Tentative Stabilization, Sluggish Recovery?

IMF Blog, January 20, 2020

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Global growth projected to increase from 2.9 percent in 2019 to 3.3 percent in 2020 and 3.4 percent in 2021.
Slight downward revision of 0.1 percent for 2019 and 2020, and 0.2 percent for 2021, owed largely to downward revisions for India.
Projected recovery remains uncertain and continues to rely on recoveries in stressed and underperforming emerging market economies, as growth in advanced economies stabilizes at close to current levels.
The almost synchronized monetary easing across major economies has contributed an estimated 0.5 percentage point to global growth in both 2019 and 2020.

Preliminary signs that the decline in manufacturing and trade may be bottoming out.
Improvement in the auto sector as disruptions from new emission standards start to fade.
A US-China Phase I deal, if durable, is expected to reduce the cumulative negative impact of trade tensions on global GDP by end 2020—from 0.8 percent to 0.5 percent.
Monetary policy has continued to support growth and buoyant financial conditions.

Service sector remains in expansionary territory, with resilient consumer spending supported by sustained wage growth.
Manufacturing and trade had been weakening but show tentative stabilization signs.

Advanced economies: growth projected to slow slightly from 1.7 percent in 2019 to 1.6 percent in 2020 and 2021.
- Export-dependent economies like Germany should benefit from improvements in external demand.
- US growth is forecast to slow as fiscal stimulus fades.
Emerging market and developing economies: forecasted pickup from 3.7 percent in 2019 to 4.4 percent in 2020 and 4.6 percent in 2021, a downward revision of 0.2 percent for all years.
- Biggest contributor to the revision is India, where growth slowed sharply owing to stress in the nonbank financial sector and weak rural income growth.
- China’s growth revised upward by 0.2 percent to 6 percent for 2020, reflecting the trade deal with the United States.
The pickup in global growth for 2020 remains highly uncertain as it relies on improved growth outcomes for stressed economies like Argentina, Iran, and Turkey and for underperforming emerging and developing economies such as Brazil, India, and Mexico.

Overall risks to the global economy remain on the downside despite positive trade news and diminishing concerns of a no-deal Brexit.
Potential risk triggers:
- New trade tensions between the United States and the European Union.
- Return of US-China trade tensions.
- Rising geopolitical risks and intensifying social unrest.
Possible consequences of adverse shocks:
- Reversal of easy financing conditions.
- Exposure of financial vulnerabilities.
- Severe disruption to growth.
Policy space to respond is more limited than before, increasing the importance of policymakers doing no harm and reducing policy uncertainty to help revive weak investment.

Monetary policy:
- Should remain accommodative where inflation is still muted.
- With interest rates expected to stay low for long, macroprudential tools should be proactively used to prevent the build-up of financial risks.
Fiscal policy:
- Countries with fiscal space should invest in human capital and climate-friendly infrastructure to raise potential output.
- Economies with unsustainable debt levels will need to consolidate, including through effective revenue mobilization.
- Prepare contingent measures in advance and enhance automatic stabilizers to ensure a timely fiscal response if growth were to slow sharply.
- A coordinated fiscal response may be needed to improve the effectiveness of individual measures.
Structural and social policies:
- Undertake structural reforms, enhance inclusiveness, and ensure safety nets protect the vulnerable.
International cooperation and reforms:
- Reverse protectionist trade barriers and resolve the impasse over the World Trade Organization’s appellate court.
- Adopt strategies to limit the rise in global temperatures and the severe consequences of weather-related natural disasters.
- Establish a new international taxation regime to adapt to the growing digital economy and to curtail tax avoidance and evasion, while ensuring that all countries receive their fair share of tax revenues.

While there are signs of stabilization, the global outlook remains sluggish and there are no clear signs of a turning point.
There is no room for complacency; stronger multilateral cooperation and national-level policies are needed to support a sustained recovery that benefits all.

Source: IMF blog post "Tentative Stabilization, Sluggish Recovery?" by Gita Gopinath, January 20, 2020.