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IMF says China growth at risk

In a blow to Australia’s exporters, the International Monetary Fund (IMF) has lowered its outlook for the global economy, due to a slowdown in emerging economies such as China, and Europe’s recession woes.

This is the fifth time that the IMF has cut its forecasts since April last year. The IMF now says global growth is expected to come in at 3.1%, down from the 3.3% it forecast in April. Growth in the US was lowered from 1.9% to just 1.7%, suggesting that the US Federal Reserve is more than likely to continue with its economic stimulus program beyond September, and any tapering is likely to be fairly small.

The IMF also warned that any pull back in stimulus would negatively impact on global growth, with investors likely to pull money out of developing nations. Growth forecasts for developing countries Brazil, Russia, India, China and South Africa, commonly referred to as BRICS, was lowered to 5%. “After years of strong growth, the BRICS are beginning to run into speed bumps,” said Olivier Blanchard, the IMF’s chief economist.

The IMF says it also underestimated the depth of the recession in Europe, expecting the Eurozone economy to contract at 0.6% this year, before recovering to expand at less than 1% next year.

China’s slowing growth has major implications for commodity exporting nations such as Canada, Brazil and Australia, with China one of the world’s largest energy consumers. China’s economy is also undergoing a structural change from an infrastructure led to a consumer-driven economy, which is likely to see commodity demand slow.

Australia’s pure play iron ore exporters such as Fortescue Metals Group (ASX:FMG), BC Iron (ASX:BCI), Atlas Iron Limited (ASX:AGO) and Mount Gibson Iron (ASX:MGX), are most exposed, such iron ore prices fall dramatically, as demand softens at the same time as additional supply comes on stream.

Foolish takeaway

Australia relies to a great extent on China’s growth as our biggest export customer. A slowdown in the Chinese economy could have severe implications for our own economy.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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