IMF FORECASTS: Australia’s economic growth will be under 2.5%, below the global trend

Shanghai at night. Feng Li/Getty Images

The International Monetary Fund’s latest forecasts show economic growth in Australia staying under 2.5% and below global trends in 2016 before a recovery over the next two years.

The significant factor in slower growth is the shrinking activity in China, Australia’s biggest export destination, which means fewer goods are being imported.

“In Australia, growth is expected to remain below potential at 2.5% in 2016 but to rise above potential to 3% over the next two years, supported in part by a more competitive currency,” the IMF says in its World Economic Outlook update.

The forecast was at odds with the stronger trend in the latest Australian Bureau of Statistics numbers which show GDP (Gross Domestic Product) at 3% in the final quarter of 2015.

But it is in line with MYEFO’s (Mid Year Economic and Fiscal Outlook) revised 2015‑16 federal budget forecast of a more gradual pickup in economic activity with GDP at 2.5%, down from 2.75%.

The Reserve Bank has a range of 2% to 3%.

The latest IMF forecasts show global growth at 3.2% in 2016 and 3.5% in 2017, a downward revision of 0.2% and 0.1 percentage points respectively, compared with the January update.

In a recent speech, IMF managing director Christine Lagarde warned that the recovery remains slow, fragile and with the risk that persistent low growth can have damaging effects on the social and political fabric of many countries.

Maurice Obstfeld, IMF director of research, says that lower growth means less room for error.

“Persistent slow growth has scarring effects that themselves reduce potential output and with it, demand and investment,” he says.

The downturn in China’s imports in 2015 is an important economic drag.

Growth in China is projected to slow to 6.5% this year and 6.2 per cent in 2017, slightly higher than the projections in the October 2015 forecasts, reflecting announced policy stimulus.

“A further weakening is expected in the industrial sector, as excess capacity continues to unwind, especially in real estate and related upstream industries, as well as in manufacturing,” the IMF says.

“Services sector growth should be robust as the economy continues to rebalance from investment to consumption.

“High income growth, a robust labor market, and structural reforms designed to support consumption are assumed to keep the rebalancing process on track over the forecast horizon.”