The Global Economy: A Delicate Moment

IMF Blog, April 9, 2019

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One year ago economic activity was accelerating in almost all regions; by the second half of 2018 the global expansion significantly weakened.
Contributing factors:
- Escalation of US–China trade tensions
- Needed credit tightening in China
- Macroeconomic stress in Argentina and Turkey
- Disruptions to the auto sector in Germany
- Financial tightening alongside normalization of monetary policy in the larger advanced economies
These developments contributed to a notably weaker global expansion, especially in the second half of 2018.

The new World Economic Outlook (WEO) projects a slowdown in growth in 2019 for 70 percent of the world economy.
Global growth:
- 2018: 3.6 percent
- 2019 (projected): 3.3 percent
- Downward revision for 2019 from the January projection: 0.2 percentage points
2020 projection:
- Global growth projected to return to 3.6 percent in 2020
- Recovery in 2020 is predicated on a rebound in emerging market and developing economies
- Emerging market and developing economies: 2019 projected growth 4.4 percent; 2020 projected growth 4.8 percent
Beyond 2020:
- Global growth expected to stabilize at around 3½ percent
- Growth in emerging market and developing economies expected to stabilize at 5 percent
- Low-income countries: varied outcomes with some commodity importers growing rapidly and others falling further behind in per capita terms
Regional and group outlook notes:
- Growth in advanced economies will slow slightly in 2020 despite a partial recovery in the euro area, reflecting fading US fiscal stimulus and modest potential growth due to aging trends and low productivity growth
- The recovery is precarious and relies on expected rebounds in Argentina and Turkey and improvements in other stressed developing economies

Monetary policy accommodation:
- The US Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England shifted to a more accommodative stance.
China policy response:
- China has ramped up fiscal and monetary stimulus to counter the negative effect of trade tariffs.
Trade outlook:
- Prospects for a US–China trade agreement improved, helping overall outlook.
Financial conditions and real economy divergence:
- Policy responses have helped reverse tightening of financial conditions to varying degrees.
- Emerging markets: some resumption in portfolio flows, a decline in sovereign borrowing costs, and strengthening of currencies relative to the US dollar.
- Real economy indicators (industrial production and investment) remain weak in many advanced and emerging market economies; global trade has yet to recover.

The baseline does not anticipate a global recession, but many downside risks exist:
- Trade policy tensions could flare up and spread to other areas (such as the auto industry), disrupting global supply chains.
- Growth in systemic economies (for example the euro area and China) could surprise on the downside.
- Heightened risks surrounding Brexit.
- A deterioration in market sentiment could rapidly tighten financing conditions amid large private and public sector debt, including sovereign-bank doom loop risks.

Avoid costly policy mistakes; policymakers need to work cooperatively to reduce policy uncertainty and support investment.
Fiscal policy:
- Manage trade-offs between supporting demand, protecting social spending, and ensuring public debt remains on a sustainable path.
- The optimal fiscal mix depends on country-specific circumstances.
Financial sector policies:
- Address vulnerabilities proactively using macroprudential tools (such as counter-cyclical capital buffers).
- This is made more urgent by the possibility that interest rates will remain low for longer.
Monetary policy:
- Remain data dependent, be well communicated, and ensure inflation expectations remain anchored.
Structural and multilateral priorities:
- Actions to boost potential output, improve inclusiveness, and strengthen resilience across economies.
- Greater multilateral cooperation needed to resolve trade conflicts, address climate change and cybersecurity risks, and improve effectiveness of international taxation.
Contingent macro policy response if downside risks materialize:
- Policymakers may need synchronized though country-specific fiscal stimulus across economies, complemented by accommodative monetary policy, depending on circumstances.
Multilateral institutions:
- Adequate resources for multilateral institutions remain essential to retain an effective global safety net to help stabilize the global economy.

Source: Gita Gopinath, April 9, 2019