Global Growth Plateaus as Economic Risks Materialize

IMF Blog, October 9, 2018

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The latest World Economic Outlook projects that global growth will remain steady over 2018–19 at last year’s rate of 3.7 percent.
Last April’s projection was 3.9 percent for both this year and next; subsequent developments make 3.9 percent over-optimistic.
Growth has plateaued at 3.7 percent rather than rising.

Projected 2018–19 growth in advanced economies is 0.1 percentage point lower compared with six months ago.
Projected revisions for emerging market and developing economies are:
- -0.2 percentage point for this year and next year for emerging market economies.
- -0.4 percentage point for this year and next year for developing economies.
Emerging market and developing economies comprise about 40 percent of world GDP at market exchange rates.

United States:
- Growth buoyed by a procyclical fiscal package, driving US interest rates higher.
- US growth is expected to decline once parts of fiscal stimulus go into reverse.
- 2019 US growth forecast downgraded owing to recently enacted tariffs on a wide range of imports from China and China’s retaliation.
China:
- Expected 2019 growth is marked down.
- Domestic Chinese policies are likely to prevent an even larger growth decline than projected, at the cost of prolonging internal financial imbalances.
Geographic diversity of negative revisions includes Argentina, Brazil, Mexico (Latin America); Turkey (emerging Europe); India (south Asia); Indonesia and Malaysia (east Asia); Iran (Middle East); and South Africa (Africa).
Petroleum exporters that will benefit from higher oil prices include Nigeria, Kazakhstan, Russia, and Saudi Arabia.

Advanced economies: core inflation largely quiescent and financial conditions remain easy.
Emerging and developing economies: financial conditions have tightened markedly over the past six months.
Contributing factors for emerging markets:
- Gradually tightening US monetary policy.
- Trade uncertainties.
- Country-specific factors for Argentina, Brazil, South Africa, and Turkey.
Observed market effects in affected emerging economies:
- Discouraged capital inflows.
- Weakened currencies.
- Depressed equity markets.
- Pressured interest rates and spreads.
High levels of corporate and sovereign debt built up over years of easy global financial conditions constitute a potential fault line.
The susceptibility to large global shocks has risen; a sharp reversal for emerging markets would pose a significant threat to advanced economies.
News-based indicators of policy uncertainty have spiked recently, even if advanced-country asset markets remain less concerned.
Trade policy disruptions are a near-term downside risk, including uncertainty around the United States-Mexico-Canada Agreement, Brexit negotiations, US tariffs on China, and tariffs more broadly on auto and auto part imports that may disrupt supply chains.

Policymakers have an excellent opportunity to build resilience and implement growth-enhancing reforms.
Governments need to:
- Build their fiscal buffers.
- Enhance resilience by upgrading financial regulatory regimes.
- Enact structural reforms that raise business and labor-market dynamism.
Multilateral global policy cooperation mechanisms are under strain, notably in trade, and need strengthening.
Governments have less fiscal and monetary ammunition than when the global financial crisis broke out ten years ago, increasing the urgency to act now.
Despite potentially reduced “political space” in some countries, immediate action is advised to create consensus on sound policies.

Advanced economies face secular challenges including:
- Slow growth of workers’ incomes.
- Perceptions of lower social mobility.
- Inadequate policy responses to structural economic change in some countries.
Emerging market and developing economies face diverse long-term challenges:
- Improving investment environments.
- Reducing labor-market duality.
- Upgrading educational systems.
The dangers of climate change are rapidly intensifying.
All countries must prepare workforces for changes in the nature of work due to new technologies.
Ensuring that growth is inclusive is critical; without more inclusive growth, centrist and multilateral approaches to politics and policy become increasingly vulnerable.

Maurice Obstfeld, October 9, 2018