Dr Gift Mugano
The International Monetary Fund (IMF) notes that buoyant financial markets and a long-awaited cyclical recovery in manufacturing and trade under way will spur world growth to rise from 3,1 percent for last year to 3,5 percent this year and 3,6 percent next year. This is slightly above the October 2016 World Economic Outlook (WEO) forecast. The world economy gained speed in the fourth quarter of last year and the momentum is expected to persist.
Global growth is projected to increase from an estimated 3,1 percent for last year to 3,5 percent this year and 3,6 percent next year. Activity is projected to pick up markedly in emerging market and developing economies because conditions in commodity exporters experiencing macroeconomic strains are gradually expected to improve, supported by the partial recovery in commodity prices, while growth is projected to remain strong in China and many other commodity importers.
In advanced economies, the pickup is primarily driven by higher projected growth in the United States, where activity was held back by inventory adjustment and weak investment last year.
Although changes to the global growth forecast for this year and next year since the October 2016 WEO are small, there have been meaningful changes to forecasts for country groups and individual countries.
In line with stronger-than-expected momentum in the second half of last year, the forecast envisages a stronger rebound in advanced economies. And while growth is still expected to pick up notably for the emerging market and developing economies group, weaker than-expected activity in some large countries has led to small downward revisions to the group’s growth prospects for 2017.
For advanced economies, projected growth has been revised upward in the United States, reflecting the assumed fiscal policy easing and an uptick in confidence, especially after the November elections, which, if it persists, will reinforce the cyclical momentum.
The outlook has also improved for Europe and Japan based on a cyclical recovery in global manufacturing and trade that started in the second half of 2016.
The downward revisions to growth forecasts for emerging market and developing economies result from a weaker outlook in several large economies, especially in Latin America and the Middle East, reflecting continued adjustment to the decline in their terms of trade in recent years, oil production cuts, and idiosyncratic factors.
Growth forecasts for this year and next year have been marked up for China, reflecting stronger-than-expected policy support, as well as for Russia, where activity appears to have bottomed out and higher oil prices bolster the recovery.
Since the US election, expectations of looser fiscal policy in the United States have contributed to a stronger dollar and higher US Treasury interest rates, pushing up yields elsewhere as well.
Market sentiment has generally been strong, with notable gains in equity markets in both advanced and emerging market economies.
Stronger activity and expectations of more robust global demand going forward, coupled with agreed restrictions on oil supply, have helped commodity prices recover from their troughs of early last year.
Headline inflation has been picking up in advanced economies due to higher commodity prices, but core inflation dynamics remain subdued and heterogeneous (consistent with diversity in output gaps). Core inflation has improved little where it had been the weakest (for instance, in Japan and parts of the euro area).
Headline inflation has also picked up in many emerging market and developing economies due to higher commodity prices, but in a number of cases it has receded as pass-through from the sharp currency depreciations in 2015 and early 2016 continues to fade. Risks remain skewed to the downside, however, especially over the medium term, with pervasive uncertainty surrounding policies.
Buoyant market sentiment implies that there is now more tangible upside potential for the near term, but in light of the sources of uncertainties discussed below, a sharp increase in risk aversion is possible.
Risks to medium-term growth appear more clearly negative, also because policy support in the United States and China will have to be unwound or reversed down the road to avoid unsustainable fiscal dynamics. More generally, downside risks stem from several potential factors:
An inward shift in policies, including toward protectionism, with lower global growth caused by reduced trade and cross-border investment flows;
A faster-than-expected pace of interest rate hikes in the United States, which could trigger a more rapid tightening in global financial conditions and a sharp dollar appreciation, with adverse repercussions for vulnerable economies;
An aggressive roll-back of financial regulation, which could spur excessive risk taking and increase the likelihood of future financial crises;
Financial tightening in emerging market economies, made more likely by mounting vulnerabilities in China’s financial system associated with fast credit growth and continued balance sheet weaknesses in other emerging market economies;
Adverse feedback loops among weak demand, low inflation, weak balance sheets, and anaemic productivity growth in some advanced economies operating with high levels of excess capacity;
Non-economic factors, including geopolitical tensions, domestic political discord, risks from weak governance and corruption, extreme weather events, and terrorism and security concerns.
These risks are interconnected and can be mutually reinforcing. For example, an inward turn in policies could be associated with increased geopolitical tensions as well as with rising global risk aversion; non-economic shocks can weigh directly on economic activity as well as harm confidence and market sentiment; and a faster-than-anticipated tightening of global financial conditions or a shift toward protectionism in advanced economies could exacerbate capital outflow pressures in China.
However, notwithstanding this positive outlook, IMF noted that enforced structural impediments continue to hold back a stronger recovery, and the balance of risks remains tilted to the downside, especially over the medium term. Incessant structural problems — such as low productivity growth and high income inequality — pressures for inward-looking policies are increasing in advanced economies.
IMF notes that renewed protectionism threaten global economic integration and the co-operative global economic order that has served the world economy, especially emerging market and developing economies, well.
Against this setting, economic policies have an important role to play in staving off downside risks and securing the recovery.
On the domestic front, policies should aim to support demand and repair balance sheets where necessary and feasible; boost productivity, labour supply, and investment through structural reforms and supply-friendly fiscal measures; upgrade the public infrastructure; and support those displaced by structural transformations such as technological change and globalisation.
At the same time, credible strategies are needed in many countries to place public debt on a sustainable path.
Adjusting to lower commodity revenues and addressing financial vulnerabilities remain key challenges for many emerging market and developing economies. A renewed multilateral effort is also needed to tackle common challenges in an integrated global economy.
Policy choices will therefore be crucial in shaping the outlook and reducing risks. Priorities for macroeconomic demand management are increasingly differentiated, given the diversity in cyclical positions.
These findings highlight the need to make growth more inclusive. Possible policy levers include more progressive taxation; investments in skills, lifelong learning, and high-quality education; and other efforts to enhance the occupational and geographical mobility of workers to ease and hasten labour market adjustments to structural transformations.
Many of the challenges that the global economy confronts call for individual country actions to be supported by multilateral co-operation.
Key areas for collective action include preserving an open trading system, safeguarding global financial stability, achieving equitable tax systems, continuing to support low income countries as they pursue their development goals, and mitigating and adapting to climate change.
Disclaimer: This article was extracted from the IMF World Economic Report.
Dr Mugano is an author and expert in trade and competitiveness. He is a Research Associate at Nelson Mandela Metropolitan University and a Senior Lecturer at the Zimbabwe Ezekiel Guti University. Feedback: Email: [email protected], Cell: +263 772 541 209.