The July update on the world economy released by the International Monetary Fund (IMF) on the 24th of July 2017 has some interesting insights from a macroeconomic standpoint. A few key highlights appear to emanate from the IMF monthly update. Firstly, the role of the US in driving the global growth is likely to be much lower than previous years. Secondly, China and EU region could be the two positive surprises in terms of growth and they could be the key to driving global growth in the next year. Thirdly, despite the lag effect of demonetization, the IMF expects the Indian real GDP to grow annually at around 7.5% backed by low inflation. Lastly, IMF is of the view that overall risks to the global economy are likely to be much lower in 2018 than in the last couple of years. This is notwithstanding the trajectory of the Federal Reserve.
How and where will growth come from?
The IMF projects the global economy to grow at 3.5% in 2017 and at 3.6% in 2018. This is at least 30-40 basis points higher than the growth rate in 2016. However, the IMF also believes that the global growth rate may remain below the pre-crisis levels for some more time. However, the actual spread of growth could be quite varied across the various economies. The US economy is likely to disappoint with its growth being downgraded from 2.3% to 2.1% for 2017 and from 2.5% to 2.1% in 2018. With a high degree of uncertainty over Trump’s proposed fiscal boosting measures, the IMF expects pressure on US growth. The growth projections for the UK have also been revised downward due to the lag effect of BREXIT. Similarly, the IMF has also downgraded the growth rates of commodity and oil driven economies like Brazil and Russia.
On the positive side there are likely to be a lot of refreshing surprises. The IMF sees green-shoots of economic recovery in Japan and in the EU region. In fact, France Germany, Italy and Spain have all shown better than expected growth in the first quarter of 2017. All these economies are likely to be driven largely by domestic demand growth. China could be the interesting takeaway. While its growth rate is expected to touch 6.7% in 2017, it is likely to decline to 6.4% in the year 2018. China has embarked on some smart supply side reforms including reduction of excess capacity and policy easing to keep up the growth momentum. However, the IMF has also pointed out that the level of debt in China is already reaching unmanageable levels. With China planning to double its 2010 GDP by 2020, the PBOC is likely to be inclined towards easier liquidity and higher levels of debt.
What about India? IMF has pointed out that 7.1% growth in 2016 was actually commendable considering the lag effect of demonetization. However, the first quarter of 2017 has been showing green shoots of recovery. The IMF expects the Indian GDP growth to touch 7.5% in 2017 and gradually trend higher from that level. A lot will predicate on how the GST pans out on an all-India basis and how the RBI provides liquidity support to the economy.
What are the risks to the global economy that IMF sees?
The IMF has highlighted some key risks that global markets need to be conscious about. Here are a few key risks that the IMF has identified…
In a nutshell, the crux of the message seems to be that the next 2 years will see new drivers to global growth. The good news is that India will maintain its growth momentum!