Surging Dollar to boost Europe, Japan as US slows: IMF

The strengthening dollar is boosting growth in the euro area and Japan while taking some steam out of the U.S. recovery, the International Monetary Fund said in its latest forecast.

The IMF left its projection for global growth in 2015 unchanged from three months ago at 3.5 percent, according to its World Economic Outlook released Tuesday. Underneath the stable forecast, however, the IMF depicts a global economy being reshaped by swings in currency markets and the drop in oil prices.

The Washington-based crisis lender cut its U.S. expansion forecast by 0.5 percentage point to 3.1 percent, still the fastest among major developed economies. The Japan growth outlook increased to 1 percent from 0.6 percent and the euro area is projected to expand 1.5 percent as weakening currencies provide a “welcome boost,” the IMF said.

Emerging markets are showing their own mixed forecasts, with growth projected to slow to 4.3 percent from 4.6 percent in 2014, the fifth straight annual decline and the same forecast as in January.

The figures show India will grow more quickly this year than China for the first time since 1999, according to previous data on the fund’s website. The IMF predicts India will expand at a 7.5 percent rate, up 1.2 percentage points from the January forecast. India is benefiting from policy reforms by Prime Minister Narendra Modi’s government, a pickup in business investment and lower energy prices, the fund said.

China ‘Excesses’

Meanwhile, China is expected to grow 6.8 percent this year, unchanged from January’s forecast. The world’s second-biggest economy is slowing as “previous excesses in real estate, credit and investment continue to unwind,” the IMF said.

Brazil will contract 1 percent in 2015, compared with projected growth of 0.3 percent at the start of the year, the IMF said. In cutting its forecast, the fund cited “stubbornly weak” private-sector sentiment, fallout from the investigation into allegations of corruption at Petroleo Brasileiro SA, and efforts to curb public spending and inflation.

The IMF projects an even deeper contraction in Russia this year than it did in January, with output expected to shrink 3.8 percent.

While the 50 percent drop in oil prices since June is hurting Russia, the fund estimates the decline will boost global output between 0.5 percent and 1 percent by 2016, depending on how it’s passed through to consumers and businesses. Uncertainty has increased about the path of oil prices, the fund said, pointing to volatility levels implied by derivatives markets.

Winners, Losers

“Large movements in relative prices, whether exchange rates or the price of oil, create winners and losers,” Olivier Blanchard, the IMF’s chief economist, said in a statement.

The IMF said short-term downside risks to its outlook include a faster-than-expected rebound in oil prices that undercuts gains for households and firms. A further “sizable” strengthening of the dollar could hurt holders of U.S.- denominated debt in emerging markets, while the threat of low inflation or falling prices in advanced economies remains an “important concern,” the IMF said.

The greenback has appreciated 6.8 percent this year after an 11 percent jump in 2014, according to the Bloomberg Dollar Spot Index.

Policies Diverge

The strong dollar is blunting the reemergence of the U.S. as the world’s primary growth engine as Federal Reserve officials led by Chair Janet Yellen consider when to raise their benchmark lending rate. The global economy risks becoming mired in a “mediocre” recovery if policy makers don’t take bolder steps to boost growth, IMF Managing Director Christine Lagarde said in a speech ahead of this week’s meetings of central bankers and finance ministers in Washington.

With headline inflation negative in Europe and weak in Japan, the IMF expects a “protracted divergence” in the monetary policies of the main advanced economies. Both the euro and yen have declined against the dollar as the European Central Bank and Bank of Japan purchase assets to boost the supply of money in their economies.

The IMF’s forecast of 3.5 percent global growth this year compares with 2014 expansion of 3.4 percent.

Source: Bloomberg