IMF and OECB revise economic growth outlook for advance economies

The IMF and OECD, in their recently published mid-year Economic Updates, both note that global economic activity has firmed, helped by an improvement in investment, manufacturing and trade. Activity started to gain momentum in the second half of 2016, especially in advanced economies, with stronger growth performances in the US, Eurozone, the UK and Japan. The OECD expects growth in the world economy to accelerate from 3.0 percent in 2016, its lowest rate since 2009, to 3.5 percent in 2017 and 3.6 percent in 2018, with the IMF also forecasting the same growth for 2017-18.

The IMF sees advanced economies growing by around 2 percent this year and next, up from 1.7 percent in 2016, helped by continuing very loose monetary policies and a more supportive stance to fiscal policy. It notes, though, that growth in the US and UK was weaker than expected in H1 2017, but this was o9set by stronger than anticipated growth in the Eurozone, Japan and Canada.

Growth did strengthen in the US in the second quarter, but growth forecasts for 2018 have been scaled back significantly on the view that fiscal policy will now be much less expansionary than previously assumed. Nonetheless, GDP growth in the US is still forecast by the IMF to average a solid 2.1 percent in both 2017 and 2018. By contrast, the strong performance of the Eurozone economy has seen its GDP forecasts revised up to around 2 percent for this year. There was a marked slowdown in UK growth in H1 2017 as rising inflation and concerns over Brexit weighed on activity. The IMF sees GDP growth in the UK at 1.7 percent in 2017 and 1.5 percent in 2018.

Downside risks, though, persist for the world economy, especially over the medium term. High private sector debt levels and a reliance on capital inflows represent risks to the growth prospects for emerging economies. Increases in US interest rates could also yet negatively impact global financial markets, where valuations looks stretched with very low bond yields and stock markets rising to elevated levels amidst unusually low volatility. The IMF warns about the risk of a market correction that could dampen global economic growth and confidence.

Meantime, despite the pick-up in global growth, inflation in advanced economies remains subdued and below targets, while it is declining in some emerging economies. Sluggish wage growth and quite low oil prices suggest that inflation is likely to remain subdued in H2 2017 and 2018.

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