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By Anthony Fensom
The world economy continues to pick up speed, but with threats including high global debt and a trade war, there is no room for complacency. The warning by the International Monetary Fund (IMF) follows forecasts that the upturn could be over in as little as two years, according to some estimates.On April 17, the IMF unveiled the latest update to its global growth forecasts, painting a mixed picture for the outlook. “Three months ago, we updated our global growth forecast for this year and next substantially, to 3.9 percent in both years. That forecast is being borne out by continuing strong performance in the euro area, Japan, China, and the United States, all of which grew above expectations last year,” the IMF’s Maurice Obstfeld said.
“We also project near-term improvements for several other emerging market and developing economies, including some recovery in commodity exporters. Continuing to power the world economy’s upswing are accelerations in investment and, notably, in trade.”
Among its projections, the Washington-based institution sees gains in advanced economies, including the Eurozone, with an expected 2.4 percent gross domestic product (GDP) gain in 2018 compared to last year’s 2.3 percent, and a 2.9 percent GDP rise for the United States following last year’s 2.3 percent.
However, both the United States and Eurozone economies are seen slowing next year, to 2.7 percent and 2 percent GDP growth, respectively.
For Asia, China is expected to decelerate from last year’s 6.9 percent GDP gain to 6.6 percent this year and 6.4 percent in 2019. Japan is also seen cooling, dropping from the 1.7 percent GDP gain seen in 2017 to 1.2 percent this year and just 0.9 percent in 2019.
For emerging and developing Asia, the region is seen growing steadily at 6.5 percent this year, the same pace as in 2017, rising to 6.6 percent in 2019. The “ASEAN-5” comprising Indonesia, Malaysia, the Philippines, Singapore, and Thailand are also seen holding steady at 5.3 percent this year and 5.4 percent in 2019.
However, similar to the Asian Development Bank’s recent forecasts, India is seen bucking the trend, with its economy expected to accelerate from last year’s 6.7 percent GDP gain to 7.4 percent this year and 7.8 percent in 2019.
Yet amid the generally good news came a sober warning from Obstfeld.
“Advanced economies —f acing aging populations, falling rates of labor force participation, and low productivity growth — will likely not regain the per capita growth rates they enjoyed before the global financial crisis,” he said.
“Emerging and developing economies present a diverse picture, and among those that are not commodity exporters, some can expect longer-term growth rates comparable to pre-crisis rates. Many commodity exporters will not be so lucky, however, despite some improvement in the outlook for commodity prices.”
Escalating Risks
Obstfeld highlighted escalating risks including “very high” global debt levels, both public and private, which threaten repayment problems as monetary policies “normalize.”
According to the IMF, global debt high a new record high of $164 trillion in 2016, the equivalent of 225 percent of global GDP, of which around two-thirds comprises nonfinancial private sector debt and the remainder public debt.
While advanced economies are responsible for most global debt, the IMF said China had contributed 43 percent to the increase since 2007, reflecting its rapid debt build-up to an estimated 260 percent of GDP.
Although the IMF expects debt-to-GDP ratios to ease over the next three to five years, it added: “But this hinges on countries delivering fully on their policy commitments. There is no room for complacency.”
The ability of politicians to “kick the can down the road” has been constantly demonstrated, including in Japan where the Abe administration has twice postponed hikes to the consumption tax.
Any downturn in the global economy would also threaten such debt-reduction efforts, as governments likely would turn to fiscal spending or tax cuts to boost demand and avert recession.
The IMF also pointed to the elephant in the room, notably the threatened trade war between the world’s two largest economies. Despite saber-rattling by Washington and Beijing, financial markets appear complacent over the risks.
Ironically, the IMF said efforts by the Trump administration to curb its trade deficit through tariff hikes and other fiscal measures would actually widen the U.S. current account deficit for 2019 by $150 billion.
Instead, Obstfeld called for the burden of correcting global imbalances to be addressed domestically, with excess deficit and surplus countries needing to “align their spending levels more closely with their incomes.”
He suggested inequitable trade practices and intellectual property disputes could be handled within a “rules-based multilateral framework,” suggesting the current system could be strengthened through “plurilateral” arrangements such as free trade zones.
Slowdown Ahead?
Yet even if policymakers avert risks over debt and trade, other analysts warn of an impending global slowdown driven by the world’s two largest economies.
In its latest “Global Economic Outlook,” Capital Economics said global growth should hold up this year, but a slowdown appeared likely from 2019.
“Despite some weakness in the first quarter, and concerns about protectionism, global economic growth is likely to hold up well this year. In advanced economies, the outlook for investment and household consumption is fairly bright. Tightening labor markets are putting some upward pressure on wages, but the [European Central Bank] and [Bank of Japan] will be in no hurry to tighten policy,” it said.
“In contrast, we expect rising price pressures to prompt the [U.S. Federal Reserve] to raise rates five more times by mid-2019, which will contribute to a sharp slowdown there next year. With China also losing momentum, global economic growth is set to slow in 2019 and 2020.”
The London-based consultancy sees the U.S. economy slowing from 2.8 percent GDP growth this year to 2 percent next year and 1.5 percent in 2020. Japan is also seen softening, from 1.2 percent GDP growth in 2018 to 1 percent next year and only 0.3 percent in 2020, depending on whether the expected sales tax hike in 2019 goes ahead.
For China, it sees growth at just 4.5 percent this year and next and 4 percent in 2020, based on its own estimates of economic conditions. It pointed to headwinds including “a withdrawal of fiscal support, slower credit growth, and weakening construction activity,” along with potential trade clashes with the United States.
“[Chinese] President Xi [Jinping] shows no signs of implementing the market-based reforms which are needed to rein in the growing debt burden and boost long-term growth. We expect growth to slow over the medium term,” it said.
The picture is brighter for India however, which is seen expanding by 6.5 percent this year, rising to 7 percent next year and 6 percent in 2020.
“India’s economy is likely to gain a bit more momentum this year as household spending is boosted by strong rural wage growth and state governments loosen the purse strings ahead of next year’s election. Buoyant demand will probably keep inflation above the Reserve Bank’s new 4 percent target and prompt it to raise interest rates later this year,” Capital Economics said.
On April 17, China reported 6.8 percent GDP growth for the first quarter of 2018, slightly ahead of economists’ forecasts and unchanged from the prior quarter. However, a slowdown to 6.5 percent is anticipated for this year on the back of tighter fiscal and monetary policy and growing capacity constraints.
“China will likely cool further in the coming months as Beijing’s policy restrictions are starting to bite. Construction in particular is feeling the brunt,” HSBC economist Frederic Neumann told Bloomberg News.
Should China slow to 6.5 percent GDP growth in 2018, it would be the slowest expansion since 1990 for the world’s second-biggest economy. Meanwhile, rising interest rates in the United States combined with massive fiscal spending threaten the health of the world’s biggest economy.
Little wonder then, that the IMF and others have urged policymakers to cooperate and get their fiscal houses in order before the current cyclical upswing ends.
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