The pickup in global activity that started in 2016 has gathered further steam, in particular reflecting firmer domestic demand growth in advanced economies and in China and other large emerging market economies in the first half of 2017. Global financial conditions remain easy, but commodity prices are softer than in April, with the exception of metal prices. Global growth forecasts, at 3.6 percent for 2017 and 3.7 percent for 2018, are 0.1 percentage point higher than in April (October 2017 World Economic Outlook [WEO]).
Nevertheless, growth remains subdued in many countries. Stubbornly weak price and wage inflation in many advanced economies suggests continued slack. At the same time, medium-term prospects for growth in GDP per capita are also weak for many advanced and emerging market economies. Around the world, exporters of commodities, especially fuel, are particularly hard hit as the adjustment to the loss in commodity revenues continues.
Short-term risks are broadly balanced, but medium-term risks are skewed to the downside. Stronger confidence and favorable market conditions could spur pent-up demand. At the same time, in an environment of high policy uncertainty, risks to currently favorable market confidence and asset valuations could materialize, leading to a tightening of global financial conditions. In the medium term, risks include an inward turn of policies in advanced economies and increased protectionism, a sharp slowdown in China, and greater fallout from geopolitical conflicts.
In the United States, weakness in consumption in the first quarter turned out to be temporary, while business investment continued to strengthen, reflecting in part a recovery in the energy sector. Growth is projected at 2.2 percent for 2017 and 2.3 percent for 2018 (respectively, 0.1 and 0.2 percentage point lower than projected in April). These changes in growth projections mainly reflect downward revisions for early 2017 and changes in fiscal assumptions relative to the April forecast (which embedded a fiscal impulse of 1 percent of GDP between 2017 and 2019 on the basis of anticipated corporate and personal income tax reductions). The fiscal stance is now projected to be broadly neutral in 2017 and tighter in 2018. Hurricanes Harvey, Irma, and Maria increase near-term uncertainties, including about the size and timing of rebuilding efforts.
Inflation projections for the United States have been revised downward relative to the April WEO, reflecting weak price pressures in recent months, including for cell phones and prescription drugs. Consumer price inflation is projected to reach 1.8 percent in 2017 (compared with 2.7 percent in the April WEO), down from 2.2 percent in 2016. Core personal consumer expenditure inflation remains subdued and is projected to rise more slowly, slightly exceeding 2 percent in 2019 before returning to 2 percent over the medium term. The forecast assumes a somewhat more gradual normalization of the policy interest rate in the United States than projected in the April 2017 WEO, given weaker projected demand and diminished inflation pressures. With markets pricing in a more gradual normalization of US monetary policy, nominal yields on 10-year US Treasury bonds have declined since March 2017 (as of mid-September). With narrowing interest differentials, the US dollar weakened in real effective terms by over 7 percent from March to mid-September 2017, more than reversing its gains after the US election.
Following a failure to reach agreement on health care reform in the summer, the administration and Congress have shifted their focus back to fiscal policy. With deadlines on the debt ceiling and on federal spending authority looming, an agreement was reached in September to raise the debt limit and to continue to fund the government until December (as part of legislation to provide hurricane relief). The US administration has outlined, in broad terms, their plans for tax reform. The administration’s stated goals include simplifying the personal income tax with lower rates for individuals and families, increasing the standard deduction and child tax credit, eliminating the alternative minimum tax and estate tax, lowering the tax rate for pass-through entities, lowering the corporate tax rate and moving to a territorial system, allowing for immediate write-off of the cost of new investments, and imposing a one-time, low tax rate on the profits of US multinationals that have accumulated overseas. Given the uncertainties about the details, the proposed tax reform is not incorporated into the IMF staff forecast.
Despite the downward revision to US growth, Canada’s growth forecast for 2017 has been revised upward from 2.5 to 3 percent, owing to a stronger-than-expected growth outcome in the first half of 2017 and the authorities’ supportive cyclical policies. The economy expanded by an annualized rate of 4.5 percent in the second quarter, marking the strongest quarterly growth rate since 2011. Household spending, buoyed by gains in employment and earnings, and energy exports were the most important contributors to second quarter growth, while business investment and non-energy exports showed further signs of recovery. Housing activity slowed, with investment in residential structures declining by 4.7 percent in the second quarter, as local and federal governments tightened measures to cool the housing market. With the economy back in full swing and the output gap narrowing sharply, the Bank of Canada raised the policy rate twice this year to 1 percent.
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