The Case for Optimism in World Economic Outlook

IMF projects strong global growth despite key risks to watch.

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1068361_good_luckThe International Monetary Fund set an optimistic tone for global growth as it updated its latest world economic outlook on Monday.

The update noted that last year’s projected global growth of 3.7 per cent was slightly higher than anticipated. It attributes the better-than-expected gains to “notable upside surprises in Europe and Asia.” For 2018 and 2019, the report credits tax reform in the United States for the strong anticipated growth of 3.9 per cent, “in particular the reduction in corporate tax rates and the temporary allowance for full expensing of investment.”

The IMF projects Canada’s economy will grow 2.3 per cent this year, up from an estimate of 2.1 per cent in October. It forecasts growth for 2019 at two per cent, up from an earlier projection of 1.7 per cent.

However, risks do persist globally, according to the report. Overall, global movements in monetary policy will be a key risk for investors to watch. Continued low interest rates, along with an environment of high valuations and low volatility for equities, could create financial vulnerabilities if investors make riskier investments in the search for yield, the report noted.

And while tax reform should boost U.S. growth and subsequently the economies of its major trading partners, namely Canada and Mexico, renegotiations of trade deals, such as the North American Free Trade Agreement, could dampen the synchronized momentum. The NAFTA talks, as well as the trade negotiations between Britain and the European Union, have the potential to “reduce production efficiency, exerting a drag on potential growth in advanced, emerging market and developing economies,” according to the IMF. Despite the trade jitters, Mexico’s growth remains on an upward trajectory, according to the IMF’s predictions, with 2.3 per cent growth projected for 2018 and three per cent for 2019.

In Europe, the IMF expects many countries to post strong growth, notably Germany, Italy and the Netherlands. Spain, however, could be an exception with its projected growth sitting at 2.4 per cent for 2018. That number, which is down from 3.1 per cent last year, reflects ongoing political tensions that are dampening demand prospects. For Europe’s emerging economies, Poland and Turkey led the way to stronger growth in 2017, which is reflective of stronger demand from the rest of Europe, the IMF noted.

In Asia, Japan’s growth forecast improved on better-than-expected domestic economic activity, as well as rising external demand. Emerging and developing economies in Asia continue to account for more than half of the world’s growth, with a projected rise of 6.5 per cent for 2018.

As for the Middle East and northern Africa, strong oil prices have helped to spur steady expected growth at around 3.5 per cent. However, the report noted global markets anticipate a gradual decline in oil prices over the next few years. Sub-Saharan Africa is likely to see a gradual increase in growth during 2018 and 2019, with South Africa lagging at less than one per cent anticipated growth as political instability detracts from investor confidence.

Further, the report highlighted certain non-economic risk factors. Increasingly dramatic weather events, such as hurricanes in Atlantic coastal regions and drought in Australia and sub-Saharan Africa, “point to the risk of recurrent, potent climate events that impose devastating humanitarian costs and economic losses on the affected regions.” With more such events, resulting migrant movements could affect the economies of some countries, notes the report.


This story was originally published on benefitscanada.com.

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