John Fahey: Global growth has regained some momentum lost in 2008/09 crisis
The Organisation for Economic Co-operation and Development (OECD) is on record as saying the world economy has been caught in a “low growth trap”.
Global growth averaged around 3% in both 2015 and 2016, its weakest since the economic crisis of 2008/09.
However, both the OECD and IMF are expecting global growth to pick-up modestly over the next two years. The IMF released its latest World Economic Outlook last week which contained updated growth forecasts for the next two years.
The report noted global economic activity is picking up with a “long awaited cyclical recovery in investment, manufacturing, and trade”. The IMF is forecasting world growth to rise from 3.1% in 2016 to 3.5% this year and 3.6% in 2018.
This upward momentum is projected to come from improvements in both advanced and emerging economies.
The performance of advanced economies is being helped by continuing loose monetary policies, a more supportive fiscal policy stance, and a general uptick in confidence.
The IMF is expecting growth in developed economies to accelerate to 2% — from 1.7% in 2016 — over the period 2017-2018.
However, the report noted that these forecasts are particularly uncertain due to potential changes in the policy stance of the new US administration and “their global spillovers”.
Meanwhile, emerging economies are expected to benefit from a stabilisation/recovery among commodity exporters, as well as strengthening of growth in India, helping to offset to some degree the gradual slowdown in the Chinese economy.
The IMF is forecasting growth of 4.5% and 4.8%, for 2017 and 2018 respectively, for emerging economies. This compares to growth of just over 4% last year.
The IMF though continues to emphasise the balance of risks remains tilted to the downside, especially over the medium term.
It lists several potential risks including a move towards protectionism, faster than expected US rate hikes, aggressive rollback of financial regulation, financial tightening in emerging markets, and geopolitical tensions.
It also noted that these various risks are interconnected and can be mutually reinforcing.
However despite these risks, as well as the tendency of global growth to disappoint in the last few years, recent macro data from all the major economies suggest the world economy is on track to meet expectations for a pick-up in growth this year.
In fact, the Citigroup economic surprise indices for both developed economies and developing economies indicate that the majority of data are coming in ahead of forecasts.
Notably, the global composite purchasing managers’ index (PMI) is close to two-year highs.
Labour market data also offers encouragement, with solid jobs growth almost everywhere, including continued steady employment growth in the US, allowing the Fed to continue on its rate tightening cycle.
In the eurozone, the PMI is at a six-year high, indicating that the economy has gained momentum in the early months of this year.
The UK economy continues to perform solidly despite Brexit-related uncertainty, while the Japanese economy has been aided by strong net exports.
In the US, Donald Trump’s election, with the promise of fiscal stimulus and reduced business regulation, has the potential to boost the near-term growth prospects for the economy.
Although at the same time there is increasing uncertainty over his ability to implement his stimulus agenda. There is also the aforementioned risk to the global economy from his potential protectionist policies on trade.
Overall, though, recent data suggest that global growth has regained some of the momentum it lost in the last couple of years.
The policy backdrop is supportive, with monetary policy remaining at accommodative levels while at the same time fiscal policy is turning more expansionary.
Thus, global growth is on track to strengthen somewhat in 2017 and 2018, but risks remain prevalent on the horizon.
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