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Global economic recovery gaining pace: IMF

11 October 2017

The International Monetary Fund (IMF) has upgraded its global growth projections to 3.6 per cent for this year and 3.7 per cent for next - in both cases 0.1 percentage point above its previous forecasts, and well above 2016's global growth rate of 3.2 per cent, which was the lowest since the global financial crisis.

For 2017, most of our upgrade owes to brighter prospects for the advanced economies, whereas for 2018's positive revision, emerging market and developing economies play a relatively bigger role.

The global economy is witnessing an acceleration in cyclical upswings, boosting Europe, China, Japan, and the United States, as well as emerging Asia, a picture which is very different from the faltering growth and financial turbulence witnessed last year, says the International Monetary Fund (IMF) in its latest World Economic Outlook.

''Notably, we expect sub-Saharan Africa, where growth in per capita incomes has on average stalled for the past two years, to improve overall in 2018.

''The current global acceleration is also notable because it is broad-based - more so than at any time since the start of this decade. This breadth offers a global environment of opportunity for ambitious policies that will support growth and raise economic resilience in the future. Policymakers should seize the moment: the recovery is still incomplete in important respects, and the window for action the current cyclical upswing offers will not be open forever,'' says the WEO report.

However, the reports says the recovery is incomplete in three important ways.

First, the recovery is incomplete within countries. Even as output nears potential in advanced economies, nominal and real wage growth have remained low. This wage sluggishness follows many years during which median real incomes grew much more slowly than incomes at the top, or even stagnated. Drivers of growth, including technological advances and trade, have had uneven effects, lifting some up but leaving others behind in the face of structural transformation. The resulting higher income and wealth inequalities have helped fuel political disenchantment and skepticism about the gains from globalisation, putting recovery at risk.

Second, the recovery is incomplete across countries. While most of the world is sharing in the current upswing, emerging market and low-income commodity exporters, especially energy exporters, continue to face challenges, as do several countries experiencing civil or political unrest, mostly in the Middle East, North and sub-Saharan Africa, and Latin America.

Many small states have been struggling. About a quarter of all countries saw negative per capita income growth in 2016, and despite the current upswing, nearly a fifth of them are projected to do the same in 2017.

Finally, the recovery is incomplete over time. The cyclical upswing masks much more subdued longer-run trends of productivity and demographics, even correcting for the arithmetical effect of more slowly growing populations. For advanced economies, per capita output growth is now projected to average only 1.4 per cent a year during 201722 compared with 2.2 per cent a year during 19962005.

Moreover, the report projects that all 43 emerging market and developing economies will grow even less in per capita terms than the advanced economies over the coming five years.

''These economies are diverging rather than converging, going against the more benign trend of declining inequality between countries due to rapid growth in dynamic emerging markets such as China and India.''

Window for action
The IMF report suggests a three-pronged approach in the context of completing and refining the important financial stability reforms undertaken since the global crisis, without weakening them.   

It has pointed to the need for structural reforms that differ across countries, although all have ample room for measures that raise economic resilience along with potential output. However, it said, structural reforms are easier to implement when the economy is strong.

''For some countries that have returned close to full employment, the time has come to think about gradual fiscal consolidation to reduce swollen public debt levels and build buffers against the next recession. Higher infrastructure and educational spending, which are needed in some countries that do have fiscal space, can have the added benefit of boosting global demand just as consolidation measures elsewhere subtract from it. This multilateral fiscal policy mix can also help reduce excess global imbalances, ''it said.

More importantly, the report said, better education, training, and retraining can both ease labour market adjustment to long-term economic transformation - from all sources, not only trade - and raise productivity. In the short term, the excessive youth unemployment that afflicts many countries urgently deserves attention.

''Investing in human capital should also help push labour's income share upward, contrary to the broad trend of recent decades - but governments should also consider correcting distortions that may have reduced workers' bargaining power excessively.''

IMF said there is a need to synchronise structural and fiscal policies in order to  promote economic conditions conducive to sustainable and more inclusive real wage growth.

Monetary policy still has a key role to play. While earlier deflation threats in advanced economies have receded considerably, inflation has remained puzzlingly low even as unemployment rates have come down, which brings out the still keay role of monetary policy.

Clear central bank communication and the smooth execution of monetary policy normalisation, where and when appropriate, remain crucial, it added.

The IMF report has suggested adoption of mutually beneficial cooperation, which includes strengthening of the global trading system, further improving financial regulation, enhancing the global financial safety net, reducing international tax avoidance, mitigate greenhouse gas emissions and fighting famine and infectious diseases as crucially important to streamline growth.

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