projected to rise from 10.1% of government expenditure in 2014/15 to 11.6% in 2018/19, putting pressure on other components of expenditure.  Moreover, the Budget projects new taxes of an unspecified form of R 15 billion in 2017/18 and R 31.4 billion in 2018/19.  Our fiscal space is minimal

3. Structural reforms.  There is most scope for improvement here.  But don’t hold your breath: pro-growth reforms in the last fifteen years have been virtually non-existent.  And now our political conflicts are further diverting attention from what needs to be done.  Our ride may well be rougher than Figure 2 suggests.   

Charles Simkins
Senior Researcher