The Global Expansion: Still Strong but Less Even, More Fragile, Under Threat
IMF Blog, July 16, 2018
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- Authors: Maurice Obstfeld
- Published: July 16, 2018
Overview
- The broad global expansion that began roughly two years ago has plateaued and become less balanced.
- Latest World Economic Outlook Update projects global growth rates of just about 3.9 percent for both this year and next, while judging that the risk of worse outcomes has increased, even for the near term.
Global and group growth projections
- Global growth: just about 3.9 percent for this year and just about 3.9 percent for next year.
- Advanced economies:
- Projected 2018 growth: 2.4 percent (down 0.1 percentage point from April World Economic Outlook projection).
- Projected 2019 growth: 2.2 percent (unchanged).
- Emerging market and developing economies (aggregate):
- Projected 2018 growth: 4.9 percent.
- Projected 2019 growth: 5.1 percent.
Regional and country developments
- United States:
- GDP continues to grow faster than potential.
- Job creation remains robust, driven in large part by recent tax cuts and increased government spending.
- US growth projected to decelerate over the next few years as the cyclical recovery runs its course and temporary fiscal stimulus effects wane.
- Euro area, Japan, United Kingdom:
- Growth remains generally strong but has slowed in many of these advanced economies.
- China:
- Continues to grow in line with earlier projections.
- Emerging oil exporters and importers:
- Supply disruptions and geopolitical tensions have helped raise oil prices, benefiting emerging oil exporters (for example, Russia and Middle Eastern suppliers) but harming importers (for example, India).
- Sub-Saharan Africa:
- Overall growth will exceed that of population over the next couple of years, allowing per capita incomes to rise in many countries.
- Growth will still fall short of levels seen during the commodity boom of the 2000s.
- Adverse developments—civil strife or weather-related shocks—could intensify outward migration pressures, especially toward Europe.
- Aggregate of emerging market economies:
- Upward and downward revisions to individual country assessments largely offset each other.
Financial conditions and monetary policy
- Federal Reserve policy is central to global financial developments.
- Given strong US employment and firming inflation, the Fed is on track to continue raising interest rates over the next two years, tightening monetary policy compared with other advanced economies and strengthening the US dollar.
- The dollar has already appreciated broadly since April, and financial conditions facing emerging and frontier economies have become somewhat more restrictive.
- Financial conditions remain relatively benign in historical context despite the tightening.
- Markets have so far continued to differentiate among borrowers; capital account pressures have been most intense for those with evident weaknesses (for example, political uncertainty or macroeconomic imbalances).
- Were the Fed to tighten faster than currently expected, a broader range of countries could face more intense pressures.
Trade tensions — greatest near-term threat
- The escalation of trade tensions is identified as the greatest near-term threat to global growth.
- The United States has initiated trade actions affecting a broad group of countries, and faces retaliation or retaliatory threats from China, the European Union, its NAFTA partners, and Japan, among others.
- Modeling suggests that if current trade policy threats are realized and business confidence falls as a result, global output could be about 0.5 percent below current projections by 2020.
- The United States, as the focus of global retaliation, finds a relatively high share of its exports taxed in global markets in such a broader trade conflict and is therefore especially vulnerable.
- Global current account imbalances are set to widen owing to the United States’ relatively high demand growth, possibly exacerbating frictions.
Political uncertainty and market complacency
- Political uncertainty has risen in Europe, with the European Union facing fundamental political challenges regarding migration policy, fiscal governance, norms concerning the rule of law, and the euro area institutional architecture.
- Terms of Brexit remain unsettled despite months of negotiation.
- Prospective political transitions in Latin America over coming months add to uncertainty.
- Some geopolitical dangers may appear in remission, yet underlying drivers often remain active.
- Financial markets seem broadly complacent, with elevated valuations and compressed spreads in many countries.
- High levels of public and private debt create widespread vulnerability.
- Asset prices are buoyed by easy financial conditions and the generally still satisfactory global growth picture, making them susceptible to sudden re-pricing if growth and expected corporate profits stall.
Structural challenges and equity
- Widespread political malaise driving many current policy risks has roots in non-inclusive growth and difficult structural transformation experiences, heightened by the financial crisis of 2007-09 and subsequent difficulties.
- It is urgent to address underlying trends through equity- and growth-friendly policies while assuring macroeconomic tools are available to fight the next economic slowdown; otherwise, political prospects may worsen.
- Governments must pay more attention to economic equity among citizens, especially protecting the poorest.
Policy recommendations and areas for multilateral cooperation
- Policymakers should act now to raise growth potential and resilience through reforms, re-build fiscal buffers, and guide monetary policy carefully to keep inflation expectations well anchored on targets.
- Countries should resist inward-looking thinking and pursue multilateral cooperation on issues where national action is not sufficient, including:
- Strengthening the multilateral trading system.
- Reducing excess global imbalances.
- Financial stability policy.
- International tax policy.
- Cyber and other terrorist threats.
- Disease control.
- Global warming.
- Curtailing corruption, which undermines faith in government.
- Cooperative action to mitigate recurrent surges in international migration pressures by improving international security, supporting the Sustainable Development Goals, and resisting climate change and its effects.
Source: The Global Expansion: Still Strong but Less Even, More Fragile, Under Threat (Maurice Obstfeld, July 16, 2018).
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