WASHINGTON – The world economy is picking up momentum.
The International Monetary Fund on Tuesday raised its forecast for global growth to 3.6 percent this year and 3.7 percent in 2018. For both years, the outlook is up 0.1 percentage points from the IMF’s previous forecast in July and would mark the fastest growth since 2010. The world economy grew 3.2 percent in 2016.
Just a year ago, the global economy was still stuck in a slump in the aftermath of the Great Recession of 2007-2009 and a debt crisis in Europe. China’s economy was slowing steadily, raising fears of economic fallout in the developing countries that supply raw materials to the world’s second-biggest economy.
Now the global recovery appears widespread – three-quarters of the globe is enjoying an upswing for the first time this decade – and many of the fears have eased.
The United States, the 19-country eurozone, Japan and China are all forecast to grow faster this year.
World trade is expected to grow 4.2 percent this year, the most in six years.
IMF chief economist Maurice Obstfeld said the sunnier outlook for the United States – 2.2 growth this year versus 1.5 percent in 2016 – did not include any expectations that the U.S. Congress will pass big tax cuts and just reflected healthy U.S. growth in the first half of 2017.
A pickup in investment, industrial production and consumer and business confidence also underpins the improved global outlook.
Here are five takeaways from the fund’s World Economic Outlook:
No rush to tighten
The IMF devotes considerable space to the persistence of low inflation in advanced economies, a trend that has baffled central bankers. In short, the fund doesn’t see the rush to raise rates, given that inflation remains below central-bank targets in many countries. The IMF downgraded its global inflation forecast for both this year and next, partly because of lower-than-expected oil prices.
Part-time work curbing wages
Conventional measures such as the unemployment rate explain most of the wage slowdown in countries where joblessness remains above levels during the Great Recession, the IMF found. But where the unemployment rate has fallen below the prerecession average, involuntary part-time employment also appears to be weighing on wage growth. There could be more slack in the job market than captured by headline unemployment, meaning central banks such as the Fed may have to look at other gauges of labor market tightness.
U.S. tax reform not the base case
President Donald Trump and Republican leaders in Congress may find a way to turn their tax reforms into law, but the IMF isn’t betting on it. The U.S. growth forecast assumes no boost from fiscal stimulus. The fund may be playing it safe after being whipsawed by politics in Washington. Just before Trump took office in January, the IMF added a fiscal boost to its U.S. forecast from the then president-elect’s proposals. But in June, the fund cut its U.S. outlook, removing assumptions that the administration will reduce taxes and increase infrastructure spending.
Another warning on China’s debt
The IMF raised its outlook for China’s growth this year and next. But the reasons for the upgrade may not all be good news: the fund is now assuming a slower rebalancing of the Chinese economy toward services and consumption, as well as a higher debt trajectory and diminished fiscal space to respond to a crisis. All of which, the IMF warns, imply a higher risk of a “sharp” slowdown in China’s growth.
Japan most at risk of recession
The IMF puts the probability of a recession in Japan within the next year at just under 40 percent. Still, the risk dropped from April, and the overall global picture is looking better, with the chance of a downturn also down in the euro area and a group of five big Latin American countries. The risk of a U.S. recession rose slightly from April and now stands at slightly less than 25 percent.
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