IMF: Sluggish Global Growth Calls for Supportive Policies

In the July update of the World Economic Outlook (IMF) was revised downward the projection for global growth to 3.2 percent in 2019 and 3.5 percent in 2020, according to Gita Gopinath in this post.

While this is a modest revision of 0.1 percentage points for both years relative to our projections in April, it comes on top of previous significant downward revisions. The revision for 2019 reflects negative surprises for growth in emerging market and developing economies that offset positive surprises in some advanced economies.

Growth is projected to improve between 2019 and 2020. However, close to 70% of the increase relies on an improvement in the growth performance in stressed emerging market and developing economies and is therefore subject to high uncertainty.

Technology tensions

Global growth is sluggish and precarious, but it does not have to be this way because some of this is self-inflicted. Dynamism in the global economy is being weighed down by prolonged policy uncertainty as trade tensions remain heightened despite the recent US-China trade truce, technology tensions have erupted threatening global technology supply chains, and the prospects of a no-deal Brexit have increased.

The negative consequences of policy uncertainty are visible in the diverging trends between the manufacturing and services sector, and the significant weakness in global trade.

Manufacturing purchasing manager indices continue to decline alongside worsening business sentiment as businesses hold off on investment in the face of high uncertainty. Global trade growth, which moves closely with investment, has slowed significantly to 0.5 percent (year-on-year) in the first quarter of 2019, which is its slowest pace since 2012.

On the other hand, the services sector is holding up and consumer sentiment is strong, as unemployment rates touch record lows and wage incomes rise in several countries.

Regions

Among advanced economies —the United States, Japan, the United Kingdom, and the euro area— grew faster than expected in the first quarter of 2019.

However, some of the factors behind this—such as stronger inventory build-ups—are transitory and the growth momentum going forward is expected to be weaker, especially for countries reliant on external demand.

Owing to first quarter upward revisions, especially for the United States, we are raising our projection for advanced economies slightly, by 0.1 percentage points, to 1.9 percent for 2019.

Going forward, growth is projected to slow to 1.7 percent, as the effects of fiscal stimulus taper off in the United States and weak productivity growth and aging demographics dampen long-run prospects for advanced economies.