Eurozone growth forecast up but Brexit dampens outlook
WASHINGTON: The global economic recovery is improving and picking up steam, but still faces a series of threats that could erode the improvements, especially the rise of protectionist rhetoric, the International Monetary Fund warned yesterday.
The fund’s semi-annual World Economic Outlook report revised global growth up to 3.5 percent for this year, one-tenth higher than the January forecast. It was a rare upward revision to the growth forecast-the first in two years-which has been consistently disappointing. For 2018, growth is expected to rise to 3.6 percent, and to 3.8 percent by 2022.
“The global economy seems to be gaining momentum-we could be at a turning point. But even as things look up, the post-World War II system of international economic relations is under severe strain,” IMF chief economist Maurice Obstfeld said.
The report warns of the “significant downside risks” to the outlook, which have gotten worse since January-among them, “the turn towards protectionism, leading to trade warfare,” Obstfeld said in the foreword of the report.
Many of the concerns-including rolling back financial regulation, pulling away from the multilateral trading system and restricting immigration are centerpieces of US President Donald Trump’s policy program, but also are issues visible in the bitter French election campaign, as well as in Britain’s planned exit from the European Union. The anti-trade, anti-immigration attitude in advanced economies is to some degree understandable, given “the failure of growth gains in rich economies to substantially reach those in the lower parts of the income distribution in recent decades,” he said.
However, Obstfeld warned: “Capitulating to those pressures would result in a self-inflicted wound,” which would harm countries by pushing prices higher and eroding household income, prompt retaliation, and worsen the global economy.”
Initiatives for jobless
In its report, the Washington-based IMF said “hundreds of millions” of people were lifted out of poverty through economic integration and technological progress, “helping to reduce global income inequality.” But Obstfeld said the benefits of growth and the burden of economic adjustments too often have been unequally shared, so it will be up to the governments to “address these disparities head-on to ensure the stability of an open, collaborative trading system that benefits all.”
The IMF recommends “well-targeted initiatives” to help workers adversely affected by free trade and other economic changes to “find jobs in expanding sectors” as well as “social safety nets to smooth the loss of income,” and improved education and training in the longer term.
“Similarly, curbing immigration flows would hinder opportunities for skill specialization in advanced economies, limiting a positive force for productivity and income growth over the long term,” the report said.
The IMF warned that the eurozone economic outlook was clouded by Brexit and election uncertainties, with growth expected to be only modest overall. In its latest World Economic Outlook report, the IMF said growth this year in the 19-nation eurozone would be 1.7 percent, up 0.1 percentage point from its January estimate but unchanged from the 2016 performance.
For 2018, the IMF said eurozone growth will slow slightly to 1.6 percent, in line with its previous forecast. “The euro area recovery is expected to proceed at a broadly similar pace in 2017-18 as in 2016,” it said.
“The modest recovery is projected to be supported by a mildly expansionary fiscal stance, accommodative financial conditions, a weaker euro, and beneficial spillovers from a likely US fiscal stimulus,” it said. However, “political uncertainty as elections approach in several countries, coupled with uncertainty about the European Union’s future relationship with the United Kingdom, is expected to weigh on activity.”
British Prime Minister Theresa May announced earlier Tuesday she would call snap elections on June 8 to clear the decks for Brexit as her Conservative Party rides high in the opinion polls.
May formally triggered the two-year Brexit divorce process on March 29, with both sides promising to do their best to reach a fair settlement. But she has made clear repeatedly that she would walk away rather than accept a bad deal and the negotiations are expected to be difficult and politically challenging. Meanwhile, France holds presidential polls shortly, with far-right and anti-EU candidate Marine Le Pen among the front-runners. Germany, Europe’s biggest economy and the EU’s paymaster, goes to the polls in September.
The IMF sees the German economy slowing from a gain of 1.8 percent last year to 1.6 percent this year which represents an increase of 0.1 percentage points on its January forecast. For 2018, Germany will slip further to 1.5 percent, unchanged compared with the January estimate, it said in the report.
In contrast, second-ranked France, which has struggled to get its economy going, will rise to 1.4 percent this year-also up 0.1 of a point compared with January-from 1.2 percent in 2016.
France should expand further next year, to 1.6 percent. In contrast, Italy will continue bumping along-at 0.8 percent in both 2017 and 2018 after 0.9 percent last year, while Spain growth would slump-from 3.2 percent in 2016 to 2.6 percent and then 2.1 percent this year and next.
In addition to Brexit and election uncertainties, the IMF said there were concerns over the underlying fundamentals of the eurozone.
“The medium-term outlook for the euro area as a whole remains dim, as projected potential growth is held back by weak productivity, adverse demographics, and, in some countries, unresolved legacy problems of public and private debt overhang, with a high level of non-performing loans,” it said in the report.
The IMF put China growth this year at 6.6 percent, up a tenth of a point. Its 2018 prediction was for 6.2 percent growth, up two tenths. “Global economic activity is picking up speed, but the potential for disappointments remains high, and momentum is unlikely to be sustained in the absence of efforts by policymakers to implement the right set of policies and avoid missteps,” the IMF said.-AFP