Steady as she goes (maybe): IMF updates its global outlook for trade and growth

18 Jan 2017

Tags

  • Mark Thirlwell
  • International Trade
  • World Economy

The IMF has released the January update to its world economic outlook (WEO). The projection for global growth is unchanged from the previous round of forecasts the Fund released last October, with world real GDP growth still expected to pick up from a soft 3.1 per cent last year to 3.4 per cent this year before rising again to 3.6 per cent in 2018[1]. With last year’s lacklustre growth the weakest performance for the world economy since the global financial crisis, the key theme therefore is of a modest but welcome recovery in global economic activity.

World economic outlook update, 16 January 2017

If the IMF’s forecasts turn out to be prescient, world GDP growth this year will be the fastest since 2012 and next year’s growth the fastest since 2011. Overall, however, growth would still be stuck below four per cent – a rate that used to be thought of as a reasonable estimate for trend global growth.

World real GDP growth 2000-2018F

Behind the global aggregate, the Fund is telling slightly different stories about advanced and emerging economies. In the case of the former, growth is now expected to increase from just 1.6 per cent last year to 1.9 per cent this year and then to two per cent in 2018. That represents upgrades of 0.1 and 0.2 percentage points respectively for the two forecast years, relative to October’s WEO. The United States is at the forefront of these forecast upgrades, with a shift to fiscal stimulus predicted to deliver a small upgrade to US growth this year (up by 0.1 percentage points to 2.3 per cent) followed by a large upgrade of almost half a percentage point to 2.5 per cent growth for 2018. Growth forecasts for 2017 for Germany, Japan, Spain and the UK have all also been upgraded relative to the IMF’s earlier numbers, with the outlook for the UK for this year boosted by a healthy 0.4 percentage points (although note that the Fund has also downgraded its 2018 UK forecast by almost as much).

What about emerging economies? Here, the IMF sees growth increasing from 4.1 per cent last year to 4.5 per cent this year and increasing again to 4.8 per cent next year. That leaves the outlook for this year down by 0.1 percentage point and for next year unchanged relative to the October WEO, a shift that reflects a combination of an upgrade in expectations for Chinese growth this year (up 0.3 percentage points to 6.5 per cent) on the back of more stimulus and some downward revisions for India (down one percentage point this year due to a growth hit from New Delhi’s recent monetary policy experimentation) and weaker outlooks for Latin America and the Middle East. It also means that emerging economies will again be the main engine of world growth.

Real GDP growth 1980-2018F

These projections imply that the pace of convergence (captured by the growth gap between emerging economies and advanced economies) will remain positive but modest this year before increasing towards, but still below, three per cent by 2018.

The growth gap 1980-2018F

As a last point on the growth outlook, the Fund cautions that risks to its forecasts are ‘two-sided’ but also ‘skewed to the downside’. Downside risks include geopolitics, vulnerability to financial accidents in some large emerging markets and a ‘fraying consensus about the benefits of cross-border economic integration . . . [which] could further intensify protectionist pressures’ while the main risk on the upside is that either the United States or China (or both) end up delivering an even greater policy stimulus to growth than the Fund currently expects.

Turning to trade, the new forecasts see growth in world trade volumes of goods and services bouncing back from the extremely weak performance of sub-two per cent growth last year to 3.8 per cent growth this year and 4.1 per cent in 2018. As I’ve noted before, however, in recent years, the Fund’s projections for world trade growth have been consistently over-optimistic (compare the series of revisions for 2016 shown in the chart below).

Growth in world trade volumes, 2000-2018F, IMF forecasts for world trade growth in 2016

If the IMF’s forecasts for a strengthening in global growth do play out, that should in turn help support a recovery in trade growth this year, but to be set against that are the risks of a deterioration in the trade policy environment: according to both the WTO and Global Trade Alert (GTA), new trade restrictions reached a post-crisis high last year. At the same time, trade flows continue to face a series of structural headwinds.

Global goods trade growth, Global value chain growth, Temporary trade measures, Advanced economy trade deals signed

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[1]  World output measured at purchasing power parity (PPP) rates. At market exchange rates, world GDP growth is forecast to rise from 2.4 per cent in 2016 to 2.8 per cent this year and to three per cent in 2018. As with the PPP-based numbers, there’s no change to the forecast for this year from the October WEO projections, although growth in 2018 has been revised up by a modest 0.1 percentage points.