Economists at the International Monetary Fund just took a hacksaw to their global growth forecasts, slicing 0.3 percentage points off their previous projection for the world economy in 2015. The IMF’s World Economic Outlook, released Monday night, forecast global growth of 3.5 percent this year, down from 3.8 percent in October’s report. The estimate for 2016 was lowered from 4 percent to 3.7 percent.
Those revisions represent the biggest cuts to the IMF’s forecast in three years, an indication of just how much economic conditions in Europe and elsewhere have deteriorated despite the consumer benefits of falling oil prices. Yet even as the outlook for many regions has worsened, the U.S. remains reasonably well insulated from those percolating economic troubles, the report suggests. Growth prospects for the U.S were actually raised slightly to 3.6 percent. At the same time, the IMF makes clear that the U.S. will eventually feel the effects if the global economy fails to turn around.
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“At the country level, the cross currents make for a complicated picture,” Olivier Blanchard, IMF Economic Counselor and Director of Research said in a release. “It means good news for oil importers, bad news for oil exporters. Good news for commodity importers, bad news for exporters. Continuing struggles for the countries which show scars of the crisis, and not so for others. Good news for countries more linked to the euro and the yen, bad news for those more linked to the dollar.”
WHY THIS MATTERS
The global fallout from the 2008 financial crisis isn’t over yet, but the IMF report suggests the U.S. economy should be able to withstand continued weakness in Europe and other regions, helped by lower oil prices. A worldwide slowdown could still undercut some of the recent economic gains at home.
In the near term, at least, U.S. workers and consumers should be able to look forward to relatively steady growth, in large part because compared to most other countries, the U.S. economy is largely self-contained.
“The U.S. is not that much of an export-oriented economy,” said economist David Dollar, a senior fellow at the Brookings Institution and a 20-year veteran of the World Bank. “A special feature of the United States is that it seems to be the only big economy that can grow based on domestic demand.”
Others agreed that, at least in the near term, falling exports will have a minimal impact on growth in the U.S.
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“It’s a pretty light drag,” said Josh Bivens, director of research and policy at the Economic Policy Institute. “We are still a pretty closed economy as compared to others.”
To be clear, by “closed,” Bivens and others are talking about the relative percentage of the economy that is dependent on imports and exports.
“As a policy matter, we’re pretty open,” he said. “We don’t stop imports. But we are a really, really big economy. We just end up doing lots of buying and selling among ourselves. Big economies tend to be slightly more closed. A big, rich economy like ours has less need for specialization.”
None of this is to say that the global slowdown will have no effect on the U.S. The Brookings Institution’s Dollar estimates that the effect, currently, is marginal. “A soft world economy takes away a couple of tenths of a percentage point of growth; a robust world economy adds a couple of tenths of a percentage point.”
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What could start causing some difficulty, though, is if international capital flows, already sending more cash to the U.S., continue to increase.
“I don’t view the U.S. as in need of a lot of capital,” said Dollar. “Softness around the world means capital flow into the U.S. but that’s not necessarily a good thing. The immediate effect is to strengthen the U.S. dollar, which has a muting effect on exports.”
While they may not account for a large amount of U.S. growth, a blow to exports not just related to a weaker global economy but to U.S. goods being priced out of many markets, could have a more negative impact over time.
“Most of the things that could hurt the U.S. would be related to a stronger dollar running through weaker exports,” said Bivens. “It could be a drag on growth.”
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