IMF lifts global forecast but warns of risks

The International Monetary Fund grew slightly more optimistic over the last three months about global growth but clearly remained concerned about risks. The IMF’s new forecast for global growth this year and next was boosted by one-tenth of a percentage point each year, compared with the organisation’s views in July. Roughly 75% of the world’s economy is sharing in the acceleration, a broader recovery than any in a decade, the agency said.

Upward revisions in the euro area, Japan, emerging Asia, emerging Europe and Russia more than offset downward revisions for the U.S. and the U.K. The U.S. forecast from the IMF, of 2.2% this year and 2.3% next year is a one-tenth of a percentage point lower for this year and two-tenths lower for 2018. The Federal Reserve’s projection is for 2.4% growth in 2017, slowing to 2.1% in 2018.

“A closer look suggests that the global recovery may not be sustainable” and neither policy makers nor markets should be “lulled into complacency,” warned Maurice Obstfeld, the IMF’s chief economist, in a note accompanying the forecast. Inflation remains muted in much of the advanced economies, and wage growth is weak. This is a concern because policy makers may not have enough ammunition to fight the next downturn, the IMF said. Inflation seems to have peaked in many emerging markets and developing economies, as well. Chief among the risks is an abrupt rise in long-term interest rates in the U.S. Fed policy should remain accommodative “until there are firm signs of inflation returning to target,” the IMF said.
At the same time, a premature exit by the European Central Bank from its easy monetary-policy stance could derail growth in many European countries. The IMF urged China’s economic leaders to accelerate their efforts to curb the expansion of credit. If further action is not taken,”there is a greater probability of “a sharp growth slowdown in China“ that would have important spillover effects in other countries.

The international agency appeared leery of current benign financial conditions, suggesting these could be gone in a heartbeat. “In an environment of high policy uncertainty and geopolitical tensions, policy missteps … could take a toll on market confidence, resulting in tighter financial conditions and weaker asset prices,” the report said. The recovery is vulnerable to serious risks, Obstfeld said. “Financial markets that ignore these risks are susceptible to disruptive repricing, and are sending [a] misleading message to policy makers,” he said.