World economic growth improving, even as US, UK potential slows: IMF

Washington (Reuters): The current broad-based global economic upswing will likely be sustained this year and next, the International Monetary Fund said on Tuesday, with gains in most of the world offsetting sluggish outcomes in the United States, Britain and India.

The IMF upgraded its global economic growth forecast for 2017 by 0.1%age points to 3.6%, and to 3.7% for 2018, from its April and July outlook, driven by a pickup in trade, investment, and consumer confidence.

Forecasts for euro zone, Japan, China, emerging market Europe and Russia were all revised upwards.

The growth outlook in the United States was unchanged from the Fund’s July report at 2.2% for this year and 2.3% in 2018, as expected tax cuts under President Trump’s administration have not yet materialized.

The US outlook for 2017 had been cut by 0.1 percentage points, and its 2018 forecast had been cut by 0.2 percentage points in the Fund’s April report, but then revised upwards in July by the same amounts.

“Given the significant policy uncertainty, IMF staff’s macroeconomic forecast now uses a baseline assumption of unchanged policies, whereas the April 2017 WEO (World Economic Outlook) built in a fiscal stimulus from anticipated tax cuts,” the Fund said in its revisions to its U.S. economic forecasts.

The US Republican party has presented three tax proposals since Trump took office in January and the latest effort by the Trump administration is already mired in political disagreements in Congress.

The fund said that over the longer term, US economic growth would moderate due to sluggish productivity growth and changing demographics. It said the economy’s potential growth rate was just 1.8%, far lower than the 3.0% or more being targeted by Trump and his administration.

Euro zone recovery

Economic growth in the euro zone was revised upwards from the July forecast by 0.2 percentage points for both 2017 and 2018 to 2.1% and 1.9% respectively, reflecting an export revival, stronger domestic demand due to accommodative financial conditions and a lowering of political risk.

The report pre-dated unrest in the Catalonia region of Spain.

The Fund cautioned that euro zone growth would remain under pressure due to weak productivity, an ageing population and, in some countries, high debt.

Economic growth in Britain for 2017 had already been revised sharply lower by the Fund to 1.7% in the wake of the country’s vote to leave the European Union and so-far inconclusive talks on Brexit.

The Fund had already cut its 2017 forecast by 0.3%age points in July from April and left its latest forecast unchanged.

Since its 2016 Brexit vote, Britain has gone from being one of the fastest growing economies in the Group of Seven rich nations to one of the slowest, with only Japan and Italy forecast to grow more slowly than the 1.5% forecast for Britain in 2018.

The Fund upgraded its growth rates for China all the way through 2022, on the assumption that authorities in Beijing will maintain expansionary policies. The Fund forecast 6.8% growth for this year and 6.5% for next, both upward revisions of 0.1%age points from July.

Looking forward, the Fund warned that potential major disruptions to its global outlook could come from “difficult-to-predict” US regulatory, trade and fiscal policies, and from disruptions relating to Britain’s exit from the European Union, as well from central banks raising interest rates too quickly.

The US Federal Reserve is now well into a cycle of interest rate rises that began in late 2015, although the European Central Bank and Bank of Japan have yet to move away from negative rates and bond buying.

“In advanced economies, monetary policy settings should remain accommodative until there are firm signs of inflation returning to targets...(as) still-subdued wage pressures mostly reflect remaining slack, not fully captured by headline unemployment rates,” the Fund said.