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Web Posted on : Mon, 05 Feb 2018

 

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Earlier this month, the International Monetary Fund (IMF) published its revised forecasts for global growth in its World Economic Outlook (WEO) update. Global growth is estimated at 3.7% in 2017 (compared to 3.2% in 2016) while the forecast for 2018 has been revised up from 3.7% to 3.9%.

 

The upswing in global growth that began in mid-2016 has continued to gather momentum. As the IMF points out, some 120 countries accounting for about three quarters of global output have witnessed higher year-on-year growth in 2017 – this makes it the broadest upswing in global growth since 2010 when the global economy was emerging from the depths of the global financial downturn.

 

At the same time, growth in global trade volumes picked up in 2017, supported by an upswing in investment, especially in advanced economies.

 

Looking ahead, the strong growth momentum in 2017 is expected to carry through to 2018. First, the recently-passed US tax reform legislation and associated fiscal deficits is forecast to lead to higher demand in the US that should also benefit its trading partners, particularly those economies with large export sectors exposed to the US such as the NAFTA economies of Canada and Mexico.

 

Second, although global central banks will be withdrawing stimulus in 2018, growth will continue to be supported by still favourable global financing conditions. Equity markets continue to march higher, in part supported by earnings growth, while credit spreads remain tight and the rise in long term government bond yields has been contained as the market continues to price in a very gradual rate hiking cycle in the US against a backdrop of muted inflationary pressure.

 

In terms of regional breakdown, the IMF is forecasting growth in the US to accelerate from 2.3% in 2017 to 2.7% in 2018. For the advanced economies as a group, the IMF has revised up its growth forecast to 2.3% (from 2.0% previously).

 

The forecast for emerging market and developing economies remains unchanged relative to the October WEO, with growth accelerating to 4.9% in 2018 from 4.7% in 2017. Emerging Asia and Developing Asia remains the fastest growing region with growth forecast at 6.5% in 2018, the same as in 2017. Within the region, China is expected to slow moderately to 6.6% in 2018 (revised up from 6.5% previously reflecting stronger external demand), while growth in India is forecast to accelerate markedly to 7.4% in 2018 (from 6.7% in 2017).

 

The IMF forecast for the Middle East and North Africa has growth accelerating from 2.5% in 2017 to 3.6% in 2018 reflecting the benefits of higher oil prices that provide more fiscal space for government spending.

 

While the outlook for global growth remains bright there are nevertheless downside risks. An upside inflation surprise in the US, where unemployment is at historical lows, would likely lead markets to price in a more rapid hiking cycle by the US Fed. This would push long term bond yields higher, the US dollar stronger and equity markets lower. The cost of borrowing would rise and global capital flows would slow as financial conditions tightened resulting in a slowdown in growth, especially for those economies that have large external borrowing requirements.

 

In summary, over the next year the global economy should continue to enjoy a synchronised upturn buoyed by stronger demand growth in the US, a resilient China, and still favourable financing conditions.