IMF predicts stronger growth but warns of risks

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The International Monetary Fund has forecast that 2018 will be the strongest year for global growth since 2011.

In its new assessment of the World Economic Outlook, the IMF predicts growth this year and next of 3.9%.

However, it warned that performance could be curtailed by trade barriers.

For the UK, the IMF has made a modest upgrade for growth this year to 1.6%. For next year, the forecast has been slightly reduced, to 1.5%.

The IMF report warned that the current momentum was “not assured”.

It lists a number of risks that could lead to weaker performance than its main forecast, including what it calls policies that “harm international trade”.

The report refers to “waning support for global integration”. It says increased trade barriers – tariffs or other restrictions – could harm sentiment in financial markets, disrupt global supply chains and slow the spread of new technology.

Protectionism also affects consumers by making tradable goods more expensive.

WTO warns over tit-for-tat trade wars

The complexity of UK/EU trade talks

The increased tension in recent months over trade largely reflects President Trump’s view that the deficit in US trade – the country imports more than it exports – is a result of poor agreements negotiated by his predecessors and other countries taking advantage of the US.

But IMF chief economist Maurice Obstfeld dismisses the idea that the steps taken by the US can reduce the deficit.

He says the reason for the deficit is that total spending in the US exceeds income. He says that recent tax measures are actually likely to increase the deficit.

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IMF chief economist Maurice Obstfeld warned of a ‘sobering’ long-term outlook for the global economy

The general thrust of this report is relatively upbeat for the near-term future. The forecasts for this year and next have been raised.

The upgrade to global growth for this year to 3.9% potentially makes 2018 the strongest year since 2011, when the economy was rebounding from the financial crisis.

Mr Obstfeld describes the upgrade from 3.7% as “substantial”.

Compared with forecasts issued in October 2017, the predictions for this year for the euro-area, Japan and the US have all been raised by half a percentage point or slightly more.

For the UK, the report says that unemployment close to historic lows could add to inflationary pressures, by triggering faster wage growth.

Inflation is already above the government and Bank of England’s target of 2%. The IMF says further cuts in interest rates are needed to bring price rises back towards that rate.

Lurking dangers

That said, Mr Obstfeld describes longer-term prospects as “more sobering”.

In the developed economies, he says, ageing populations and low growth in productivity (the amount each worker produces) mean they are unlikely to achieve the per capita growth rates they managed before the crisis – and it is per capita growth that drives average living standards.

Among developing countries, he says those that depend on exporting commodities need to diversify their economies.

There are warnings about the risks ahead, lurking dangers that could lead to the global economy falling short of the IMF’s forecasts, in addition to the concerns about trade.

Debt levels – private and government – are very high. That could lead to debtors getting into difficulty with repayments as interest rates rise from the post-financial crisis lows.

IMF predicts stronger growth but warns of risks

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