IMF: stock markets 'may be overreacting' to China and oil

Onlookers have adopted an increasingly panicked tone as markets have failed to steady

Gian Maria Milesi-Ferretti, Deputy Director, Research Department of IMF, Maurice Obstfeld Economic Counsellor and Director, Research Department of IMF and Thomas Helbling, Division Chief, Research Department of IMF (L-R) deliver the International Monetary Fund's media briefing on the world economic outlook during its annual meeting in Lima, Peru, October 6, 2015 (Reuters)

Stock markets around the world may be overreacting to the threat of falling oil prices and a downturn in the Chinese economy, according to the chief economist of the International Monetary Fund.

Maurice Obstfeld said that China's economic growth was actually in line with IMF expectations and that the falling price of oil could benefit the consumer.

“It's not a stretch to suggest that (markets) may be reacting very strongly to rather small bits of evidence in an environment of volatility and risk aversion,” Obstfeld said at a news conference.

“The oil price puts stresses on oil exporters... but there is a silver lining for consumers worldwide, so it's not an unmitigated negative.”

Chinese shares have had a disastrous start to the year, stoking fears about the fragility of the Chinese economy. But GDP growth came in at the expected 6.9 per cent in 2015, marking a slowdown but not beyond expectations.

Onlookers have adopted an increasingly panicked tone as markets have failed to steady. RBS cried "sell everything" in the second week of January, in an alarmist research note warning of a global deflationary crisis.

“Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,” RBS said in a note to clients.

Obstfeld warned against the dangers of overreacting. "Financial markets have been known to overreact in the past," he said.

According to the IMF world economic update for 2016, the key transitions that will influence global outlook are:

• the gradual slowdown and rebalancing of economic activity in China away from investment and manufacturing toward consumption and services 
• lower prices for oil and other commodities
• a gradual tightening of interest rates in the US and around the world 

The IMF revised global growth forecasts down by 0.2 per cent for 2016 and 2017. The global economy is now expected to grow by 2.1 per cent in 2016 and hold steady in 2017.

Growth expectations were hit by Brazil, where the Petrobras scandal has caused prolonged political upheaval. The Middle East, where oil prices and conflict weigh on growth and the US, which is expected to hold steady rather than take off, contributed to lowering expectations.