The IMF recently released the 2015 World Economic Outlook Report. I am astounded by the complexity of the forces shaping macroeconomic evolutions around the world and the challenges facing the global economy, especially in Europe and emerging markets more broadly. According to the IMF managing director, Christine Lagarde, “growth will be moderate and uneven”.
There are two deep forces shaping the evolutions over the medium-term. Firstly, legacies of both the financial and the euro area crises are still visible in many countries. To varying degrees, weak banks and high levels of debt — public, corporate, or household — still weigh on spending and growth.
Low growth in turn makes deleveraging a slow process. Secondly, potential output growth has declined. Potential growth in advanced economies was already declining before the crisis. Ageing, together with a slowdown in total productivity has been at play for sometime now. The crisis made it worse, with the large decrease in investment leading to even lower capital growth. This benign outlook has implications for growth and investment in Africa.
As we exit from the financial crisis, capital growth will recover, but ageing and weak productivity growth will continue to weigh down on growth.
The effects are even more pronounced in emerging markets, where ageing, lower capital accumulation, and lower productivity growth are combining to significantly lower potential growth for the future. More subdued prospects lead, in turn, to lower spending and lower growth today.
Adding to these two underlying forces, the current scenario is dominated by two factors that have significant distributional implications, namely, the decline in the price of oil and large exchange rate movements.
The sharp decline in the price of oil came as a surprise. Many explanations have been offered after the fact, the most convincing of which focus on the steady increase in supply from nonconventional sources combined with a change in strategy by Opec.
Most of these explanations suggest that the decline will likely be long-lasting. The price declines have effected a large reallocation of real income from oil exporters to oil importers.
This will certainly benefit Zimbabwe, however, any potential benefit will be offset by the strengthening of the US$ and fall in commodity prices.
Exchange rate movements have been unusually large. Among major currencies, the dollar has seen a major appreciation and the euro and the yen a major depreciation.
These movements clearly reflect major differences in monetary policy, with the US expecting to exit the zero lower bound this year, but with no such prospects for the euro area or Japan. As discussed before, this is not great news for Zimbabwe, as we clearly need an expansionary monetary policy or a weaker dollar
The appreciation of the US dollar especially against the ZAR continues to have a negative impact on export competitiveness in Zimbabwe. It is difficult for Zimbabwean manufactures to compete with South Africa given the sharp depreciation in the South African Rand. Combining these four forces together provides a fairly complex and diverse growth outlook. Some countries suffer from legacies while others do not. Some countries will suffer from lower growth while some will not.
Some countries’ currencies move with the dollar like Zimbabwe, while others move with the Euro and Yen. Add to this a couple of idiosyncratic developments, such as the economic troubles in Russia or the weakness of Brazil. It is no surprise that the assessment must be granular.
On balance, advanced economies will do better this year than last year, emerging markets and low-income countries will slow down relative to last year, and as a result, global growth will be roughly the same as last year. However, these aggregate numbers mask the diversity of underlying evolutions.
According to Oliver Blanchard, macroeconomic risks have decreased slightly. The major risk last year — namely, a recession in the euro area — has decreased, as has the risk of deflation.
However, financial and geopolitical risks have increased. Large movements in relative prices, whether exchange rates or the price of oil, create losers and winners. Energy companies and oil-producing countries face both tougher conditions and higher risks.
So do non-US companies and governments that have borrowed in dollars. This includes Zimbabwe, which has over US$10 billion in outstanding dollar denominated debts. If large exchange rate movements were to continue, they could both create further financial risks and reignite talk of currency wars.
The benign global macroeconomic outlook has implications for growth and investment in Africa.
While global growth is expected to be moderate at 3,7%, growth will be uneven. Emerging markets including Africa are expected to slowdown in 2015. The benefits of lower oil prices for Zimbabwe are likely to be offset by the strong dollar and lower commodity prices. Against this backdrop, we expect growth in Zimbabwe to decline by 4% in 2015 and 2% in 2016 unless something is done to improve the investment climate.