IMF Says Global Eco­nomic Re­cov­ery May Not Last


WASHINGTON (Dis­patches) - The In­ter­na­tional Mone­tary Fund has said the global econ­omy’s re­cent re­cov­ery may not last, de­spite a pickup in ac­tiv­ity in all west­ern coun­tries ex­cept the UK.

Mark­ing the 10th an­niver­sary of the on­set of the fi­nan­cial cri­sis, the IMF said in its World Eco­nomic Out­look (WEO) there was a risk that gov­ern­ments could be lulled into a false sense of se­cu­rity by boom­ing mar­kets and pol­i­cy­mak­ers needed to guard against com­pla­cency.

Mau­rice Ob­st­feld, the IMF’s eco­nomic coun­sel­lor, cited high as­set prices, rapid credit growth in China, po­lit­i­cal tur­moil in Cat­alo­nia and a cliff-edge Brexit as risks to an im­prov­ing global out­look.

Ob­st­feld wel­comed the speech made by Theresa May in Florence last month in which she said Bri­tain was seek­ing an im­ple­men­ta­tion pe­riod of about two years after the for­mal date for leav­ing the EU in March 2019.

“We very much hope these ne­go­ti­a­tions can be con­struc­tive and min­i­mize the costs to both sides”, Ob­st­feld said. “That is in ev­ery­body’s in­ter­est. A cliffedge Brexit with­out any for­mal ar­range­ments would lead to a lot of un­cer­tainty.”

The UK’s growth fore­cast has been cut by 0.3 points to 1.7% since April as a re­sult of the con­sumer-led slow­down in ac­tiv­ity in the first half of the year, caused by the pound’s de­pre­ci­a­tion.

There has been no change in the out­look since the WEO was up­dated in July and fore­cast­ers at the National In­sti­tute for Eco­nomic and So­cial Re­search, a UK think­tank, said they ex­pected growth to pick up from 0.3% to 0.4% in the third quar­ter of 2017.

After warn­ing strongly about the risks of a Brexit-in­duced re­ces­sion in the run-up to the EU ref­er­en­dum in June 2016, the IMF adopted a more cau­tious note in the WEO.

“The medium-term growth out­look [for the UK] is highly un­cer­tain and will de­pend in part on the new eco­nomic re­la­tion­ship with the EU and the ex­tent of the in­crease in bar­ri­ers to trade, mi­gra­tion and cross-bor­der fi­nan­cial ac­tiv­ity,” it said.

Six months ago, the IMF pre­dicted that in 2022 the UK would grow by 1.9% but in the ex­pec­ta­tion that any form of Brexit will be neg­a­tive for the econ­omy it has now trimmed that fore­cast to 1.7%.

Over­all, the IMF said global out­put growth would in­crease from 3.2% in 2016 to 3.6% this year and 3.7% in 2018. It up­graded its growth fore­cast by 0.1 per­cent­age points for this year and next from the last full WEO in April and the up­date to its fore­casts in July.

Ob­st­feld said the state of the world econ­omy was markedly dif­fer­ent from 18 months ago, when there was the prospect of stalling growth and fi­nan­cial tur­bu­lence.

“The pic­ture now is very dif­fer­ent, with ac­cel­er­at­ing growth in Europe, Ja­pan, China and the United States,” he said, not­ing that fi­nan­cial mar­kets did not ex­pect higher in­ter­est rates in the US or the phas­ing out of stim­u­lus by the Euro­pean Cen­tral Bank to cause trou­ble.

“These pos­i­tive de­vel­op­ments give good cause for greater con­fi­dence, but nei­ther pol­i­cy­mak­ers nor mar­kets should be lulled into com­pla­cency,” Ob­st­feld said.

“A closer look sug­gests that the global re­cov­ery may not be sus­tain­able. Not all coun­tries are par­tic­i­pat­ing, in­fla­tion of­ten re­mains be­low tar­get, with weak wage growth, and the medium-term out­look still dis­ap­points in many parts of the world.

“The re­cov­ery is also vul­ner­a­ble to se­ri­ous risks. Fi­nan­cial mar­kets that ig­nore these risks are sus­cep­ti­ble to disruptive repric­ing and are send­ing a mis­lead­ing mes­sage to pol­i­cy­mak­ers.

“Pol­i­cy­mak­ers, in turn, need to main­tain a longer-term vi­sion and seize the cur­rent op­por­tu­nity to im­ple­ment the struc­tural and fis­cal re­forms needed for greater re­silience, pro­duc­tiv­ity and in­vest­ment.”

Since April, the IMF has be­come less op­ti­mistic about Don­ald Trump’s abil­ity to de­liver a pack­age of tax cuts and spend­ing in­creases, and has trimmed its US growth fore­cast for 2018 by 0.2 points to 2.3%. The fund has re­vised its fore­cast for the eu­ro­zone up by 0.3 points to 1.9%.

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