A Shifting Global Economic Landscape: Update to the World Economic Outlook
IMF Blog, January 16, 2017
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- Authors: Maurice Obstfeld
- Published: January 16, 2017
Overview
- The update reports that "the global economic landscape started to shift in the second half of 2016" and that "developments since last summer indicate somewhat greater growth momentum coming into the new year in a number of important economies."
- The 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.
- The improved outlook is driven largely by "improvements in some large emerging market and low income economies that in 2016 were exceptionally stressed" and by better prospects in the United States, China, Europe, and Japan compared to the October view.
Growth performance and drivers
- Global growth context and recent shifts:
- "Global growth in 2016 was the weakest since 2008–09."
- Broad indicators of manufacturing activity in emerging and advanced economies "have been in expansionary territory and rising since early summer."
- "In many countries, previous downward pressures on headline inflation weakened, in part owing to firming commodity prices."
- China:
- "China remains a major driver of world economic developments."
- "Our China growth upgrade for 2017 is a key factor underpinning the coming year’s expected faster global recovery."
- The upgrade "reflects an expectation of continuing policy support," but risks remain, including "continuing rapid credit expansion, impaired corporate debts, and persistent government support for inefficient state-owned firms."
Asset market repricing and U.S. policy implications
- Post-U.S. election asset moves:
- "A significant repricing of assets followed the U.S. presidential election."
- Notable elements: "a sharp increase in U.S. longer-term interest rates, equity market appreciation and higher long-term inflation expectations in advanced economies, and sharp movements in opposite directions of the dollar—up—and the yen—down."
- "Emerging market equity markets broadly retreated as currencies weakened."
- Market interpretation and policy expectations:
- Market moves interpreted as predicting "that U.S. fiscal policy will turn more expansionary and require a swifter pace of interest rate increases by the Federal Reserve."
- Observed political fact: "the White House and Congress are in the hands of the same party for the first time in six years."
- Potential policy shifts mentioned: "lower tax rates and possibly higher infrastructure and defense spending."
- U.S. projections and uncertainty:
- The update "moderately raised our two-year projections for U.S. growth."
- Uncertainties remain about "the specifics of future fiscal legislation," including "the degree of net increase in government spending and the resulting impacts on aggregate demand, potential output, the Federal deficit, and the dollar."
Upside and downside scenarios and spillovers
- Upside scenario:
- "A sustained non-inflationary growth increase, marked by higher labor force participation and significant expansion of the U.S. capital stock and infrastructure, would allow a more moderate pace of interest rate increases in line with the Federal Reserve’s price stability mandate."
- Downside scenario:
- If "a fiscally-driven demand increase collides with more rigid capacity constraints":
- "A steeper path for interest rates will be necessary to contain inflation,"
- "the dollar will appreciate sharply,"
- "real growth will be lower,"
- "budget pressure will increase,"
- "and the U.S. current account deficit will widen."
- That scenario "intensifies the risk of protectionist measures and retaliatory responses" and "would also imply a faster than expected tightening of global financial conditions, with resulting possible stress on many emerging market and some low-income economies."
- Distributional effects: "Some emerging and especially low-income commodity exporters could benefit from higher export prices, but importers would then lose."
- Policy details matter: "The details of the U.S. policy mix matter; and as these become clearer, we will adjust our forecast and spillover assessment."
Other vulnerabilities and geopolitical factors
- Global vulnerabilities highlighted:
- "Higher popular antipathy toward trade, immigration, and multilateral engagement in the United States and Europe;"
- "Widespread high levels of public and private debt;"
- "Ongoing climate change—which especially affects low-income countries;"
- "In a number of advanced countries, continuing slow growth and deflationary pressures."
- Europe-specific risks:
- "Britain’s terms of exit from the European Union remain unsettled and the upcoming national electoral calendar is crowded, with possibilities of adverse economic repercussions, in the short and longer terms."
Policy recommendations
- General approach:
- "We continue to recommend a three-pronged policy approach relying on fiscal and structural policies alongside monetary policy, but one that is tailored to country circumstances."
- For advanced economies operating near full capacity (example countries cited: Germany and the United States):
- Fiscal policy should focus on "increasing potential output through investments in needed infrastructure and skills, as well as supply-friendly, equitable tax reform."
- Policymakers should "turn their attention to longer-term fiscal sustainability."
- Monetary policy can "follow a data-dependent normalizing path."
- Structural policy:
- "Structural reform remains a priority everywhere in view of continuing tepid productivity growth."
- "In many cases appropriate fiscal support can raise the effectiveness of reforms without worsening governments’ fiscal positions."
- Financial sector resilience:
- "Financial resilience is another universal priority and requires stronger financial regulatory frameworks, better focused on key problem areas."
- While "countries can do much on their own to improve financial oversight and institutions, but not everything, and continuing multilateral financial regulatory cooperation is vital."
- Social and distributional policies:
- Social dislocation from globalization and technology change is "a major challenge" leading to "wider inequality and wage stagnation in many countries."
- The update argues "rolling back economic integration... would impose aggregate economic costs" and emphasizes the need for "government investment in well-trained, nimble workforces, along with policies to promote better matching of available jobs to skills."
- Sustainability and inclusiveness:
- A key takeaway: "sustainable growth must also be inclusive growth."
Source: A Shifting Global Economic Landscape: Update to the World Economic Outlook (Maurice Obstfeld, January 16, 2017).