The Strategist

IMF: G20 failed to hit GDP target set two years ago

09/02/2016 - 11:30

The IMF admitted that G20’s efforts to accelerate the global economy failed. The fund considered impossible a goal of increasing total GDP of the G20 by 2% by 2018. The target was set at a summit in 2014.

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Next meeting of G20 leaders will be held on September 4-5 in Hangzhou China. In preparation, the International Monetary Fund (IMF) acknowledged that attempts to increase the world's GDP turned futile. The organization called for "drastic" measures to prevent the global economy from getting into a "trap of slow growth."

Analytical report of the IMF says that the ambitious goal set at the G20 meeting in Brisbane two years ago now looks impossible. Precisely, the world’s leading economies aimed to increase total GDP of the G20 by 2% in 2018 (by $ 2 trillion in real terms). Now, the IMF believes that if all measures planned two years ago are implemented, the G20 countries will increase GDP by only 1% (up 1.5%) by 2018. According to estimates of the organization, G20 leaders have fulfilled only 55% of commitments made in Brisbane in 2014, and 45% of commitments taken a year later in Antalya, Turkey.

According to conclusions of the fund, the world economy’s problems haven’t changed over two years. In February 2014, before the Sydney summit, the IMF called pace of global economic recovery "disappointing". In particular, it was said that GDP growth in a number of G20 countries was below forecasts. The main reason for that is "a lack of structural reforms and public investment". Lack of decisive action in politics, as the IMF notes, also led to a slowdown in international trade. In 2012-2015, according to the Fund, import of goods and services fell in most countries.

In this connection, the IMF chief Christine Lagarde urged the world leaders to take decisive action to prevent the world economy from getting into a "trap of slow growth." They must do much more to boost demand, trade and globalization, as well as step up fight against inequality, Lagarde said in an interview with Reuters on Thursday, September 1st. Otherwise, rate of global GDP growth may remain unsatisfactory for quite a long time. According to the IMF’s forecast, global GDP growth in 2016 will be below long-term average of 3% for the fifth year in a row. 2017 may well become the sixth in the series, noted the fund’s Head.

Lagarde also lowered outlook for global GDP growth in 2016. She said it is likely to be degraded since the fund is receiving "not very good signals" on macroeconomic statistics. If the downgrade occurs, it will be the sixth in a row over the last year and a half. Now, the IMF forecasts global GDP growth of 3.1% in 2016 and 3,4% - in 2017. At the same time, the IMF notes that about 60% of the expected GDP growth in G20 would be achieved thanks to developing markets, which account for more than half of G20.

A significant and prolonged slowdown in the global economy is the first since 1990s, when global GDP growth was held back by transition of some countries to a market economy, says Lagarde. Real growth in developed economies is almost a full percentage point behind the average level of 1990-2007 years. The situation was triggered by a series of negative factors in both developed and developing economies. First, many countries still have not overcome crisis trends, particularly, excessive levels of debt in private and public sectors, and deterioration of balance sheets of financial institutions. These factors inhibit growth of demand. Secondly, weak demand restrains trade, and exacerbates lack of productivity growth. Third, slowdown in productivity growth and unfavorable demographic trends have a negative impact on potential growth.

Pace of growth in emerging economies is also slowing down, returning to historical norms after high levels of the past decade, believes Lagarde. IMF connects this trend primarily to reorientation of the Chinese economy from investment to consumption, and external demand to domestic. This transition is quite costly for China's trade partners, which rely on demand for their exports to China. Besides, the process can cause surges of financial volatility. Another reason for the slowed growth is associated with significant decrease in commodity prices, which adversely affected disposable income of many commodity exporters.