State of the world economy

IN THE LATEST economic outlook, the International Monetary Fund (IMF) maintained the global growth projection of 3.5 per cent for 2017. As Chart 1 shows the Fund has upped its growth forecast for emerging markets and developing economies to 4.6 per cent in 2017, from 4.3 per cent earlier, largely on the back of stronger Chinese growth. It has lowered the US growth estimates on the grounds that the fiscal policy of the country is likely to be less expansionary than anticipated. For India, the forecast remains unchanged.

The Fund has also upped its forecast for global trade growth, as shown in Chart 2. Global trade is now expected to grow at a faster pace than growth in 2017, reversing the trend seen in the previous years.

The headline inflation rate has softened across both advanced economies and emerging markets, as shown in Chart 3. This is largely because the commodity price rebound seen in the second half of 2016 has faded. Crude oil prices are unlikely to trend upward (Chart 4), due to the dynamics of the shale market.

With the inflation rate well below its target of two per cent, the US Federal Reserve kept rates at 1-1.25 per cent in its latest meeting. The expectation is that the Fed will now raise rates in December. And while the US and Chinese yields have firmed up over the past year or so, Indian G-sec yields have fallen, as shown in Chart 5.

Equity prices have remained strong in both advanced and emerging markets, as shown in Chart 6, signalling continued optimism. But a faster than expected winding down on the Fed balance sheet could tighten global financial conditions.

As a consequence of the uncertainty over Brexit, the pound has fallen 10.6 per cent against the dollar as shown in Chart 7, while stronger than anticipated growth in the eurozone has pushed up the currency (euro) against the dollar.