{
  "title": "The Current Economic Sweet Spot Is Not the “New Normal”",
  "publication": "IMF Blog, January 22, 2018",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2018/01/22/the-current-economic-sweet-spot-is-not-the-new-normal",
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  "summary": "The new World Economic Outlook Update revises the forecast for the world economy’s growth in both 2018 and 2019 to 3.9 percent.",
  "sections": [
    {
      "heading": "Overview and headline forecast",
      "content": "- The new World Economic Outlook Update revises the forecast for the world economy’s growth in both 2018 and 2019 to 3.9 percent.\n- For both years, that is 0.2 percentage points higher than last October’s forecast, and 0.2 percentage points higher than our current estimate of last year’s global growth.\n- The present economic momentum reflects a confluence of factors that is unlikely to last for long; without prompt action the next downturn will come sooner and be harder to fight."
    },
    {
      "heading": "Near-term prospects and drivers",
      "content": "- Primary sources of GDP acceleration so far: Europe and Asia, with improved performance also in the United States, Canada, and some large emerging markets (notably Brazil and Russia, both of which shrank in 2016, and Turkey).\n- The recent U.S. tax legislation will contribute noticeably to U.S. growth over the next few years, largely because of the temporary exceptional investment incentives that it offers.\n  - This short-term growth boost will have positive, albeit short-lived, output spillovers for U.S. trade partners.\n  - It will also likely widen the U.S. current account deficit, strengthen the dollar, and affect international investment flows.\n- Trade is growing faster than global income, driven in part by higher global investment.\n- Commodity prices have moved up, benefiting commodity-exporting countries.\n- Inflation pressures remain contained even as economies return to full employment; nominal wage growth is subdued.\n- Financial conditions are quite easy: booming equity markets, low long-term government borrowing costs, compressed corporate spreads, and attractive borrowing terms for emerging market and developing economies."
    },
    {
      "heading": "Explaining the upturn",
      "content": "- The upturn began to take hold in mid-2016 and owes much to accommodative macroeconomic policies that supported market sentiment and hastened natural healing processes.\n- Monetary policy:\n  - Remains accommodative in the largest countries, underpinning easy global financial conditions.\n  - The United States Federal Reserve continues to raise interest rates gradually but has been cautious, postponing previously expected rate increases after early-2016 turbulence.\n  - The European Central Bank has started to taper large-scale asset purchases but has signaled that interest-rate increases are a more distant prospect.\n- Fiscal policy:\n  - In advanced economies, fiscal policy has shifted from contractionary to roughly neutral over the past few years.\n  - China has provided considerable fiscal support since its growth slowed at mid-decade, with important positive spillovers to trade partners.\n  - In the U.S., fiscal policy is about to take a markedly expansionary turn, with complex effects on the world economy."
    },
    {
      "heading": "Why this is not a “new normal” — key medium-term risks",
      "content": "- Advanced economies are leading the upswing, but once their output gaps close they will return to longer-term growth rates expected to be well below pre-crisis rates.\n  - Projected advanced-economy growth: 2.3 percent in 2018.\n  - Assessment of the group’s longer-term potential growth: only about two-thirds as high.\n  - Causes: demographic change and lower productivity growth.\n- China and the United States—the two biggest national economies driving current and near-term future growth—are headed for slower growth.\n  - China will cut back fiscal stimulus and rein in credit growth as part of rebalancing, implying lower future growth.\n  - U.S. tax cuts are temporary in effects (notably for investment); some of the near-term growth will be paid back later as incentives expire and increasing federal debt takes a toll.\n- Easy financial conditions and fiscal support have left a legacy of debt (government, and in some cases corporate and household) in advanced and emerging economies.\n  - A sudden rise in inflation and interest rates would tighten financial conditions globally and prompt markets to re-evaluate debt sustainability in some cases.\n  - Elevated equity prices are vulnerable, raising the risk of disruptive price adjustments.