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Abu Dhabi, UAEMonday 25 June 2018

IMF keeps global growth forecast unchanged for this year and next

But slower in United States and United Kingdom while faster in euro zone and China

The IMF has maintained its overall global growth outlook but some regions have changed. Daniel Munoz / Reuters
The IMF has maintained its overall global growth outlook but some regions have changed. Daniel Munoz / Reuters

The IMF on Monday maintained its global growth outlook for this year and 2018 as lower forecasts for the United States over uncertainties related to its fiscal policy are offset by expansion in China, the euro zone, Japan and Canada.

However, growth, which is projected to reach 3.5 per cent this year and 3.6 per cent next year, also faces medium-term risks, including high market valuations, monetary policy normalisation especially in the US, protectionism and geopolitical uncertainty, the fund said.

The IMF downgraded its growth forecast for the US for this year to 2.1 per cent versus 2.3 in April and, for next year, it lowered it to 2.1 per cent from 2.5 per cent.

“While the markdown in the 2017 forecast reflects in part the weak growth outturn in the first quarter of the year, the major factor behind the growth revision, especially for 2018, is the assumption that fiscal policy will be less expansionary than previously assumed, given the uncertainty about the timing and nature of US fiscal policy change,” the fund said in its update to the World Economic Outlook. “Market expectations of fiscal stimulus have also receded.”

The US president Donald Trump had promised to cut taxes and boost spending on infrastructure as key planks of his economic policy. So far none of these election promises have materialised, dampening investor confidence.

First quarter US growth reached 1.4 per cent, the slowest rate since the second quarter of last year. Mr Trump has pledged to nudge annual growth to 3 per cent, a rate that was last achieved in 1990s. The US economy grew 1.6 per cent last year at the slowest pace in five years.

With regards to the United Kingdom, the forecast for this year was also revised down to 1.7 per cent, versus 2 per cent in April, owing to lower than expected first quarter growth of 0.2 per cent .

Meanwhile, forecasts for the euro zone, Japan, Canada and China were raised.

“Growth has been revised up for Japan and especially the euro area, where positive surprises to activity in late 2016 and early 2017 point to solid momentum,” the fund said.

Projections for countries including France, Germany, Italy and Spain were increased thanks to better than expected growth figures in the first quarter and indications of “stronger momentum in domestic demand”.

China’s economy is now forecast to grow at 6.7 per cent for this year and 6.4 per cent for next year, higher than previously estimated by 0.1 per cent and 0.2 per cent, respectively.

“For 2018, the upward revision of 0.2 percentage point mainly reflects an expectation that the authorities will delay the needed fiscal adjustment (especially by maintaining high public investment) to meet their target of doubling 2010 real GDP by 2020,” said the IMF.

Maurice Obstfeld, the IMF's economic counsellor and director of research, said the fund was worried about China's credit growth and cautioned that economic growth targets and goals should be downplayed, while recognising that China is going through a "rebalancing process" that will hit growth.

"In the first two quarters of this year, growth has come in very high. Part of this is the general upsurge in world growth and the upsurge in trade in Asia. But there is also a component that has been fuelled by expanding domestic credit, and that's the part that worries us," Mr Obstfeld said.

For the Middle East, North Africa, Afghanistan and Pakistan region, growth was maintained at 2.6 per cent for this year, but lowered by 0.1 per cent to 3.3 per cent for next year as the oil price outlook remains cloudy.

The fund warned of a risk of correction in markets, particularly in equities, and the growing concern over protectionism in the US, which obstructed the Trans-Pacific Partnership (TPP) by withdrawing from it and is gearing up to renegotiate the North American Free Trade Agreement with Mexico and Canada.

"There of course has been (protectionism) rhetoric from several corners, we haven’t seen a lot of action with the major exception of the US withdrawing from TPP," said Mr Obstfeld.

"These threats are in our downside thinking, they are not built into our baseline [forecast] because hopefully they don’t happen but there are risks."