Transcript of a Press Briefing On Update Of The World Economic Outlook
IMF News, January 16, 2017
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- Published: January 16, 2017
Global growth outlook and recent dynamics
- Central projection: global growth will rise to a rate of 3.4 percent in 2017 and 3.6 percent in 2018, from a 2016 rate of 3.1 percent.
- 2016 was the weakest global growth since 2008-09; broad improvement began around mid-2016.
- Drivers of improved momentum: manufacturing indicators in emerging and advanced economies in expansionary territory since early summer 2016; weakening of downward pressures on headline inflation in many countries due in part to firming commodity prices.
- Asset-market repricing after the U.S. presidential election: sharp increase in U.S. longer-term interest rates, equity market appreciation, higher long-term inflation expectations in advanced economies, sharp movements in opposite directions for the dollar (up) and the yen (down), and emerging market equity market retreats with currency weakening.
- Wider dispersion of risks to the short-term forecast and rising uncertainty; risks still tilted to the downside.
United States — outlook, policy uncertainty, and scenarios
- IMF view: moderately raised two-year projections for U.S. growth reflecting U.S. momentum entering 2017 and a likely shift in policy mix.
- Major uncertainties: specifics of future U.S. fiscal legislation, net increase in government spending, impacts on aggregate demand, potential output, the Federal deficit, and the dollar.
- Upside scenario: sustained non-inflationary growth with higher labor-force participation and significant expansion of the U.S. capital stock and infrastructure could allow a moderate, data-dependent pace of interest-rate increases by the Federal Reserve.
- Downside scenario: fiscally-driven demand increase colliding with rigid capacity constraints would require a steeper path for interest rates to contain inflation, lead to sharp dollar appreciation, lower real growth, increased budget pressure, and a wider U.S. current account deficit.
- Trade policy risks: a widening of global imbalances could intensify protectionist measures and retaliatory responses, risking faster tightening of global financial conditions and stress on emerging market and low-income economies.
- Border-adjustment and tariff issues: IMF is assessing macroeconomic impacts under alternative scenarios; the Fund notes limited empirical or modeling research on macro impacts of border taxation and tariffs and is undertaking further work.
China and other emerging market considerations
- China: growth upgrade for 2017 is a key factor underpinning expected faster global recovery; change reflects expectation of continuing policy support.
- China risks: rapid credit expansion, impaired corporate debts, and persistent government support for inefficient state-owned firms create risk of a sharp or disruptive slowdown.
- Emerging markets: tighter financial conditions have been a trend across emerging markets; some economies (e.g., Mexico) have experienced more pronounced tightening tied to policy uncertainty.
- Spillovers to low-income economies: stronger U.S. demand can benefit exporters in low-income countries; however, faster-than-expected tightening of financial conditions and higher interest rates pose risks, particularly for countries increasingly integrated into global financial markets and for corporates with significant foreign-currency debt.
Regional and country-specific notes
- Mexico:
- Forecast downgraded for 2017 and 2018 by about 0.5 percentage point.
- Primary cause: tighter financial conditions weighing on confidence and domestic spending, linked to uncertainty about future U.S. trade policies.
- Authorities’ strengths: credible inflation-targeting regime, prudent fiscal policy, flexible exchange rate; policy stance judged appropriate for the moment with ongoing fiscal consolidation.
- Brazil:
- 2016 growth weaker than anticipated in Q3–Q4, pushing stabilization and pick-up in activity further out.
- Saudi Arabia:
- 2016 growth: 1.4 percent.
- 2017 outlook depends on oil-sector behavior (including supply-curtailing agreements) and non-oil sector performance.
- Non-oil growth constrained by sizeable fiscal consolidation (spending down, taxes up) and ongoing structural reform ambitions; higher oil prices help revenues but substantial adjustment remains.
- Potential regional spillovers from lower Saudi spending depend on future budgetary choices.
- South Africa:
- Projected recovery to a still-weak pace of .8 percent in the next year, then improvement thereafter.
- Constraints: power provision issues, inadequate level and mix of skills, and recent policy uncertainty.
- Improvements needed: more inclusive labor-market policies, broad-based education reforms.
- Kenya and low-income importers:
- Stronger U.S. growth increases external demand, benefiting exporters.
- Risk from faster tightening of financial conditions and higher interest rates that could harm countries integrating into global financial markets.
- India:
- Short-term downgrade linked to currency reform causing cash shortages and temporary reduction in spending; projected strong bounce-back thereafter once cash supply normalizes.
- Italy:
- Italy singled out as downgraded among G7; long-standing low growth.
- Needed measures: implement and extend structural reforms, address banking sector weaknesses and non-performing loans, expand out-of-court loan workouts, and assess smaller banks not covered by ECB comprehensive assessment.
Policy recommendations and priorities
- Continued three-pronged approach: fiscal and structural policies alongside monetary policy tailored to country circumstances.
- For advanced economies operating near full capacity (examples cited: Germany and the United States):
- Fiscal policy should prioritize increasing potential output through infrastructure and skills investment and supply-friendly, equitable tax reform rather than short-term demand support.
- Attention to longer-term fiscal sustainability while monetary policy follows a data-dependent normalizing path.
- Structural reform: priority everywhere to address tepid productivity growth; targeted fiscal support can raise reform effectiveness without worsening fiscal positions.
- Financial resilience: strengthen financial regulatory frameworks, better focus on key problem areas; reform tax biases favoring debt over equity to reduce corporate leverage vulnerabilities.
- Social inclusion: invest in training and policies to improve job-skills matching; sustainable growth must be inclusive growth.
- On central bank independence and policy rules: IMF emphasizes the importance of operational flexibility and independence for the Federal Reserve versus legislated mechanical rules (e.g., fixed-weight Taylor Rule).
Debt, financial stability, and vulnerabilities
- High global debt (public and private) noted as a worrying overhang.
- Easing the debt burden requires structural reforms to raise growth, smart and equitable fiscal policies, and prudent fiscal frameworks to prevent further debt accumulation.
- Specific vulnerability: emerging market corporates with significant foreign-currency debt in the face of financial tightening.
- Tax systems that favor debt finance over equity finance exacerbate corporate leverage risks; reforming such biases would mitigate vulnerabilities.
Transcript of a Press Briefing On Update Of The World Economic Outlook — January 16, 2017