World Economic Outlook Update, January 2018: Brighter Prospects, Optimistic Markets, Challenges Ahead
World Economic Outlook, January 2018
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- Published: January 11, 2018
Global outlook and growth revisions
- Global output is estimated to have grown by 3.7 percent in 2017 (0.1 percentage point faster than projected in the fall and ½ percentage point higher than in 2016).
- Global growth forecasts for 2018 and 2019 have been revised up by 0.2 percentage point to 3.9 percent for both years.
- The upward revision reflects increased global growth momentum and the expected impact of the recently approved U.S. tax policy changes.
- The cyclical upswing since mid-2016: about 120 economies (accounting for three quarters of world GDP) saw a pickup in year-on-year growth in 2017 — the broadest synchronized global growth upsurge since 2010.
United States: tax policy effects and forecasts
- The U.S. tax policy changes are expected to stimulate activity, with investment response to corporate income tax cuts driving the short-term impact.
- The effect on U.S. growth is estimated to be positive through 2020, cumulating to 1.2 percent through that year, with a range of uncertainty around this central scenario.
- Because some provisions are temporary, the package is projected to lower growth for a few years from 2022 onwards.
- U.S. real GDP is projected to be 1.2 percent higher by 2020 than in a projection without the tax policy changes.
- U.S. growth forecasts revised:
- 2018: raised from 2.3 percent to 2.7 percent.
- 2019: raised from 1.9 percent to 2.5 percent.
- The forecast assumes the decline in tax revenues will not be offset by spending cuts in the near term; stronger domestic demand is projected to increase imports and widen the current account deficit.
Regional and sectoral highlights
- Advanced economies: upward revisions mean growth is now expected to exceed 2 percent in 2018 and 2019.
- Emerging and developing Asia: expected to grow at around 6.5 percent over 2018–19, broadly the same pace as in 2017; region accounts for over half of world growth.
- Emerging and developing Europe: 2017 growth now estimated to have exceeded 5 percent; activity in 2018 and 2019 projected to remain stronger than previously anticipated.
- Latin America and the Caribbean: growth of 1.9 percent in 2018 (as projected in the fall) and 2.6 percent in 2019 (a 0.2 percentage point upward revision).
- Middle East, North Africa, Afghanistan, and Pakistan: growth subdued at around 3½ percent in 2018 and 2019.
- Sub-Saharan Africa: growth from 2.7 percent in 2017 to 3.3 percent in 2018 and 3.5 percent in 2019; South Africa expected to remain below 1 percent in 2018–19.
- Commonwealth of Independent States: growth this year and next projected to remain above 2 percent.
Commodities, inflation, and financial markets
- Crude oil:
- Prices rose by about 20 percent between August 2017 and mid-December 2017, to over $60 per barrel, with some further increase as of early January 2018.
- Markets expect prices to gradually decline over the next 4–5 years; as of mid-December, medium-term price futures stood at about $54 per barrel.
- Table memo: The average price of oil in U.S. dollars a barrel was $52.7 in 2017; the assumed price based on futures markets (as of December 11, 2017) is $59.9 in 2018 and $56.4 in 2019.
- Inflation:
- Increase in fuel prices raised headline inflation in advanced economies, but wage and core-price inflation remain weak.
- Emerging market economies: headline and core inflation have ticked up slightly in recent months after declining earlier in 2017.
- Bond and equity markets:
- Market expectations for the U.S. Federal Reserve policy path have shifted up since August, but still price in a gradual increase over 2018 and 2019.
- Yield curves have tended to flatten as short-term rates have risen more than longer-term rates in several advanced economies.
- Equity prices in advanced economies continued to rally; emerging market equity indices have risen further since August.
- Exchange rates (as of early January 2018):
- U.S. dollar and euro: close to their August 2017 level in real effective terms.
- Japanese yen: depreciated by 5 percent.
- Sterling: appreciated by close to 4 percent.
- Renminbi: appreciated by around 2 percent.
