IMF revises global growth projection downward to 3.7%, says earlier numbers overoptimistic

Maurice Obstfeld, economic counsellor and director of the research department at the International Monetary Fund (IMF) has explained that the 3.9 percent erstwhile projection of global economic growth for 2018 and 2019 taken last April is overoptimistic.

According to Obstfeld at the time of the IMF’s last World Economic Outlook (WEO), the world economy’s broad‑based momentum led the fund to project a 3.9 percent growth rate for both this year and next.

He said considering developments since then, the numbers now show growth has plateaued at 3.7 percent, instead of rising.

“There are clouds on the horizon. Growth has proven to be less balanced than we had hoped. Not only have some downside risks that the last WEO identified been realized, the likelihood of further negative shocks to our growth forecast has risen,” Obstfeld said.

Adding that in several key economies, growth is being supported by policies that seem unsustainable over the longer term.

Although the newly projected rate is same as last year’s rate of 3.7 percent, this growth exceeds that achieved in any of the years between 2012 and 2016, and it occurs as many economies have reached or are nearing full employment and as earlier deflationary fears have dissipated.

Thus, policymakers still have an excellent opportunity to build resilience and implement growth‑enhancing reforms, the economic counsellor said.

He further stated that growth in the United States, buoyed by a pro‑cyclical fiscal package, continues at a robust pace and is driving U.S. interest rates higher, but U.S. growth will decline once parts of its fiscal stimulus go into reverse.

“Notwithstanding the present demand momentum in the U.S., we have downgraded its 2019 growth forecast, owing to the recently enacted tariffs on a wide range of imports from China and China’s retaliation.”

He said China’s expected 2019 growth is also marked down. Domestic Chinese policies are likely to prevent an even larger growth decline than the one we project, but at the cost of prolonging internal financial imbalances.

“Overall, compared with six months ago, projected 2018‑2019 growth in advanced economies is 0.1 percentage point lower, including downgrades for the euro area, the United Kingdom, and Korea. The negative revisions for emerging market and developing economies are more severe, at minus 0.2 and minus 0.4 percentage point respectively for this year and next year.”

Stressing that the IMF do not see the recent developments as part of a generalized investor pullback from emerging and frontier markets, Obstfeld said they also do not expect that the current problem cases will necessarily spill over to countries with stronger fundamentals.

“Many emerging economies are managing relatively well, given the common tightening they face, using established monetary frameworks based on exchange rate flexibility.

But there is no denying that the susceptibility to large global shocks has risen. Any sharp reversal for emerging markets would pose a significant threat to advanced economies, as emerging market and developing economies’ GDP now constitutes about 40 percent of world GDP at market exchange rates.”