ShareEmerging Asia seen as top global growth engine
WASHINGTON, DC: Maurice Obstfeld (on screen), Economic Counselor and Director of the Research Department at the IMF, holds a press briefing at IMF Headquarters in Washington, DC yesterday.—AFPWASHINGTON: 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 yesterday.
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.
Risks to the downside
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.
Market disruption
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.
Upbeat on Asia
The IMF said yesterday it remains upbeat about the economic prospects of emerging Asia, labeling the region "the most important engine of global growth" despite concerns over trade disputes and mounting debt. The fastest-paced expansion will remain concentrated in Asia, it predicts, where the buoyant economies of China, India and a host of Southeast Asian nations will perform well above the global average.
The IMF left unchanged from January its growth estimate for China of 6.6 percent for 2018 and 6.4 percent in 2019. The country's own 2018 target is around 6.5 percent.
India is widely expected to be the next global growth juggernaut. The IMF foresees the nation's economy surging by 7.4 percent this year and 7.8 percent in 2019, also unchanged from its previous outlook in January.
The two Asian giants have seen their economic prospects brighten amid strong global demand for their exports and as their massive populations start spending, the IMF said.
Southeast Asia's booming economies of Indonesia, Malaysia, the Philippines, Thailand and Vietnam will collectively maintain growth above five percent this year and next, the fund said.
"Emerging Asia, which is forecast to continue growing at about 6.5 percent during 2018-19, remains the most important engine of global growth," the fund wrote.
Global trade jumped 4.9 percent last year, the fund estimated, with China's exporters being among the largest beneficiaries. Their prospects are less certain amid US President Donald Trump's threats to impose tariffs on up to $150 billion worth of Chinese goods as part of his "America First" agenda.
Debt risk
Ballooning debt in both India and China has been a top concern for the IMF in recent years. Last year the fund said China's credit growth was on a "dangerous trajectory".
In India spiraling bad debt forced the government to recapitalize state-owned banks to the tune of $32 billion in October to help them clean up their books.
Chinese policymakers have delayed cutting debt, instead allowing for "stable and rational debt rises" this year to maintain growth. The IMF said officials were "eroding valuable policy space" but applauded regulators' efforts to rein in the riskiest portion of its lending known as shadow banking.
"Nevertheless, total credit growth remains high," the IMF wrote. In India public banks are saddled with bad loans, making it hard for them to continue to fund the economy. The debt and credit quality problems at banks will "exert a drag on investment in India", the IMF wrote. - AFP
