Why the IMF Expects Global Economy to Grow at 3.9%

The International Monetary Fund (IMF) has bumped up its estimate for global gross domestic product (GDP) growth in 2018 and 2019. The forecast did come with several warnings:

As the year 2018 begins, the world economy is gathering speed. The new World Economic Outlook Update revises our forecast for the world economy’s growth in both 2018 and 2019 to 3.9 percent. For both years, that is 0.2 percentage points higher than last October’s forecast, and 0.2 percentage points higher than our current estimate of last year’s global growth.

This is good news. But political leaders and policymakers must stay mindful that the present economic momentum reflects a confluence of factors that is unlikely to last for long. The global financial crisis may seem firmly behind us, but without prompt action to address structural growth impediments, enhance the inclusiveness of growth, and build policy buffers and resilience, the next downturn will come sooner and be harder to fight.

IMF cautions about growth have leaned on economic and social policy for years.

The IMF’s warnings rely primarily on whether “we” can set in place policies to “counter” the next downturn. Since recessions are a normal, although periodic, part of the world’s economic cycle, any effort along those lines will be less than entirely successful.

“Near-term” success will rely on the continued growth of the world’s largest economies. Another factor for improvement is new U.S. tax policy:

The primary sources of GDP acceleration so far have been in Europe and Asia, with improved performance also in the United States, Canada, and some large emerging markets, notably Brazil and Russia, both of which shrank in 2016, and Turkey. Much of this momentum will carry through into the near term. The recent U.S. tax legislation will contribute noticeably to U.S. growth over the next few years, largely because of the temporary exceptional investment incentives that it offers.

Central bank monetary policy gets much of the credit for the current and near-term expansion, according to the IMF. The Federal Reserve is an example. It has kept its loan rate near 0% for almost a decade. Among many economists, there is a concern that central banks have exhausted the tools they have to combat another downturn.

The role that the older, more established economies will have in future growth will be muted:

Advanced economies are leading the upswing, but once their output gaps close, they will return to longer-term growth rates that we still expect to be well below pre-crisis rates. While we project advanced-economy growth of 2.3 percent in 2018, our assessment of the group’s longer-term potential growth is only about two-thirds as high. Demographic change and lower productivity growth pose obvious challenges that call for major investments in people and research. Fuel exporters face especially bleak prospects and must find ways to diversify their economies.

The GDP growth of China and the United States also will slow. China will cap and perhaps cut credit availability. The United States still faces an extremely large national debt.

The U.S. economy will grow by 2.7% this year and 2.5% in 2019. The euro area’s growth will be 2.2% this year and 2.0% in 2019. This is primarily due to slowing growth of its largest economy, Germany. The IMF expects its GDP to rise by 2.3% this year and 2.0% in 2019.

China’s economy is expected to grow by 6.6% this year and 6.4% in 2019. This would take its growth rate back to Great Recession levels. The growth of India’s GDP — the hottest among large economies — is expected to be 7.4% this year and 7.8% in 2019.

The IMF forecast, like all others, depends on factors that are largely unpredictable. However, for the time being, despite worries about the future, the world can “sit back and enjoy the sunshine,” as IMF researchers wrote. That is until the world’s economy starts to fall apart again, as it always does from time to time.