The International Monetary Fund (IMF) has warned that the global economic situation still faces threats that could erode its recovery. The fund’s semi-annual World Economic Outlook report revised global growth up to 3.5 per cent for this year, one-tenth higher than the January forecast. It was a rare upward revision to the growth forecast – the first in two years – which has been consistently disappointing. For 2018, growth is expected to rise to 3.6 per cent, and to 3.8 per cent by 2022.
“The global economy seems to be gaining momentum – we could be at a turning point. But even as things look up, the post-World War II system of international economic relations is under severe strain,” IMF chief economist Maurice Obstfeld said.
The report warns of the “significant downside risks” to the outlook, which have gotten worse since January – among them, “the turn towards protectionism, leading to trade warfare,” Obstfeld said in the foreword of the report.
Many of the concerns – including rolling back financial regulation, pulling away from the multilateral trading system and restricting immigration – are centerpieces of US President Donald Trump’s policy programme, but also are issues visible in the bitter French election campaign, as well as in Britain’s planned exit from the European Union. The anti-trade, anti-immigration attitude in advanced economies is to some degree understandable, given “the failure of growth gains in rich economies to substantially reach those in the lower parts of the income distribution in recent decades,” he said.
However, Obstfeld warned: “Capitulating to those pressures would result in a self-inflicted wound,” which would harm countries by pushing prices higher and eroding household income, prompt retaliation, and worsen the global economy.”
In its report, the Washington-based IMF said “hundreds of millions” of people were lifted out of poverty through economic integration and technological progress, “helping to reduce global income inequality.”
But Obstfeld said the benefits of growth and the burden of economic adjustments too often have been unequally shared, so it will be up to the governments to “address these disparities head-on to ensure the stability of an open, collaborative trading system that benefits all.”
The IMF recommends “well-targeted initiatives” to help workers adversely affected by free trade and other economic changes to “find jobs in expanding sectors” as well as “social safety nets to smooth the loss of income,” and improved education and training in the longer term. “Similarly, curbing immigration flows would hinder opportunities for skill specialisation in advanced economies, limiting a positive force for productivity and income growth over the long term,” the report said.
The IMF report stressed that risks to the outlook “remain tilted to the downside,” meaning that while growth could turn out to be faster than expected – particularly if there is a large US government spending programme – there are more negative possibilities on the horizon.
The threat of protectionism is the most worrying, but others include as-yet undetermined US policies and their impact on the global economy, especially the possibility for a rising deficit and tearing down of financial regulations erected in the wake of the 2008 global crisis.
“A wholesale dilution or backtracking on important steps taken since the global financial crisis in enhancing the resilience of the financial system would raise the probability of costly financial crises in the future, ” the IMF warned.
China’s “dangerous dependence on rapidly expanding credit” is another area of concern, as is weak demand in Europe, and a series of noneconomic factors, including geopolitical risks and corruption.
The IMF put China growth this year at 6.6 per cent, up a tenth of a point. Its 2018 prediction was for 6.2 per cent growth, up two tenths.
“Global economic activity is picking up speed, but the potential for disappointments remains high, and momentum is unlikely to be sustained in the absence of efforts by policymakers to implement the right set of policies and avoid missteps,” the IMF said.