World Economic Outlook Update, July 2018: Less Even Expansion, Rising Trade Tensions
World Economic Outlook, July 2018
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- Published: July 2, 2018
Global outlook and headline projection
- Global growth is projected to reach 3.9 percent in 2018 and 2019, in line with the forecast of the April 2018 World Economic Outlook (WEO).
- The expansion is becoming less even and risks to the outlook are mounting; the rate of expansion appears to have peaked in some major economies and growth has become less synchronized.
- The balance of risks has shifted further to the downside, including in the short term, notably due to rising trade tensions and the potential for tighter global financial conditions.
Growth projections by aggregate and major economies
- Global growth (2018, 2019): 3.9 percent, 3.9 percent.
- Advanced economies (2018): 2.4 percent; (2019): 2.2 percent; 2018 forecast lower by 0.1 percentage point relative to April WEO.
- United States: growth projected at 2.9 percent in 2018 and 2.7 percent in 2019.
- Euro area: projected to slow from 2.4 percent in 2017 to 2.2 percent in 2018 and to 1.9 percent in 2019 (downward revision of 0.2 percentage point for 2018 and 0.1 percentage point for 2019 vs April WEO).
- Japan: marked down to 1.0 percent for 2018 (0.2 percentage point below April WEO projection).
- Emerging market and developing economies (2018, 2019): 4.9 percent, 5.1 percent (unchanged from April WEO).
- Emerging and Developing Asia: expected to grow at 6.5 percent in 2018–19.
- China: projected 6.6 percent in 2018 and 6.4 percent in 2019 (from 6.9 percent in 2017).
- India: expected to rise from 6.7 percent in 2017 to 7.3 percent in 2018 and 7.5 percent in 2019 (projections 0.1 and 0.3 percentage point lower for 2018 and 2019 vs April WEO).
- ASEAN-5: expected to stabilize at around 5.3 percent.
- Emerging and Developing Europe: projected to moderate from 5.9 percent in 2017 to 4.3 percent in 2018 and 3.6 percent in 2019 (0.1 percentage point lower than April WEO for 2019).
- Latin America: projected to increase from 1.3 percent in 2017 to 1.6 percent in 2018 and 2.6 percent in 2019 (0.4 and 0.2 percentage point lower than April WEO).
- Middle East, North Africa, Afghanistan, and Pakistan: projected to strengthen from 2.2 percent in 2017 to 3.5 percent in 2018 and 3.9 percent in 2019 (0.2 percentage point higher than April WEO for 2019).
- Sub-Saharan Africa: growth expected to increase from 2.8 percent in 2017 to 3.4 percent in 2018 and 3.8 percent in 2019 (0.1 percentage point higher for 2019 than April WEO).
- Nigeria: growth set to increase from 0.8 percent in 2017 to 2.1 percent in 2018 and 2.3 percent in 2019 (0.4 percentage point higher than April WEO for 2019).
- Commonwealth of Independent States: projected to stabilize around 2.3 percent in 2018–19 (upward revision of 0.1 percentage point for each year vs April WEO).
Regional and country-specific downward revisions and pressures
- Revisions down: euro area, Japan, United Kingdom, Argentina, Brazil, India, Venezuela (further downward revision).
- Oil exporters: outlook strengthened for some due to higher oil prices; oil importers face drag and fragility.
- Argentina: Argentine peso weakened by over 20 percent (since February), prompting policy responses.
- Turkey: Turkish lira weakened by around 10 percent (since February); growth set to soften from 7.4 percent in 2017 to 4.2 percent in 2018.
- Brazil: real depreciated by over 10 percent amid weaker-than-expected recovery and political uncertainty.
- South Africa: rand depreciated by 7 percent following weaker-than-anticipated macro data.
- Mexico: outlook affected by trade tensions and NAFTA renegotiation uncertainty.
- Venezuela: dramatic collapse in activity and humanitarian crisis; outlook revised down further despite higher oil prices.
Commodity prices, inflation, and oil market particulars
- Global oil prices increased 16 percent between February 2018 and early June 2018.
- OPEC and non-OPEC agreed to raise oil production by about 1 million barrels per day from current levels in June.
- Futures markets indicate medium-term futures prices are about $59 per barrel (20 percent below current levels) as of end‑June.
- Average price of oil in U.S. dollars a barrel was $52.81 in 2017; assumed price based on futures markets (as of June 1, 2018) is $70.23 in 2018 and $68.99 in 2019.
- Increase in fuel prices has lifted headline inflation in advanced and emerging market economies; core inflation strengthened in the United States and inched up in the euro area.
