The Following executive summary is from a note by the Staff of the IMF prepared for the March 17-18, 2017 G20 Finance Ministers and Central Bank Governors’ Meetings in Baden-Baden, Germany.
The global economy is showing more positive momentum. The WEO January update projects global growth at 3.4 in 2017 and 3.6 per cent in 2018, up from 3.1 per cent in 2016. While many advanced economies still experience demand shortfalls and core inflation below target, the outlook has generally improved, helped by a notable cyclical upturn in global manufacturing and trade, and the expectation of a more expansionary U.S. fiscal policy. The growth forecast has been slightly revised down for emerging economies, due to tighter financial conditions in the wake of a stronger U.S. dollar and higher global interest rates.
The outlook could easily change depending on the policies that materialize. The baseline forecast assumes that: U.S. fiscal policy unfolds broadly as anticipated while the Federal Reserve continues to normalize gradually in line with economic developments; China manages its transition well; and there are no major policy disruptions to trade and investment, including from Brexit negotiations. There are upside risks to the outlook in the near term—for example, if cyclical forces or growth support in the United States or China exceed expectations—but the opposite also holds.
The balance of risks remains asymmetric and is skewed to the downside. Concern has risen about adverse, and often neglected, side effects of global economic integration and technology change on jobs and income distribution in advanced economies. Political pressures to reverse these trends could lead to inward-looking policies that disrupt global trade, harming growth without materially aiding those harmed by structural economic transformations. Beyond this risk, a sharp tightening in financial conditions could trigger greater capital outflows from emerging markets; lingering financial and fiscal stability concerns in some advanced economies could become acute; and geopolitical problems could intensify.
Longer-term prospects for advanced economies as well as commodity exporters remain subdued. In several economies, high corporate debt still impedes investment, while high levels of non-performing loans and weak bank profitability constrain the credit supply. These legacies weaken economic resilience and exacerbate the impact of longer-term trends that hold back growth, especially in advanced economies, such as weak infrastructure and business investment, slowing innovation, and aging. The adjustment of commodity exporters to lower prices continues. The weakening of the commitment, in some countries, to a multilateral trade framework endangers a critical source of global productivity growth and resilience.
Policymakers hold the key to a stronger, more resilient, and fairer global economy. The right policies will support growth, safeguard economic integration, and ensure gains are broadly shared within countries:
- Reinforcing the growth momentum. In advanced economies with demand shortfalls, monetary support is still needed. For countries with fiscal space, fiscal policies should also play an active role in supporting growth, structural reforms, and balance sheet repair. In countries closer to capacity, fiscal policy should focus on raising longer-term growth potential, including through targeted infrastructure investment. Boosting demand would also help to reduce excess current account surpluses where these are present. Even where fiscal space is limited, public revenues and expenditures can be made more growth-friendly.
- Sharing gains more equitably. Longer-term growth comes from innovation, technological advances, and an efficient allocation of production factors through economic exchange. To ensure gains are shared widely within countries, more must be done to help those suffering adverse side effects, for example, through education and ensuring that the tax-benefit system is both equitable and growth-friendly.
- Strengthening resilience and long-term growth. Where still needed, balance sheet repair will support resilience and help sustain the recovery. Emerging markets should continue to allow exchange rates to buffer shocks while addressing vulnerabilities. Structural reforms, well-targeted to country needs, will raise potential growth, which could also help create much-needed future fiscal space.
- Working together. A strong, rules-oriented multilateral trade framework maximizes the benefits from global integration and safeguards against risks, including from distortive domestic policies that are collectively self-defeating. International cooperation will safeguard trade as an engine of growth and ensure its gains are broadly shared; help adjust policies to redress global imbalances; strengthen regulatory and resolution frameworks; and bolster the global financial safety net. It is also indispensable to implementing a level playing field in international taxation and tackling climate change. International cooperation should provide an adequate forum to discuss and resolve differences.
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