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IMF warns of risks as it lifts global growth outlook

October 10, 2017 7:32 PM
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Washington — The IMF warned policy makers not to get too comfortable even as it raised its global growth forecast amid brightening prospects in the big economies.

The Washington-based lender lifted its growth outlook for the US, the eurozone, Japan and China from its last forecast in July. The recovery spans about 75% of world output, according to the IMF.

The fund projects the global economy will grow 3.6% in 2017 and 3.7% in 2018, in both cases an increase of 0.1 percentage point from its previous estimate. Analysts expect GDP to climb 3.4% in 2017 and 3.5% in 2018.

Either way, the recovery is accelerating from a low gear — global growth of 3.2% in 2016 was the slowest since the 2007-09 recession. The IMF warned that medium-term risks were tilted to the downside, highlighting dangers from tightening financial conditions, low inflation in advanced economies, financial turmoil in emerging markets and protectionist policies.

"Neither policy makers nor markets should be lulled into complacency," IMF chief economist Maurice Obstfeld said in the World Economic Outlook report. "A closer look suggests that the global recovery may not be sustainable — not all countries are participating, inflation often remains below target with weak wage growth, and the medium-term outlook still disappoints in many parts."

Finance ministers and central bankers from the IMF’s 189-member nations will be heartened by the brighter global outlook as they meet this week in Washington for the fund’s annual meetings.

In a speech last week, MD Christine Lagarde said the IMF was seeing "some sun break through" for the world economy. Investors have been basking for some time, with the MSCI world stock index up 15% in 2017.

But Lagarde warned that a strengthening recovery may be masking more troubling trends, such as an increase in political polarisation brought about by inequality. The spectre of trade wars also remain, though they may be less of a danger than at recent global economic summits. The same week as the IMF meetings, negotiators from the US, Mexico and Canada will meet less than 10km away for the fourth round of increasingly tense talks to overhaul the North American Free Trade Agreement.

The IMF bumped up its forecast for US growth to 2.2% in 2017 and 2.3% in 2018 from 2.1% for both this year and next in its July estimates. "Very supportive" financial conditions and high business and consumer confidence are buoying the nation’s prospects, said the fund. The IMF’s base case does not take into account fiscal stimulus from tax reforms backed by President Donald Trump and Republican leaders in Congress.

The fund now expects growth in the eurozone of 2.1% this year and 1.9% next, both up 0.2 point from three months ago, as the currency zone’s prospects strengthen on the pickup in global trade, ongoing strength in domestic demand and diminished political risk.

Growth in Japan is being driven by global demand and policies designed to keep fiscal policy supportive. The IMF projects Japan will grow 1.5% this year, up 0.2 point from July, before slowing to 0.7% in 2018, which is still 0.1 point higher than anticipated three months ago.

The IMF raised its call on growth in China to 6.8% this year and 6.5% in 2018, up 0.1 point in each year compared with July.

The IMF is encouraging countries to take advantage of the benign climate to boost the growth potential of their economies and cushion the impact of the next downturn. In rich nations, central banks should keep monetary policy loose until there are firm signs of inflation, the fund said.

Countries should take steps to improve productivity while putting in place policies that reduce the pain of adjustment to labour-saving technology and globalisation, the IMF said.

"Policy makers should act while the window of opportunity is open," according to Obstfeld.


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