IMF Lifts Global Forecast But Warns of Various 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 organization’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, MarketWatch reported.

Upward revisions in the eurozone, Japan, emerging Asia, emerging Europe and Russia more than offset downward revisions for the US and Britain.

The US 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.

The IMF’s optimism about the global outlook came with several caveats. “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 US. 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 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.

China and India

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 IMF raised its growth forecast for China but again warned of risks stemming from the build-up of debt in the world's second largest economy. The IMF said it now expects China to post 6.8% growth in 2017 and 6.5% next year, up from previous projections of 6.7% and 6.4% respectively.

In raising the growth targets, the fund said it expects authorities to maintain a high level of investment-fuelled growth "to meet their target of doubling real GDP between 2010 and 2020".

The uptick in growth will result in greater debt levels over the long term, the IMF said in a report, raising the prospect of a "sharp growth slowdown in China".

The IMF said that it expects India's economy to grow by 6.7% in 2017, slower than the 7.2% it had forecast in April, due to the lingering impact of the government's sudden demonetization last year and a newly introduced goods and services tax.

“In India, growth momentum slowed, reflecting the lingering impact of the authorities’ currency exchange initiative as well as uncertainty related to the midyear introduction of the country-wide goods and services tax,” IMF said in the report. GST was put in place on July 1.

India is set to regain the tag of fastest-growing major economy in FY19. India’s GDP growth slumped to a three-year low of 5.7% in the June quarter, triggering downgrades in estimates for the full fiscal year. The World Bank expects the economy to slow to 7%, down from 7.2% estimated earlier.

The IMF expects consumer inflation at 3.8% in FY18, rising to 4.9% in FY19. Under the monetary management framework, the Reserve Bank of India has to target 4% consumer inflation, staying within a band of two percentage points on either side of that.