Bullish traders who insist that US economic fundamentals remain rock-solid despite tepid growth, inflation and other signs the postelection “Trump bump” in consumer confidence is already beginning to fade should take a look at the International Monetary Fund’s latest batch of quarterly forecasts for global growth.
The fund left its all-world forecasts for 2017 and 2018 unchanged from its previous quarterly update, which was released in April: It anticipates 3.5% and 3.6% growth, respectively.
However, those numbers mask a sharp decline in the fund's forecasts for US growth, which have been lowered sharply to reflect expectations that President Donald Trump's promised fiscal expansion package likely won't arrive until next year, according to a report published by the IMF. In an update that shouldn't surprise anyone who’s been following US macro data since the start of the year, the fund revised its forecasts for 2017 and 2018 down 0.2% to 2.1% and 0.4% to 2.1%. It continues to expect the US economy to expand by 1.6% in 2016.
The fund said its decision to lower US growth forecasts reflects in part the weak growth experienced during the first quarter. But what it calls the “major factor” behind the 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 U.S. fiscal policy changes. Market expectations of fiscal stimulus have also receded.”
In other words, with President Donald Trump’s health-care and tax reform efforts stalled in Congress, the timeline for implementation of the expansionary fiscal policies that Trump had campaigned on – infrastructure spending and deregulation among them - has been pushed back a year or two.
The IMF’s reading on the US contrasts sharply with the Trump administration’s own projections. According to Trump budget director Mick Mulvaney, the administration is hoping for a 3% growth rate in the coming years – a rate necessary to balance the Trump budget’s deficit projections.
The fund also reduced its growth forecasts for the UK, though the near-term nature of the reduction suggests the NGO believes Brexit-related disruptions will be a near-term phenomenon. The fund lowered its forecast for 2017 to 1.7% from 2.0%, while maintaining its 2018 forecast at 1.5%.
Meanwhile, growth expectations for China, Japan and the eurozone have been revised higher, after strong Q1 performance and (in Europe) a reduction in political risks following Emmanuel Macron’s electoral triumph over Marine Le Pen.
The emerging world is where the IMF expects to see the bulk of global growth occur from here on out. Emerging economies are projected to see “a sustained pickup in activity,” with growth rising from 4.3 percent in 2016 to 4.6 percent in 2017 and 4.8 percent in 2018.
It’s expected that much of this pickup will come from China and India.
“China’s growth is expected to remain at 6.7 percent in 2017, the same level as in 2016, and to decline only modestly in 2018 to 6.4 percent. The forecast for 2017 was revised up by 0.1 percentage point, reflecting the stronger than expected outturn in the first quarter of the year underpinned by previous policy easing and supply-side reforms (including efforts to reduce excess capacity in the industrial sector). 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. Delay comes at the cost of further large increases in debt, however, so downside risks around this baseline have also increased.
Growth in India is forecast to pick up further in 2017 and 2018, in line with the April 2017 forecast. While activity slowed following the currency exchange initiative, growth for 2016––at 7.1 percent––was higher than anticipated due to strong government spending and data revisions that show stronger momentum in the first part of the year. With a pickup in global trade and strengthening domestic demand, growth in the ASEAN-5 economies is projected to remain robust at around 5 percent, with generally strong first quarter outturns leading to a slight upward revision for 2017 relative to the April WEO.”
Both Russia and Turkey are expected to see growth rebound after a series of political and, in Russia’s case, commodity related shocks, are beginning to fade.
“In Emerging and Developing Europe, growth is projected to pick up in 2017, primarily driven by a higher growth forecast for Turkey, where exports recovered strongly in the last quarter of 2016 and the first quarter of 2017 following four quarters of moderate contraction, and external demand is projected to be stronger with improved prospects for euro area trading partners. The Russian economy is projected to recover gradually in 2017 and 2018, in line with the April forecast.”
Growth in the Middle East is expected to slow, reflecting a slowdown in oil production. Meanwhile, the outlook in Sub-Saharan Africa “remains challenging.”
“Growth in the Middle East, North Africa, Afghanistan, and Pakistan region is projected to slow considerably in 2017, reflecting primarily a slowdown in activity in oil exporters, before recovering in 2018. The 2017–18 forecast is broadly unchanged relative to the April 2017 WEO, but the growth outcome in 2016 is estimated to have been considerably stronger in light of higher growth in Iran. The recent decline in oil prices, if sustained, could weigh further on the outlook for the region’s oil exporters.
In Sub-Saharan Africa, the outlook remains challenging. Growth is projected to rise in 2017 and 2018, but will barely return to positive territory in per capita terms this year for the region as a whole—and would remain negative for about a third of the countries in the region. The slight upward revision to 2017 growth relative to the April 2017 WEO forecast reflects a modest upgrading of growth prospects for South Africa, which is experiencing a bumper crop due to better rainfall and an increase in mining output prompted by a moderate rebound in commodity prices. However, the outlook for South Africa remains difficult, with elevated political uncertainty and weak consumer and business confidence, and the country’s growth forecast was consequently marked down for 2018.”
In a section of its report dealing with risks to the global economic outlook, the IMF said it believes risks to the global economy are roughly balanced: On the upside, the cyclical rebound in Europe could be stronger and better sustained, as political risks have diminished for now. On the downside, rich market valuations and very low volatility in an environment of high policy uncertainty have increased the likelihood of a market correction, which could dampen growth and confidence.
However, the IMF urged developed countries struggling with weak demand and low inflation to continue supporting growth through monetary and fiscal policy, while cautioning central banks against raising borrowing costs too quickly.
Finally, as part of the fund’s “policy recommendations,” the fund writes that efforts “to accelerate private sector balance sheet repair and ensure sustainability of public debt are critical foundations for a resilient recovery,” while a “well-functioning multilateral framework for international economic relations is another key ingredient of strong, sustainable, balanced, and inclusive growth.”
And in what looks like a swipe at President Donald Trump and his protetionist rhetoric, the fund warned against pursuing “zero-sum” policies that could weaken growth around the world.
“Pursuit of zero-sum policies can only end by hurting all countries, as history shows. Because national policies inevitably interact and create spillovers across countries, the world economy works far better for all when policymakers engage in regular dialogue and work within agreed mechanisms to resolve disagreements.”
The fund also claims that the developing world’s failure to ameliorate rapidly worsening wealth inequality could “hinder market-friendly reforms” and lead to more protectionism. Over the longer term, failure to lift potential growth and make growth more inclusive could fuel protectionism and hinder market-friendly reforms. The results could include disrupted global supply chains, lower global productivity, and less affordable tradable consumer goods, which harm low-income households disproportionately.
As the IMF sees it, the biggest risks, at least among developed economies, are stemming from the Federal Reserve’s monetary tightening, and the shift toward more hawkish stance by the ECB, BOE and BOC. In fact, the fund warns that “a faster-than-expected monetary policy normalization in the United States could tighten global financial conditions and trigger reversals in capital flows to emerging economies,” while the attendant dollar appreciation would only add to their woes. In the emerging world, the fund sees China as the primary risk, believing that a failure by the Chinese to continue “addressing financial sector risks” and curbing excessive credit could precipitate “an abrupt growth slowdown” that could spill over into the global economy.