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IMF forecasts 3.5 percent growth in global economy

WASHINGTON, DC: April 18, 2017. The International Monetary Fund has published its latest World Economic Outlook. According to Maurice Obstfeld, IMF Economic Counselor and director of Research, the global economy has been building since the middle of last year and is now expected to grow 3.5 percent in 2017, up from 3.1 percent last year, and 3.6 percent in 2018. However he warns that a broad withdrawal from multilateralism could lead to widespread protectionism:

Our new projection for 2017 is marginally higher than what we expected in our last update. This improvement comes primarily from good economic news for Europe and Asia, as well as our continuing expectation for higher growth this year in the United States.

Despite these signs of strength, many other countries will continue to struggle this year with growth rates significantly below past readings. Commodity prices have firmed since early 2016, but at low levels, and many commodity exporters remain challenged – notably in the Middle East, Africa, and Latin America.

At the same time, a combination of adverse weather conditions and civil unrest threaten several low-income countries with mass starvation. In Sub-Saharan Africa, income growth could fall slightly short of population growth, but not by nearly as much as last year.

Whether the current momentum will be sustained remains a question mark. There are clearly upside possibilities. Consumer and business confidence in advanced economies could rise further – though confidence indicators are already at relatively elevated levels. On the other hand, the world economy still faces headwinds.

For one thing, trend productivity growth remains subdued across the world economy, for complex that seem likely to persist for some time. In addition, several prominent downside risks threaten our baseline forecast.

IMF forecasts 2017One set of uncertainties stems from macroeconomic policies in the two largest economies. The U.S. Federal Reserve has embarked on monetary normalization and may soon begin to scale back the size of its balance sheet.

Given the faster U.S. recovery, we could see more upward pressure on the dollar, as interest-rate hikes are not yet imminent for the Bank of Japan and the European Central Bank.

At the same time, however, U.S. fiscal policy still seems likely to turn more expansionary over the next couple of years. If the slack remaining in the U.S. economy is small, the result could be inflation and a faster than expected pace of interest rate rises, reinforcing dollar strength and possibly causing difficulties for emerging and some developing economies—especially those with dollar pegs or extensive dollar-denominated liabilities.

China's desirable rebalancing process continues, as seen in a declining current account surplus and an increased GDP share of services, yet growth has remained reliant on domestic credit growth so rapid that it may cause financial stability problems down the road. These problems could, in turn, spill over to other countries.

Aside from the policy uncertainties, a distinct set of threats comes from the growth in advanced economies of domestic political movements skeptical of international economic integration—no matter if integration is promoted through multilateral rules-based systems for the governance of trade, more ambitious regional arrangements such as the euro area and European Union, or globally agreed standards for financial regulation.

A broad withdrawal from multilateralism could lead to such self-inflicted wounds as widespread protectionism or a competitive race to the bottom in financial oversight – a struggle of each against all that would leave all countries worse off.

Avoiding the damage from protectionist measures will require a renewed multilateral commitment to support trade, paired with national initiatives that can help workers adversely affected by a range of structural economic transformations including those due to trade.

Trade has been an engine of growth, promoting impressive per capita income gains and declines in poverty throughout the world, especially in poorer countries. But its benefits have not always been equally shared within countries, and political support for trade will continue to erode unless governments step up to invest in their workforces and aid the adjustment to dislocations.

International growth and stability rely on multilateral collaboration across a range of problems that spill over national borders--not just trade. The challenges include financial oversight, tax avoidance, climate, disease, refugee policy, and famine relief.

Historically, inclusive cooperative approaches to interdependence have worked best. National policymakers, however, must do the hard work to ensure that the gains from harnessing interdependence, which are substantial, are broadly shared.

Maurice Obstfeld is on leave from the University of California, Berkeley where he is the Class of 1958 professor of Economics. From July 2014 to August 2015, he served as a member of former U.S. president Barack Obama's Council of Economic Advisers.

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