IMF is optimistic, but these are dangerous economic times
Outlook on Canada is more in line with country’s potential, Kevin Carmichael says.
The world economy is having a moment. The International Monetary Fund, which released its latest economic outlook on Tuesday, is struggling to find things to worry about over the short term.
“The global economic upswing that began around mid-2016 has become broader and stronger,” Maurice Obstfeld says in the introduction to the spring edition of the World Economic Outlook (WEO).
Advanced economies such as the United States and Germany are riding a wave of investment that’s stoking global trade, which is in turn helping big emerging markets such as Brazil and India pull out of slumps. The IMF predicts oil prices will average about US$62 a barrel in 2018, compared with an estimate of about US$52 a barrel in October. That will boost energy exporters, and it shouldn’t unduly burden importers.
On the whole, the IMF hasn’t been this upbeat about the economy since the short-lived 2010 boom that followed the financial crisis. Global gross domestic product will increase 3.9 per cent this year and next, the fund predicts. That’s better than the institution’s forecasting department expected six months ago and an improvement on the 3.8 per cent increase in 2017.
Positive surprises from the IMF are a recent development. For years following the Great Recession, it consistently published overly optimistic assessments of the recovery, contributing to a malaise that Bank of Canada described as “serial disappointment.”
So you might think the fund would savour its contribution to a sunnier mood. Not a chance.
“Global growth is on an upswing, but favourable conditions will not last forever, and now is the moment to get ready for leaner times,” Obstfeld writes.
These are dangerous times. The choices governments, central banks, and regulators make now will determine how long this moment lasts. They don’t have a great track record of doing the right things.
As growth rises and unemployment rates fall, politicians tend to make mistakes. They look at all the unexpected revenue and begin to think it’s the norm rather than spoils from the high point in the economic cycle. Smart policies might keep that cycle rolling at a sustainable pace. Unfortunately, that’s mostly a theoretical statement — there isn’t a lot of history to back it up.
Obstfeld doesn’t have much to say about Canada in his report; he concentrates on the bigger, systemically important economies. In some ways, we are one of the few dark blotches on an otherwise bright picture. The IMF predicts Canada will grow 2.1 per cent this year, less than the fund thought at the start of the year, when it updated its forecasts, and down considerably from three per cent last year.
Still, that’s faster than the Bank of Canada thinks the economy can grow without stoking inflation, so the outlook is more in line with the country’s potential.
The IMF would like to see countries like Canada boost their potential growth rates. Governments with “fiscal space” should borrow to fund projects and programs that will enhance productivity.
Opposition Leader Andrew Scheer would disagree, but the PhD economists at the IMF think Ottawa has some budget room to make investments that would help enhance the economy’s ability to grow and create wealth. The list could include infrastructure, education programs that prepare children and older workers for the digital economy, and efforts that increase the labour participation rates of women and youth.
Canada’s leaders are hitting a lot of these notes. Still, it is fair to ask if they are getting the most out of their deficits, as budget season included a lot of spending that will have no obvious impact on productivity.
The biggest force behind the IMF’s improved outlook is also the source of its caution.
U.S. President Donald Trump’s tax cuts at the end of 2017 and the plans this year to boost federal spending by hundreds of millions of dollars are responsible for half of the upgrade in the fund’s outlook for this year and next.
Growth in the world’s largest economy will surge to 2.9 per cent in 2018 from 2.3 per cent in 2017, then slow to 2.7 per cent in 2019. Those aren’t the growth rates of around four per cent that Trump promised, but they are pretty good all the same. Stronger U.S. demand will benefit most of the rest of the world, assuming Trump doesn’t start a trade war. The IMF acknowledges that’s a risk, but it also says business confidence could be such that it’s underestimating the U.S.’s potential to grow this year.
The fund is firmer in its belief that no one should get used to U.S. growth rates of around three per cent. Those tax cuts are stoking inflation, which will force the U.S. Federal Reserve to raise interest rates. And the large deficits Trump and the Republican majority in Congress decided to run to finance immediate fiscal stimulus will eventually force spending cuts and tax increases, the IMF says.
You could argue that we all owe Trump a favour: his decision to hit the accelerator might finally propel us out of the mire left by the 2008 financial crisis. But he may also have created the conditions for the next recession. Smart policy-makers will begin preparing for that possibility immediately.