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The IMF (International Monetary Fund) issued its twice-yearly economic forecast on Tuesday via its World Economic Outlook publication. Despite a bullish outlook for world economic growth over the next two years, they issued a stark warning that the good times in the global economy could not last beyond 2020.
The report highlighted that currently we are experiencing a global economic boom, with the second half of 2017 not showing any slack. Overall, in 2017 we witnessed a 3.8 percent increase in global growth, the fastest since 2011. The IMF is predicting global growth to tick up to 3.9 percent in both 2018 and 2019.
According to the report, advanced economies will grow faster than the long term potential GDP this year and next, with euro area economies set to narrow excess capacity with support from accommodative monetary policy, and expansionary fiscal policy will drive the US economy above full employment. Aggregate growth in emerging markets and developing economies is projected to firm further, with continued strong growth in emerging Asia and Europe and a modest upswing in commodity exporters after three years of weak performance.
The report continues to say that global growth is projected to soften beyond the next couple of years. Most advanced economies are poised to return to potential growth rates well below pre-crisis averages, held back by aging populations and lacklustre productivity. US growth will slow below potential as the expansionary impact of recent fiscal policy changes goes into reverse. Growth is projected to remain subpar in several emerging market and developing economies, including in some commodity exporters that continue to face substantial fiscal consolidation needs. The underpinning reason for this is that improvements in its forecasts for the next five years stemmed from higher productivity and was therefore unsustainable in the medium-long term.
Should the prediction materialise, this could potentially signal the end of the biggest bull run in recent times, with volatility in financial markets also set to eventually increase. In fact the report continues to say that while upside and downside risks to the short-term outlook are broadly balanced, risks beyond the next several quarters clearly lean to the downside. Downside concerns include a possibly sharp tightening of financial conditions, waning popular support for global economic integration, growing trade tensions and risks of a shift toward protectionist policies, and geopolitical strains.
This outlook quite accurately mirrors what we have witnessed from the start of 2018 to date, with markets that have been generally mixed, as political agendas take the limelight for all the wrong reasons. European equity markets have been kept in check by a strengthening Euro, with fears over its potential impact on export activity creating investor apprehension.
The IMF singled out the UK in particular to remain one of the worst-performing advanced economies, with the lowest growth rates in Europe bar Italy as Brexit uncertainties took their toll. The fund also warned that loose monetary policy was coming to an end and tighter financial conditions would expose some households, companies and countries to the full cost of the debt they had built up over the past decade of historically low interest rates.
The IMF report also focuses on the important role that policy has to play, whereby the medium to long term outlook is set to be affected by policy maker’s ability to implement reforms that secure the current upswing. Among other things the report highlighted a focus on policies to strengthen the potential for higher and more inclusive growth, building buffers to deal more effectively with the next downturn, improving financial resilience to contain market risks and stability concerns, and fostering international cooperation.
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