The International Monetary Fund has said the global economy’s recent recovery may not last, despite a pickup in activity in all western countries except the UK.
Marking the 10th anniversary of the onset of the financial crisis, the IMF said there was a risk that governments could be lulled into a false sense of security by booming markets and policymakers needed to guard against complacency.
The Washington-based fund said in its half-yearly World Economic Outlook (WEO) that global output growth would increase from 3.2% in 2016 to 3.6% this year and 3.7% in 2018. It upgraded its growth forecast by 0.1 percentage points for this year and next from the last full WEO in April and the update to its forecasts in July.
Maurice Obstfeld, the IMF’s economic counsellor, said the state of the world economy was markedly different from 18 months ago, when there was the prospect of stalling growth and financial turbulence.
“The picture now is very different, with accelerating growth in Europe, Japan, China and the United States,” he said, noting that financial markets did not expect higher interest rates in the US or the phasing out of stimulus by the European Central Bank to cause trouble.
“These positive developments give good cause for greater confidence, but neither policymakers nor markets should be lulled into complacency,” Obstfeld said.
“A closer look suggests that the global recovery may not be sustainable. Not all countries are participating, inflation often remains below target, with weak wage growth, and the medium-term outlook still disappoints in many parts of the world.
“The recovery is also vulnerable to serious risks. Financial markets that ignore these risks are susceptible to disruptive repricing and are sending a misleading message to policymakers. Policymakers, in turn, need to maintain a longer-term vision and seize the current opportunity to implement the structural and fiscal reforms needed for greater resilience, productivity and investment.”
Canada will be the fastest-growing G7 economy this year, on 3%, according to the WEO. The US (2.2%) and Germany (2%) are expected to be the next strongest performers, followed by the UK (1.7%), France (1.6%) and Italy and Japan (both 1.5%).
Britain’s growth forecast has been cut by 0.3 points since April as a result of a consumer-led slowdown in activity in the first half of the year, caused by the pound’s depreciation. There has been no change in the outlook since the WEO was updated in July.
After warning strongly about the risks of a Brexit-induced recession in the run-up to the EU referendum in June 2016, the IMF adopted a more cautious note in the WEO.
“The medium-term growth outlook [for the UK] is highly uncertain and will depend in part on the new economic relationship with the EU and the extent of the increase in barriers to trade, migration and cross-border financial activity,” it said.
Since April, the IMF has become less optimistic about Donald Trump’s ability to deliver a package of tax cuts and spending increases, and has trimmed its US growth forecast for 2018 by 0.2 points to 2.3%. The fund has revised its forecast for the eurozone up by 0.3 points to 1.9%.
Obstfeld said the backlash against globalisation, which had been stoked by stagnant wages and the loss of well-paid, middle-skill jobs, was one of the threats to the global economy. The IMF believes sustaining expansion will require policymakers to avoid protectionist measures and “do more to ensure that gains from growth are shared more widely”.
The fund also raised concerns about China, which is due to be overtaken by India as the fastest-growing emerging economy in 2018.
“Minimising the risk of a sharp slowdown in China will require the Chinese authorities to intensify their efforts to rein in the credit expansion,” the WEO said.
“Many other economies need to guard against a buildup of financial stability risks in a global environment of easy finance, and monitor the risks from volatility as advanced economies’ central banks gradually withdraw stimulus.”