- Prices of agricultural commodities have increased marginally.
Financial conditions and market developments
- US Federal Reserve: raised the target range for the Federal Funds rate by 25 basis points in June; signaled two additional rate hikes in 2018 and three in 2019.
- ECB: tapering asset purchases from €30 billion to €15 billion in October; anticipated end to program on December 31; indicated policy rates maintained at current levels at least through summer of 2019.
- US Treasury 10-year yields: around 2.85 percent as of early July (up modestly since February).
- German 10-year bund yields: around 30 basis points (declined since February).
- Italian sovereign spreads: around 240 basis points as of early July after widening in late May.
- Advanced-economy equity prices: generally higher than February-March levels; volatility subsided after February spike.
- Emerging market central banks (Argentina, India, Indonesia, Mexico, Turkey): have raised policy rates responding to inflation and exchange rate pressures.
- Emerging market equity indices: generally declined modestly; long-term yields and spreads have increased/widened in recent months.
- Exchange rates: US dollar strengthened by over 5 percent in real effective terms since February as of early July; euro, yen, and pound broadly unchanged; several emerging market currencies depreciated sharply (Argentine peso over 20 percent, Turkish lira around 10 percent, Brazilian real over 10 percent, South African rand 7 percent).
Key risks and channels of transmission
- Trade tensions: recently announced and anticipated US tariffs and retaliatory measures increase the likelihood of escalating and sustained trade actions; these could derail the recovery and depress medium-term growth via resource misallocation, lower productivity, higher uncertainty, and reduced investment.
- Financial tensions: sudden reassessments of fundamentals (e.g., firmer-than-expected US inflation) could cause abrupt shifts in global financial conditions, triggering disruptive portfolio adjustments, sharp exchange rate movements, and capital flow reversals to emerging markets.
- Noneconomic factors: political uncertainty, geopolitical risks, domestic strife, and extreme weather events or natural disasters pose downside risks and can have cross-border spillovers (including migration).
Baseline assumptions and conditionalities
- Baseline assumes gradually tightening but still favorable financial conditions, with localized pressures based on fundamentals.
- Monetary policy normalization in advanced economies assumed to proceed in a well-communicated, steady manner.
- Direct contractionary effects of recently announced and anticipated trade measures are expected to be small in the baseline because they affect a very small share of global trade so far.
- Baseline assumes limited spillovers to market sentiment though escalating trade tensions are an important downside risk.
- Note: The effect of the broader trade actions announced by the United States on July 10 is not incorporated in the baseline.
Policy priorities and recommendations
- Multilateral cooperation within an open, rule-based trade system is essential to preserve global expansion and strengthen medium-term prospects.
- Advanced economies:
- Tailor macro stance to maturing cyclical positions.
- Where inflation converges to targets, pursue gradual, well-communicated, data-dependent monetary normalization.
- Rebuild fiscal buffers where needed, calibrated to avoid sharp drags on growth; avoid and roll back procyclical fiscal stimulus (example cited: United States).
- Countries with fiscal space and external surpluses should boost domestic growth potential and address global imbalances (example cited: Germany).
- Prioritize supply-side measures to raise potential output and productivity: invest in physical and digital infrastructure, boost labor force participation, and enhance workforce skills.
- Repair financial-sector vulnerabilities: balance sheet cleanup, consolidation in overbanked jurisdictions, and boosting bank profitability; avoid indiscriminate rollback of postcrisis regulatory reforms.
- Emerging market and developing economies:
- Enhance resilience through an appropriate mix of fiscal, monetary, exchange rate, and prudential policies to reduce vulnerability to tightening global financial conditions and capital flow reversals.
- Rein in excess credit growth where needed; support healthy bank balance sheets; contain maturity and currency mismatches; maintain orderly market conditions.
- Allow exchange rate flexibility to cushion external shocks while monitoring effects on balance sheets and inflation expectations.
- Fiscal policy should focus on preserving and rebuilding buffers through growth-friendly measures that protect the most vulnerable.
- Structural reforms to alleviate infrastructure bottlenecks, strengthen the business environment, upgrade human capital, and ensure access to opportunities for all.
- Global cooperation:
- Reduce trade costs further and resolve disagreements without raising tariff and non-tariff barriers.
- Cooperative efforts needed on completing financial regulatory reform, preventing excess global imbalances, strengthening international taxation, and mitigating and coping with climate change.
Italicized source: World Economic Outlook Update, July 2018: Less Even Expansion, Rising Trade Tensions
Content in this bundle
- World Economic Outlook Update, July 2018: Less Even Expansion, Rising Trade Tensions; July 16, 2018
