## The Current Economic Sweet Spot Is Not the “New Normal” _IMF Blog, January 22, 2018_ ## Source details **Canonical URL:** [The Current Economic Sweet Spot Is Not the “New Normal”](https://www.imf.org/en/blogs/articles/2018/01/22/the-current-economic-sweet-spot-is-not-the-new-normal) ## Other formats - [Markdown version](/en/blogs/articles/2018/01/22/the-current-economic-sweet-spot-is-not-the-new-normal/index.md) - [Structured JSON version](/en/blogs/articles/2018/01/22/the-current-economic-sweet-spot-is-not-the-new-normal/index.json) - [Bundle manifest](/en/blogs/articles/2018/01/22/the-current-economic-sweet-spot-is-not-the-new-normal/bundle-manifest.json) ## Bibliographic details - Authors: Maurice Obstfeld - Published: January 22, 2018 --- ### Overview and headline forecast - 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. ### Near-term prospects and drivers - 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. - This short-term growth boost will have positive, albeit short-lived, output spillovers for U.S. trade partners. - It will also likely widen the U.S. current account deficit, strengthen the dollar, and affect international investment flows. - 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. ### Explaining the upturn - 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: - Remains accommodative in the largest countries, underpinning easy global financial conditions. - The United States Federal Reserve continues to raise interest rates gradually but has been cautious, postponing previously expected rate increases after early-2016 turbulence. - The European Central Bank has started to taper large-scale asset purchases but has signaled that interest-rate increases are a more distant prospect. - Fiscal policy: - In advanced economies, fiscal policy has shifted from contractionary to roughly neutral over the past few years. - China has provided considerable fiscal support since its growth slowed at mid-decade, with important positive spillovers to trade partners. - In the U.S., fiscal policy is about to take a markedly expansionary turn, with complex effects on the world economy. ### Why this is not a “new normal” — key medium-term risks - 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. - Projected advanced-economy growth: 2.3 percent in 2018. - Assessment of the group’s longer-term potential growth: only about two-thirds as high. - Causes: demographic change and lower productivity growth. - China and the United States—the two biggest national economies driving current and near-term future growth—are headed for slower growth. - China will cut back fiscal stimulus and rein in credit growth as part of rebalancing, implying lower future growth. - 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. - 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. - A sudden rise in inflation and interest rates would tighten financial conditions globally and prompt markets to re-evaluate debt sustainability in some cases. - Elevated equity prices are vulnerable, raising the risk of disruptive price adjustments. - Regional and distributional concerns: - Less favorable developments in the Middle East and Sub-Saharan Africa; Sub-Saharan Africa weighed down by weakness in its larger economies. - Low growth in parts of Africa driven in part by adverse weather events and sometimes civil strife, sparking significant outward migrations. - Aggregate growth in Latin America will be weighed down in the year by continuing economic collapse in Venezuela. - 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. - Levels of inequality are high in emerging market and low-income economies and can spark future disruptions unless growth is made more inclusive. ### Policy implications and recommendations - Over-arching risk: complacency among policymakers. - Immediate policy priorities: - Build policy buffers and reinforce defenses against financial instability. - Invest in structural reforms, productive infrastructure, and people to raise long-term economic efficiency and output. - Ensure availability of policy tools to counter the next downturn, given that public debts are much higher than a decade ago. - Multilateral priorities during the upswing: - Counter global financial stability threats, including cyber-threats. - Strengthen the multilateral trading system. - Cooperate on international tax policy, including the fight against money laundering. - Promote sustainable development in low-income countries. - Fight irreversible environmental damage, notably from climate change. *Maurice Obstfeld — January 22, 2018* --- ## References - [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) _Source: https://www.imf.org/en/blogs/articles/2018/01/22/the-current-economic-sweet-spot-is-not-the-new-normal_