Global growth has plateaued at 3.7 per cent, the International Monetary Fund (IMF) said on Tuesday, with its chief economist warning the world that there are clouds on the horizon and growth has proven to be less balanced than hoped.
"Last April, the world economy's broad-based momentum led us to project a 3.9 per cent growth rate for both this year and next. Considering developments since then, however, that number appears over-optimistic: rather than rising, growth has plateaued at 3.7 per cent," IMF Chief Economist Maurice Obstfeld said as the world body released the World Economic Outlook, its annual flagship report.
Released during the annual IMF and World Bank meeting in Bali, Indonesia, the World Economic Outlook projects that global growth will remain steady over 2018–19 at last year's rate of 3.7 per cent. This growth exceeds that achieved in any of the years between 2012 and 2016, he said.
"It occurs as many economies have reached or are nearing full employment and as earlier deflationary fears have dissipated. Thus, policymakers still have an excellent opportunity to build resilience and implement growth-enhancing reforms," Obstfeld said.
But "there are clouds on the horizon," he said. "Growth has proven to be less balanced than hoped. Not only have some downside risks that the last WEO identified been realised, the likelihood of further negative shocks to our growth forecast has risen. In several key economies, moreover, growth is being supported by policies that seem unsustainable over the long term. These concerns raise the urgency for policymakers to act," the top IMF official said.
Noting that growth in the United States, buoyed by a procyclical fiscal package, continues at a robust pace and is driving US interest rates higher, Obstfeld said US growth will decline once parts of its fiscal stimulus go into reverse.
"Notwithstanding the present demand momentum, we have downgraded our 2019 US growth forecast owing to the recently enacted tariffs on a wide range of imports from China and China's retaliation," he said, adding that China's expected 2019 growth is also marked down. Domestic Chinese policies are likely to prevent an even larger growth decline than the one IMF projected, but at the cost of prolonging internal financial imbalances, he said.
"Overall, compared with six months ago, projected 2018–19 growth in advanced economies is 0.1 percentage point lower, including downgrades for the euro area, the United Kingdom, and Korea. The negative revisions for emerging market and developing economies are more severe, at -0.2 and -0.4 percentage point, respectively, for this year and next year," Obstfeld said.
With their core inflation rates largely quiescent, advanced economies continue to enjoy easy financial conditions. "This is not true in emerging and developing economies, where financial conditions have tightened markedly over the past six months," he said.
For emerging market and developing economies, gradually tightening US monetary policy, coupled with trade uncertainties and — for countries such as Argentina, Brazil, South Africa, and Turkey — distinctive factors, have discouraged capital inflows, weakened currencies, depressed equity markets, and pressured interest rates and spreads, he said.
Many emerging economies, he noted, are managing relatively well — given the common tightening they face — using established monetary frameworks based on exchange rate flexibility.
"But there is no denying that the susceptibility to large global shocks has risen. Any sharp reversal for emerging markets would pose a significant threat to advanced economies, as emerging market and developing economies make up about 40 per cent of world GDP at market exchange rates," the IMF chief economist warned.
Obstfeld said the impacts of trade policy and uncertainty are becoming evident at the macroeconomic level, while anecdotal evidence accumulates on the resulting harm to companies. "Trade policy reflects politics, and politics remain unsettled in several countries, posing further risks," he added. He urged all countries to prepare their workforces for the ways that new technologies will change the nature of work.
"Ensuring that growth is inclusive is more important than ever. Unless growth can be made more inclusive than it has been, centrist and multilateral approaches to politics and policy will become increasingly vulnerable — to the detriment of all," Obstfeld said.