- Malaysian ringgit: rebounded by about 7 percent.
- South African rand: by close to 6 percent.
- Mexican peso: depreciated by 7 percent.
- Turkish lira: depreciated by 4.5 percent.
- Capital flows: capital flows to emerging economies remained resilient through Q3 2017, with continued strength in non-resident portfolio inflows.
Risks and scenarios
- Near-term risks broadly balanced; medium-term risks skewed to the downside.
- Upside scenario: cyclical rebound proves stronger if pickup in activity and easier financial conditions reinforce each other.
- Downside scenarios and triggers:
- Financial market correction due to rich asset valuations and very compressed term premiums.
- Faster-than-expected increase in advanced economy core inflation and interest rates.
- Tighter global financing terms affecting economies with high gross debt refinancing needs and unhedged dollar liabilities.
- More modest-than-expected U.S. investment response to tax changes, weakening spillovers to trading partners.
- Buildup of financial vulnerabilities if easy financial conditions persist, incl. increased exposure to lower-rated borrowers and rapid growth of non‑financial corporate debt in some emerging markets.
- Inward-looking policies, increases in trade barriers, geopolitical tensions, political uncertainty, extreme weather events, and migration pressures.
Policy priorities and recommendations
- Shared priorities across economies:
- Implement structural reforms to boost potential output and make growth more inclusive.
- Ensure financial resilience through proactive financial regulation and, where needed, balance sheet repair and stronger fiscal buffers.
- Advanced economies:
- Adopt a cautious, data-dependent monetary policy normalization where output is close to potential and wage/price pressures are muted.
- Fiscal policy should focus on medium-term objectives: public investment to boost potential output, raise labor force participation, ensure public debt sustainability, and reduce excessive external imbalances.
- Where fiscal consolidation is needed, calibrate pace to avoid sharp drags on growth and orient spending to health, education, and protecting the vulnerable.
- Emerging market economies:
- Use improved monetary policy frameworks to lower core inflation and support demand if activity weakens.
- Gradually rebuild fiscal buffers, especially in commodity-dependent economies; avoid deferring reforms and adjustments.
- Employ exchange rate flexibility to prevent sustained relative-price misalignments and limit buildup of financial and external imbalances.
- Low-income countries:
- Support near-term activity while diversifying economies and lifting potential output to sustain progress toward Sustainable Development Goals.
- Build buffers to enhance resilience; tackle high and rising debt levels.
- Focus policy on broadening the tax base, mobilizing revenue, improving debt management, reducing poorly targeted subsidies, and channeling spending into infrastructure, health, and education.
- Strengthen macroprudential frameworks and increase exchange rate flexibility where appropriate.
- Multilateral cooperation priorities:
- Continue financial regulatory reform; avoid competitive races to the bottom in taxes, labor, and environmental standards.
- Modernize rules-based multilateral trade framework; strengthen the global financial safety net.
- Preserve correspondent banking relationships; curb cross-border money laundering, organized crime, and terrorism.
- Mitigate and adapt to climate change.
Key statistics from the projections table (selected)
- World Output (percent change):
- 2016: 3.2
- 2017: 3.7
- 2018: 3.9
- 2019: 3.9
- Difference from October 2017 WEO Projections: 0.2
- Emerging and Developing Asia: 6.4 (2016) to 6.5 (2017) and about 6.6–6.8 (projections).
- India (fiscal year basis): 7.1 (2016), 7.4 (2017), 7.8 and 7.9 (projections).
- World trade volume (goods and services): recent entries include 4.6, 4.1, 4.3, 4.2 (selected series).
- Commodity prices (U.S. dollars) — oil:
- 2016 change: –15.7
- 2017 change: 23.1
- Table memo: oil price average $52.7 in 2017; assumed $59.9 in 2018; $56.4 in 2019.
World Economic Outlook Update, January 2018: Brighter Prospects, Optimistic Markets, Challenges Ahead