Global economic growth is strengthening, with improving conditions in the eurozone making up for slight deterioration in the U.S. and the U.K., according to the International Monetary Fund, though lagging wages, rising debt and protectionist policies could mean the expansion is unsustainable and financial markets vulnerable to sharp falls.
The IMF revised its expectation for global growth slightly upward to 3.6% in 2017 and 3.7% in 2018, according its World Economic Outlook released Oct. 10. That was an increase of 0.1 percentage point from its April report for both years.
"The picture now is very different, with accelerating growth in Europe, Japan, China and the United States," IMF Chief Economist Maurice Obstfeld said ahead of the report, reflecting on economic conditions at the start of 2016. "Financial conditions remain buoyant across the world, and financial markets seem to be expecting little turbulence going forward, even as the Federal Reserve continues its monetary normalization process and the European Central Bank inches up to its own."
Even in the midst of strong across-the-board growth, the IMF warned of risks for a world still recovering from the global financial crisis.
"Financial markets that ignore these risks are susceptible to disruptive repricing, and are sending a misleading message to policymakers. Policymakers, in turn, need to maintain a longer-term vision and seize the current opportunity to implement the structural and fiscal reforms needed for greater resilience, productivity, and investment," Obstfeld said.
Asset valuations could suffer if central bankers tighten monetary policy faster than expected, the international body said. In the U.S., specifically, it warned about "rising leverage in parts of the non-energy corporate sector and evidence of an erosion of underwriting standards in the corporate bond market."
Such concerns echoed the sentiments of Germany’s outgoing Finance Minister Wolfgang Schäuble, who warned in an Oct. 6 Financial Times interview that cheap, available debt could be "encouraging new bubbles to form."
"We have no idea where the next crisis will happen but economists all over the world are concerned about the increased risks arising from the accumulation of more and more liquidity and the growth of public and private debt," he said.
Protectionism on the rise
Risks to the economic expansion also included the rise of protectionist politics, most notably in the U.S. and U.K. Lower-than-expected inflation, pegged to lagging wage growth, could also be a risk for central banks, leaving them with less flexibility to adjust monetary policy during the next downturn.
The eurozone, Canada and Japan were the main drivers of growth for advanced economies, the report said, counteracting expectations of slower growth in the U.S. and the U.K. For the U.S., failure to enact promised pro-growth business fiscal policies like tax reform was the main factor responsible for lowered growth expectations, while for the U.K., protectionist policies were the primary reason, the IMF said.
For the U.S., the IMF revised its growth outlook slightly downward, to 2.2% in 2017, from 2.3% in April, and 2.3% in 2018, from 2.5% as of the April report. The revision downward was primarily due to the U.S. Congress' failure to act on healthcare and taxes, which most economists viewed as likely to spur business growth. The IMF said it expected moderate expansion of 1.8% for the U.S. over the longer term.
On the other hand, the IMF revised its expectation for the eurozone upward, mostly because of an increase in exports as global trade picked up: 2.1% in 2017, which was up 0.4 percentage point from April, and 1.9% in 2018, up 0.3 percentage point.
In the U.K., the report said it expected a slowdown in consumption and the depreciation of the pound to weigh on household real income, and so it revised its outlook for 2017 down by 0.3% from April to 1.7% and said 2018 would see 1.5% growth. It said medium-term outlook for Britain was "highly uncertain," as the country negotiated its new relationships with the EU after Brexit.
The IMF said it expected a 1.5% growth rate for Japan in 2017, but then that it would weaken to 0.7% in 2018 as the country faced a shrinking labor force and on the assumption that fiscal support would fade, as currently scheduled.
China, however, was expected to grow 6.8% in 2017 (up 0.2 percentage point from April) and 6.5% in 2018 (up 0.3 percentage point) because of stronger-than-expected first-half output. Easing of economic policy and greater supply-side reforms would also contribute to expansion, the IMF said, at the same time as it expects China to keep up its high public investment program to meet its growth targets.