\n- Regional and distributional concerns:\n  - Less favorable developments in the Middle East and Sub-Saharan Africa; Sub-Saharan Africa weighed down by weakness in its larger economies.\n  - Low growth in parts of Africa driven in part by adverse weather events and sometimes civil strife, sparking significant outward migrations.\n  - Aggregate growth in Latin America will be weighed down in the year by continuing economic collapse in Venezuela.\n  - Voters in many advanced economies have soured on political establishments due to tepid real wage gains, reduced labor shares, and rising job polarization; this raises the risk of a turn to more nationalistic or authoritarian governance models.\n  - Levels of inequality are high in emerging market and low-income economies and can spark future disruptions unless growth is made more inclusive."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Over-arching risk: complacency among policymakers.\n- Immediate policy priorities:\n  - Build policy buffers and reinforce defenses against financial instability.\n  - Invest in structural reforms, productive infrastructure, and people to raise long-term economic efficiency and output.\n  - Ensure availability of policy tools to counter the next downturn, given that public debts are much higher than a decade ago.\n- Multilateral priorities during the upswing:\n  - Counter global financial stability threats, including cyber-threats.\n  - Strengthen the multilateral trading system.\n  - Cooperate on international tax policy, including the fight against money laundering.\n  - Promote sustainable development in low-income countries.\n  - Fight irreversible environmental damage, notably from climate change.\n\nMaurice Obstfeld — January 22, 2018\n\n---\n\n\n References\n\n- World Economic Outlook Update\n- https://www.imf.org/wp-content/uploads/2018/01/weotbl012018-002.jpg\n\nSource: https://www.imf.org/en/blogs/articles/2018/01/22/the-current-economic-sweet-spot-is-not-the-new-normal"
    }
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    "Authors: Maurice Obstfeld",
    "Published: January 22, 2018",
    "The new World Economic Outlook Update revises the forecast for the world economy’s growth in both 2018 and 2019 to 3.9 percent.",
    "For both years, that is 0.2 percentage points higher than last October’s forecast, and 0.2 percentage points higher than our current estimate of last year’s global growth.",
    "The present economic momentum reflects a confluence of factors that is unlikely to last for long; without prompt action the next downturn will come sooner and be harder to fight.",
    "Primary sources of GDP acceleration so far: Europe and Asia, with improved performance also in the United States, Canada, and some large emerging markets (notably Brazil and Russia, both of which shrank in 2016, and Turkey).",
    "The recent U.S. tax legislation will contribute noticeably to U.S. growth over the next few years, largely because of the temporary exceptional investment incentives that it offers.",
    "Trade is growing faster than global income, driven in part by higher global investment.",
    "Commodity prices have moved up, benefiting commodity-exporting countries.",
    "Inflation pressures remain contained even as economies return to full employment; nominal wage growth is subdued.",
    "Financial conditions are quite easy: booming equity markets, low long-term government borrowing costs, compressed corporate spreads, and attractive borrowing terms for emerging market and developing economies.",
    "The upturn began to take hold in mid-2016 and owes much to accommodative macroeconomic policies that supported market sentiment and hastened natural healing processes.",
    "Monetary policy:",
    "Fiscal policy:",
    "Advanced economies are leading the upswing, but once their output gaps close they will return to longer-term growth rates expected to be well below pre-crisis rates.",
    "China and the United States—the two biggest national economies driving current and near-term future growth—are headed for slower growth.",
    "Easy financial conditions and fiscal support have left a legacy of debt (government, and in some cases corporate and household) in advanced and emerging economies.",
    "Regional and distributional concerns:",
    "Over-arching risk: complacency among policymakers.",
    "Immediate policy priorities:",
    "Multilateral priorities during the upswing:",
    "[World Economic Outlook Update](http://www.imf.org/en/Publications/WEO/Issues/2018/01/11/world-economic-outlook-update-january-2018)",
    "[https://www.imf.org/wp-content/uploads/2018/01/weo_tbl_012018-002.jpg](https://www.imf.org/wp-content/uploads/2018/01/weo_tbl_012018-002.jpg)"
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