Things are good… for now. They won’t last.
That’s the TL/DR summary of the latest IMF World Economic Outlook report released this morning. Like the last Financial Stability report, released in October, the sunny headline numbers – which show that global economic growth is expected to continue expanding over the next two years before the advent of the next slowdown some time after 2020 – conceal signs of growing concern buried deeper in the report.
Widening income inequality, a phenomenon the IMF says has been exacerbated by technological advancements, could lead to myriad problems down the road, from political unrest to worsening trade wars, that governments will need to grapple with.
Instead of slashing taxes, governments need to focus on raising workers sense of security in the face of radical technological changes, while more evenly distributing the benefits of strong economic growth and asset appreciation.
But first, some good news: Economic activity in 2017 ended on a high note, with second-half growth surpassing 4%, the strongest since the second half of 2010, bolstered by a recovery in investment.
In Japan, the US and China, growth exceeded the October 2017 World Economic Outlook forecasts while it also continued to improve gradually in commodity exporters. Despite the recent volatility in equity markets, financial conditions remain supportive even as bond yields have risen slightly following signs of firming inflation in the developed world. With broad-based momentum and expectations of a sizable fiscal expansion in the United States over this year and the next, global growth is now projected at 3.9% for 2018–19, a 0.2 percentage point upgrade for both years compared with the October 2017 forecast.
But while the IMF modestly raised its growth forecasts for developed economies over the next two years, US fiscal policy is expected to soon turn contractionary in advanced economies for 2020–22 and more clearly contractionary in 2023, “when the investment-expensing provisions of US tax reform begin to expire.”
Worse, the momentum will eventually slow – and then reverse- leaving countries with a challenging outlook over the medium term. Financial conditions are expected to tighten naturally as output gaps close and monetary policy normalizes. But crucially for the US, “tax reform will subtract momentum starting in 2020, and then more strongly as full investment expensing is phased out starting in 2023; and China’s transition to lower growth is expected to resume as credit growth and fiscal stimulus diminish.”
And while the expected recovery in investment will help raise potential output, weak productivity trends and reduced labor force growth due to population aging constrain medium-term prospects in advanced economies.
“Global growth is on an upswing,” the IMF says in its executive summary. “But favorable conditions will not last forever, and now is the moment to get ready for leaner times.”
As for the short-term, here the IMF is growing increasingly concerned as well:
Risks around the short-term outlook are broadly balanced, but risks beyond the next several quarters are clearly to the downside.
Here’s a summary of the major growth forecasts, courtesy of Bloomberg:
- The U.S. economy will grow 2.9 percent this year, up 0.2 percentage point from the fund’s forecast in January. The U.S. will expand at a 2.7 percent pace next year, also up 0.2 point from three months ago
- The IMF also raised its forecast for the euro area, predicting the currency zone will grow 2.4 percent in 2018, up 0.2 point from January. The fund left its forecast for euro-zone growth next unchanged, at 2 percent
- China will grow 6.6 percent this year and 6.4 percent in 2019, the fund said. Both forecasts were unchanged from three months ago
- The IMF also left its outlook for Japan flat, predicting the nation will expand at a 1.2 percent pace this year and 0.9 percent in 2019
- India will grow 7.4 percent this year and 7.8 percent in 2019, both unchanged from January
- The fund cut its forecast for Canada to 2.1 percent this year, down 0.2 point from three months ago
Here’s a summary of the IMF’s projections:
Read the report’s executive summary below (pdf link):