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US fading as growth engine, says IMF report

LiveMint logoLiveMint 24-07-2017 Andrew Mayeda

Washington: The world is leaning less on its biggest economy to sustain the global recovery, according to the International Monetary Fund (IMF).

The fund left its forecast for global growth unchanged in the latest quarterly update to its World Economic Outlook, released Monday in Kuala Lumpur. The world economy will expand 3.5% this year, up from 3.2% in 2016, and by 3.6% next year, the IMF said.

The forecasts for this year and next are unchanged from the fund’s projections in April.

Beneath the headline figures, though, the drivers of the recovery are shifting, with the world relying less than expected on the US and UK and more on China, Japan, the euro zone and Canada, according to the Washington-based IMF.

The dollar fell to its lowest in 14 months last week as investors discounted the ability of President Donald Trump’s administration to deliver on its economic agenda after efforts by the Republican Senate to overhaul health care collapsed.

Also read: IMF keeps India growth unchanged at 7.2% in FY18 and 7.7% in FY19

The IMF estimated US growth at 2.1% this year and again in 2018, consistent with what the fund said June 27 in its annual assessment of the U.S. economy. In the April world economic outlook, it had forecast US growth of 2.3% and 2.5%, respectively, in 2017 and 2018. The economy expanded by 1.6% in 2016.

“US growth projections are lower than in April, primarily reflecting the assumption that fiscal policy will be less expansionary going forward than previously anticipated,” the IMF said in the latest report.

In June, the IMF said it had dropped assumptions of a boost to growth from Trump’s plans to cut taxes and increase infrastructure spending. Trump’s budget director, Mick Mulvaney, wrote in July that the administration’s goal is “sustained 3% economic growth,” and he named the program “MAGAnomics” after Trump’s campaign slogan, “Make America Great Again.”

Meanwhile, as the UK works through its Brexit negotiations, the IMF also chopped its forecast for UK growth this year by 0.3% point to 1.7% on weaker-than-expected activity in the first quarter.

“This forecast underscores exactly why our plans to increase productivity and ensure we get the very best deal with the EU, are vitally important,” the UK Treasury said in an emailed statement. “The fundamentals of our economy are strong.”

Other countries are picking up the slack. The IMF’s projection for growth in China is 6.7% for 2017— the same as its estimate made 14 June in an annual staff report, and up 0.1 point from April’s world economic outlook. For 2018 the fund sees Chinese growth at 6.4%, an increase of 0.2 points from three months ago. In the staff report, the IMF looked for average annual growth of 6.4% in China during 2018 through 2020.

The fund raised its forecast for Japan to 1.3% growth this year, up 0.1 point from April, though it projects that the Japanese economy will slow in 2018 to 0.6% growth, unchanged from the April forecast.

The euro area as a whole will grow 1.9% this year, up 0.2 points from three months ago, and 1.7% in 2018, up 0.1 point. Spain appears to be the bright spot in both years.

Canada will lead Group of Seven countries in growth this year, expanding at a 2.5% clip, up 0.6 points from April, the IMF said. However, the fund cut its projection for Canadian growth next year to 1.9%, down 0.1 point.

While risks to the global outlook are “broadly balanced” in the near term, medium-term risks are tilted to the downside, the IMF said.

“Rich market valuations and very low volatility in an environment of high policy uncertainty raise the likelihood of a market correction, which could dampen growth and confidence,” said the fund, which also cited China’s credit growth and protectionist policies as threats.

The IMF urged advanced countries with weak demand and low inflation to continue supporting growth through monetary and fiscal policy while cautioning central banks against raising borrowing costs too quickly. The fund said widespread protectionism or a “race to the bottom” on financial and regulatory oversight would leave all countries worse off. Bloomberg

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