What’s driving global growth?

A worker welds at a construction site in China Image copyright Reuters

The latest IMF forecast for the world economy sees growth picking up this year and next. Global GDP is expected to expand by 3.5% this year and 3.8% in 2016.

The US is powering ahead, with 3.1% growth forecast in both 2015 and 2016. The UK is also expected to grow well at 2.7% this year, but slow to 2.3% next year. The euro area is recovering but slowing, as is expected to expand by about 1.5%.

China is also slowing. From a growth rate of above 7%, the IMF sees Chinese growth dropping to 6.6% and 6.4% in the next two years. Russia's economy is forecast to contract for two years: by 3.8% this year and another 1.1% next year. Brazil is recessionary as well, as its 2015 GDP growth is expected at -1%. India, though, is forecast to grow faster than China at a rate of 7.5% for the next couple of years. The country had the biggest growth upgrade by the IMF among major economies.

The divergent fortunes of emerging markets is one of the reasons why, as a group, the IMF is projecting 4.3% growth this year, which is slower than the previous two years. By contrast, advanced economies are expected to grow faster, at 2.4%, than in 2013 and 2014.

In 2013, world GDP growth of 3.4% was due to advanced economies growing by 1.4% and emerging markets by 5%. But this year, GDP is forecast to grow by 3.5% with advanced economies expanding by 2.4%, while emerging markets grow at a pace of 4.3%.

The US, UK and other non-euro economies are powering a bigger part of global growth in a change from the years when emerging economies were driving more of world output.

Emerging markets like China and India are likely to contribute more to global GDP over the longer term as their middle class consumers emerge. However, the near-term forecasts reflect a recovery in post-banking crisis economies, which will be welcome after years of trying to climb out of the worst recession in a century.

Cheaper oil

Image copyright AP

The other sizeable driver of growth is the oil price.

In their simulations, the IMF estimates that oil prices are roughly 40% lower in 2015. They are forecast to rise, but will still be 20% lower than previously expected by 2020. The baseline is August 2014 and oil prices have fallen by about 45% since last autumn.

The boost to global output is considerable. If there's full pass-through from international to domestic prices, then oil prices alone could add about one percentage point to growth by 2016.

Even if not all of the price declines are passed through, global output would still be boosted by more than half a percentage point in the next two years.

After years where high energy costs were squeezing incomes, a drop in oil prices is a nice change. For oil importers in any case.

The IMF emphasises that its projections hinge on oil prices remaining low until the end of the decade.

For now, lower energy prices are boosting income in a similar way to a fiscal stimulus. Recall that during the global financial crisis, the IMF was encouraging G20 governments to spend the equivalent of 2% of their GDP to boost growth.

Cheaper oil is adding as much as one percentage point to global GDP. Bearing in mind that global GDP is growing at 3.5-3.8%, cheaper oil accounts for a notable chunk.

There are risks around exchange rates and interest rates that the IMF stresses. Still, after years of slow growth, if cheaper oil can help raise global growth to 4% by 2020, that will certainly be a welcome driver of world output.