Publication - Maintaining the Positive Momentum of the Global Economy - Posted on March 14, 2017 by iMFdirect - Christine Lagarde
Baden-Baden, the German spa town built on ancient thermal springs, is a fitting venue to discuss the health of the global economy during this week’s meeting of the Group of Twenty finance ministers and central bank governors.
Policymakers will likely share a sense of growing optimism, because the recent strengthening of activity suggests that the world economy may finally snap out of its multi-year convalescence.
Economic prescriptions have played an important part in the recovery, and will continue to do so for some time. Maintaining the positive growth momentum continues to require supportive macroeconomic policies. And the participants at the meetings will need to take action, individually and collectively, to make growth more inclusive and resilient.
Have we reached a turning point? The short answer is yes—at least for now. Growth outturns in the second half of last year were generally solid. Manufacturing and confidence indicators are picking up, and there are signs that global trade volumes are rising along with them.
That is why the International Monetary Fund in January projected a pickup in global growth this year and next—to 3.4 and 3.6 percent—compared to 3.1 percent in 2016.
The improved outlook partly reflects a projected pickup in advanced economy activity—helped by expectations of more expansionary US fiscal policy.
We are especially encouraged by stronger-than-expected economic activity in the euro area, the United Kingdom, and Japan.
Emerging and developing economies, led by China and India, continue to contribute more than three-quarters of total global GDP growth in 2017. Adding to this is a projected normalization of conditions in Brazil and Russia, which have been facing deep recessions.
So, yes, the global economy is moving into a better position. But it would be a mistake to assume that it will automatically return to rude health.
In fact, there has rarely been a period when policy choices have mattered more for what comes next, especially since there are still considerable risks to the outlook.
Maintaining the momentum
In a number of advanced economies, for example, demand is still weak and inflation is not durably back to target. This calls for continued monetary support and a greater emphasis on fiscal policy in countries that have room in their budgets. These steps should be combined with structural reforms to lift productivity and boost long-term growth.
Lack of demand is less of a problem in the United States, where growth would benefit more from efforts to expand supply, such as investment to revamp infrastructure, efficiency-enhancing corporate tax reform, and improvements in education.
Stronger US growth would certainly be good for the global economy, but a changing US policy mix may also create knock-on effects, or spillovers. For example, depending on the nature of the US policy mix, a stronger dollar and rising US interest rates could lead to a sharper-than-expected tightening in global financial conditions. This could potentially put stress on some emerging economies and low-income countries.
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