IMF World Economic Outlook

Oktober 2017 – World economic outlook from the International Monetary Fund (IMF) – a subsumption from the chiefeconmist of HSH Nordbanik, Dr. Cyrus de la Rubia

No reason for euphoria

High and higher. The International Monetary Fund (IMF) has adjusted its forecast for the world economy upwards for this and next year in its biannual World Economy Outlook. The most positive surprise was growth in the Eurozone, Japan and Canada. Even though optimism about the United States and the United Kingdom is not as high as it was at the beginning of the year, the global economy still has robust growth of 3.6% in 2017, which will accelerate to 3.7% in 2018. This global upturn is being felt particularly strongly by Germany's export-driven economy. Will this go on forever?

Dr. Cyrus de la Rubia

Dr. Cyrus de la Rubia, HSH Nordbank chief economist

Dangers for the world economy

Let’s not delude ourselves. At least that is the message we are getting from the IMF, which is right to point out several dangers for the global economy. For example, there is monetary policy. Both the Federal Reserve and the European Central Bank are initiating a change of course in monetary policy. The Fed has already taken more steps than its counterpart in the Eurozone, but both banks are still very much at the beginning of this process and are acting cautiously. But what happens if one of the banks is no longer cautious? Can we also be sure that long-term yields will break free of central bank control and shoot upwards? The economic situation could suddenly change direction. Companies in the United States with very high debt and a low credit rating as well as governments in Southern Europe with high debt will be affected most.

Many risks can threaten the global economy

Monetary policy mistakes could also cause turbulence in some emerging markets. The IMF mentions China first in this context. The organization is most concerned that the growth model transformation underway (from investment and export-led growth to an economy in which consumption and services play a more important role) has ground to a halt. Given the disproportionately high level of debt in China's corporate sector, a sudden economic crash might occur. One thing is certain: The whole world would feel the effects of such a development.

World Trade, Industrial Production, and Manufacturing PMI

Three-month moving average; annualized percent change

World Trade, Industrial Production, and Manufacturing PMI (Three-month moving average; annualized percent change, unless noted otherwise)

Source: International Monetary Fund, October 2017, WORLD ECONOMIC OUTLOOK: Seeking Sustainable Growth — Short-Term Recovery, Long-Term Challenges

Low inflation is making the IMF anxious

Do the wages have to rise more?

The IMF is also worried about low inflation. Indeed: The fact that inflation in key industrial countries remains well below 2% ultimately does not contribute to a friendly economic environment. Improved utilization of capacities should be leading to wage increases, which would then pull inflation up. Some market observers are urging people to be patient, as prices will rise eventually. We agree with this standpoint, yet others, like the IMF, see low inflation as a sign of fragile recovery. Particular emphasis is placed on what would happen in the case of an economic downturn, namely that even lower inflation rates would put central banks back in a situation where they would either not be able to reduce the key interest rate below zero percent, or only do so to a limited extent. To put it another way: Monetary policy would lack the necessary ammunition to bring the economy back into gear. Therefore, central banks should continue an expansionary course for as long as possible.

Protectionism as a strong possible threat for the global economy

One of the greatest dangers from our perspective is only mentioned as an also-ran or side issue: Protectionism. The United States is not explicitly mentioned, and certainly not President Donald Trump, but the corresponding passage is about the new US trade policy nonetheless. Renegotiation of trade agreements (NAFTA), tariff threats against China, and travel bans: These are indications of a new policy that will heavily affect the dynamics of world trade if it radicalizes.

Overview of the World Economic Outlook (WEO) Projections

Percent change, unless noted otherwise

Projections Difference from July 2017 WEO Update1 Difference from April 2017 WEO1
2016 2017 2018 2017 2018 2017 2018
World Output 3.2 3.6 3.7 0.1 0.1 0.1 0.1
 Advanced Economies 1.7 2.2 2.0 0.2 0.1 0.2 0.0
 United States 1.5 2.2 2.3 0.1 0.2 -0.1 -0.2
 Euro Area 1.8 2.1 1.9 0.2 0.2 0.4 0.3
    Germany 1.9 2.0 1.8 0.2 0.2 0.4 0.3
    France 1.2 1.6 1.8 0.1 0.1 0.2 0.2
    Italy 0.9 1.5 1.1 0.2 0.1 0.7 0.3
    Spain 3.2 3.1 2.5 0.0 0.1 0.5 0.4
 Japan2 1.0 1.5 0.7 0.2 0.1 0.3 0.1
 United Kingdom 1.8 1.7 1.5 0.0 0.0 -0.3 0.0
 Canada 1.5 3.0 2.1 0.5 0.2 1.1 0.1
 Other Advanced Economies3 2.2 2.6 2.5 0.3 0.1 0.3 0.1

 Emerging Market and Developing Economies

4.3

4.6

4.9

0.0

0.1

0.1

0.1

1Difference based on rounded figures for the current, July 2017 World Economic Outlook Update, and April 2017 World Economic Outlook forecasts.
2 Japan’s historical national accounts figures reflect a comprehensive revision by the national authorities, released in December 2016. The main revisions are the switch from the System of National Accounts 1993 to the System of National Accounts 2008 and the updating of the benchmark year from 2005 to 2011.
3 Excludes the Group of Seven (Canada, France, Germany, Italy, Japan, United Kingdom, United States) and euro area countries.

Source: International Monetary Fund, October 2017, WORLD ECONOMIC OUTLOOK: Seeking Sustainable Growth — Short-Term Recovery, Long-Term Challenges


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The next economic downturn is certain

In the USA one seems to less prepare for rainy days. A lot is happening in the Eurozone.

The IMF correctly assesses the current recovery as a chance to prepare the various economies for worse times and to make them more resilient. The key here is structural reforms. In the Eurozone, much progress has been made in this regard. Fortunately, the new French President Emmanuel Macron is reforming the labor market in France and increasing the country’s growth potential with other additional measures. In the United States, however, there seems to be a desire to turn back the clock. This will make the United States more vulnerable to future economic shocks.

The bottom line is that one may be optimistic about the medium-term to 2018, but companies should see it as a chance to prepare themselves for more difficult times and build up reserves. The next economic downturn is a certainty.