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IMF upgrades global growth, but structural risks remain…

World | Published on Apr 28th 2017 | Comment(s) 0
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In its Spring Review of the growth potential of various economies, the IMF has gone ahead and raised the growth forecasts for the key economies. For the world GDP as a whole, the growth forecast for full year 2017 has been raised from 3.1% in 2016 to 3.5% to 2017 and further to 3.6% in the year 2018. A 0.4% higher growth on a global GDP base of $80 trillion translates into an additional income stream of $320 billion in 2017 alone. A lot of the growth re-rating has come from the pick-up in growth in the fourth quarter ending December 2016. In fact, the IMF has specifically highlighted that the growth is expected to be especially strong in both the developed markets and the emerging markets. If the investment cycle picks up and commodity prices stay buoyant then it is expected to be beneficial to commodity exporters and to commodity importers. …

How the developed economies are expected to perform in 2017…

Among the developed economies, the US is expected to see GDP growth of 2.3% in 2017 and 2.5% in 2018, as against just 1.6% in the full year 2016. This higher growth is likely to be led by reflationary policies to be pursued by Donald Trump. In his election campaigns, Trump had focused on cutting corporate and individual taxes to spur consumption as well as to invest over $1 trillion in infrastructure. These two measures combined are expected to have a salutary impact on US GDP growth over the next two years. The Euro Area is likely to witness flat GDP growth at 1.7% in 2017; the same as last year. However, the GDP growth in the Euro area is expected to weaken slightly to 1.6% in the year 2018 as the pressures of sustaining the common currency amidst rising differences is likely to take its toll on the Euro Area. Japan is likely to see a slightly improved growth in GDP, which is likely to go up from 1% in 2016 to 1.2% in 2017. This higher growth is likely to be spurred by a cheaper yen largely caused by the strength of the dollar. That will give a prop to exports from Japan, as is already evident. However, this advantage is unlikely to sustain and the growth could halve to just about 0.6% in the calendar year 2018. These advanced economies combined are expected to post slightly higher growth at 2% in 2017, compared to 1.7% in 2016. However, the growth for the advanced economies overall is likely to stagnate after that.

How the emerging markets are expected to perform in 2017…

The focus will be on two of the largest economies in this space viz. China and India. China’s growth is likely to continue to be under pressure largely due to pressure from its shadow banking problem. However, the GDP growth in 2017 is likely to fall marginally to 6.6% and later to 6.2% in 2018. It appears that the problem in China is not as acute as was originally made out to be. This is good news for commodity exports as China accounts for a chunk of the demand. On India, IMF continues to expect India to outperform other large economies by a margin. Against an overall GDP growth of 6.8% in 2016, the GDP is likely to grow at 7.2% in 2017 and at 7.7% in 2018. The remonetization effect is likely to be conducive to India’s GDP growth and domestic consumption is expected to drive GDP growth in India. Also, the GDP gap over China will widen by 2018 making the India story specifically attractive for FPI and FDI inflows. Emerging markets are likely to grow overall at 4.5% in 2017 and at 4.8% in 2018. Obviously, the commodity exporters will continue to apply pressure on emerging market growth performance.

But, IMF has pointed out some specific structural risk factors…

Some of the key risk factors highlighted by the IMF, which could impede in the achievement of these numbers, are as under…

•    IMF is apprehensive that global economies may take a cue from the US and become increasingly insular and inward-looking. If that trend catches up, then it may not be conducive to free trade and the free movement of capital.

•    The big risk to the world economy could be global tightening at a quicker pace. If the Fed hikes rates more than 2 times this year and also decides to taper its $4.2 trillion bond holdings, the resultant liquidity crunch could really impede global growth.

•    The IMF is also apprehensive that in a bid to spur growth, economies may be inclined to dilute financial regulation and compliance requirements. That could heighten risks in the market and even set the tone for the next financial crisis.

The key takeaway for India is that the IMF seems to view the demonetization exercise as a long-term positive for the Indian economy. The IMF also expects that the remonetization should ensure the return of growth momentum by the second half of 2017. Coming from the IMF; that could be the real good news for the Indian economy!




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