IMF Sees Shaken Global Economy, US Payrolls Rise
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The International Monetary Fund warns that financial turmoil could begin a vicious cycle that hurts global economic growth.
The largest Asian economy’s slowdown, combined with a bear trend in its stock market, could cause lower growth in the future. The IMF warned that China’s weakness is worse than anticipated in a new report, which predicts global growth will decelerate slightly to 3.3%, with China growing 6.8%, a large fall from 7.4% growth in 2014. The report also warned, “downside risks have risen” for the global economy.
The International Monetary Fund warns that financial turmoil could begin a vicious cycle that hurts global economic growth.
The largest Asian economy’s slowdown, combined with a bear trend in its stock market, could cause lower growth in the future. The IMF warned that China’s weakness is worse than anticipated in a new report, which predicts global growth will decelerate slightly to 3.3%, with China growing 6.8%, a large fall from 7.4% growth in 2014. The report also warned, “downside risks have risen” for the global economy.
Many analysts believe the IMF’s target growth rate for China is far too optimistic. While the official figures peg China GDP growth at 7% for the first half of 2015, almost all economists discredit those numbers and believe that the growth rate is substantially lower. Estimates for real growth vary wildly, with some as low as less than 3%. Some economists believe the U.S. may grow faster in 2015 than China.
U.S. Payroll Strength
American equity markets continue to see turmoil, although a brief recovery on Wednesday offset steep losses earlier in the week. At the same time, mixed signals on improvements in the economy continue to develop.
On Wednesday, the ADP National Employment Report showed that private payrolls rose by 190,000 in August, a large disappointment. Economists had expected payrolls to rise by 201,000, although ADP’s figures did show an accelerating trend from the 177,000 positions created in July.
The rise in jobs, although less than the expectations indicate continued expansion of labor operations in the United States, and signals expectations for growing demand.
Productivity also rose, with a 3.3% annual rate of growth, according to the Labor Department. At the same time, labor is getting cheaper, falling 1.4% annually in the second quarter of 2015. That decline in labor costs indicates weak income growth for workers, but also suggests productivity gains may persist throughout the economy.
Interest Rates, Currency War
The improving economic picture for the U.S., while lackluster, has urged the IMF to warn that an increase in interest rates could have a damaging ripple effect throughout the U.S. and global economies. The IMF said that rising interest rates could cause capital to leave emerging markets and increase the value of the U.S. dollar, again squeezing emerging market companies and nations who have issued debt in U.S. dollars.
The IMF is now urging the Federal Reserve not to raise rates until 2016, warning that raising rates sooner could damage the world economy.
Meanwhile, U.S. Treasury Secretary Jacob Lew said in an interview that China’s recent currency devaluation is an act of currency manipulation that gives exporters an unfair advantage. He warned in an interview that they would hold China “accountable,” although he did not clarify what steps the Treasury would take against China.
China currently holds over $1.2 trillion in U.S. debt in the form of Treasuries, although reports indicate the country plans to continue selling much of those bonds in an effort to offset market pressure on the Chinese yuan further.
