The global economy is expected to grow at a solid pace through next year, boosted by faster expansion in the United States and Europe but after that risks will build, the International Monetary Fund said Tuesday.
In the latest update to its World Economic Outlook, the IMF still predicts world growth of 3.9 percent in 2018 and 2019, despite raising its estimates for US and EU growth compared to the January edition.
That is an improvement on the 3.8 percent global growth seen last year but is unchanged from the forecasts in January. However, the Fund cautions that the growth “momentum is not assured,” given trade tensions between the United States and China and the expected reversal of the positive effects from the US tax cuts.
“Despite the good near-term news, longer-term prospects are more sobering,” IMF Chief Economist Maurice Obstfeld said. The sweeping US tax cuts approved in December will fuel higher growth only through next year, the IMF said.
It raised its forecast by two tenths for both years, to 2.9 percent for 2018 and 2.7 percent for 2019, which follows big upward revisions in the October report. However, Obstfeld warned the stimulus was “largely temporary.”
And because the US boost accounts for most of the higher world expansion, beyond 2019 “global growth is projected to gradually decline to 3.7 percent by the end of the forecast horizon,” the report said.
“US tax reform will subtract momentum starting in 2020, and then more strongly” in 2023 as some of the investment provisions kick in.
The risks to the outlook “clearly lean to the downside” beyond the next few quarters, the IMF warns.
Like other advanced economies, the United States will max out growth and return to a more sluggish pace, “held back by aging populations and lackluster productivity.” And despite the fact increasing world trade helped boost growth in recent years, there has been a rise in public skepticism about the benefits, leading to a renegotiation of trade deals and increasing friction.
“That major economies are flirting with trade war at a time of widespread economic expansion may seem paradoxical — especially when the expansion is so reliant on investment and trade,” Obstfeld said. He warned that “the prospect of trade restrictions and counter-restrictions threatens to undermine confidence and derail global growth prematurely.”
US President Donald Trump last month imposed steep tariffs on steel and aluminum imports and threatened to impose more on tens of billions of Chinese goods, prompting Beijing to respond in an escalating series of threats.
IMF chief Christine Lagarde last week warned governments to “steer clear of protectionism in all its forms,” saying the trade frictions hurt poor consumers the most as costs increase, and that they also undermined a system that had broadened prosperity worldwide.
Instead, the IMF argues that the United States and others should respond to anxiety about globalization and technological advances by “strengthening growth, spreading its benefits more widely, (and) broadening economic opportunity through investments in people,” Obstfeld said.
Rather than lower the trade deficit, as Trump has called for, the US trade actions could expand it by $150 billion by 2019, he said. And the fund warns that a worsening of trade conflict could have broader implications for global growth as well as market confidence.
The report cites the market turbulence in early February and into March amid the US-China trade dispute, when US stocks stumbled in after surging to repeat records in the first weeks of 2018.
The Dow had lost almost 10 percent of its value by the end of March, down from the record 26,616.71 reached on January 26. The rapid decline should “serve as a cautionary reminder that asset prices can correct rapidly and trigger potentially disruptive portfolio adjustments.”
The IMF upgraded the forecast for the euro area to 2.4 percent for 2018, an upward revision of two tenths compared to the January estimate, with growth for its key members upgraded, especially Spain. But the forecast for 2019 was unchanged at 2.0 percent.
Japan’s growth is still seen at a sluggish 1.2 percent this year, after a rare and large upgrade of five tenths in January, slowing to 0.9 percent in 2019. The forecasts for China and India, key drivers of global growth, were unchanged from January. China is expected to expand 6.6 percent and 6.4 percent, while India should rise 7.4 percent and 7.8 percent.