A security official stands in the lobby of the International Monetary Fund headquarters in Washington. Picture: REUTERS/YURI GRIPAS
A security official stands in the lobby of the International Monetary Fund headquarters in Washington. Picture: REUTERS/YURI GRIPAS

New York — The International Monetary Fund (IMF) predicts that the world economy’s strongest upswing since 2011 will continue for the next two years, but warns that the seeds of its demise have already been planted.

The fund on Tuesday left its forecasts for global growth this year and next at the 3.9% it estimated in January and raised its outlook for the US as Republican tax cuts take effect.

Beyond that horizon, it was more pessimistic, projecting global growth will fade as central banks tighten monetary policy, the US fiscal stimulus subsides, and China’s gradual slowdown continues.

"Global growth is projected to soften beyond the next couple of years," the IMF said in its latest World Economic Outlook report. "Once their output gaps close, most advanced economies are poised to return to potential growth rates well below pre-crisis averages, held back by aging populations and lacklustre productivity."

The IMF warned the expansion could be derailed if countries resort to tit-for-tat trade sanctions.

"The first shots in a potential trade war have now been fired," IMF chief economist Maurice Obstfeld said in a foreword to the fund’s outlook, reiterating the IMF’s warning earlier in April that the global trading order was in danger of being "torn apart".

"Conflict could intensify if fiscal policies in the US drive its trade deficit higher without action in Europe and Asia to reduce surpluses," he said.

Investors with $543bn of assets are the least optimistic about global growth momentum since the UK voted to leave the EU, according to Bank of America Merrill Lynch. Just 5% of money managers project the international economy to be stronger in the next 12 months, the lowest level since June 2016, according to the bank’s April survey. Underscoring diminished growth momentum, earnings expectations have peaked.

Good times

Governments should take advantage of the good times to make structural reforms and put in place tax policies that raise the potential output of their economies, Obstfeld said.

The IMF outlook is a reality check for finance ministers and central bankers from its 189 member countries as they gather this week in Washington for the fund’s annual spring meetings. US President Donald Trump’s war of words with China over trade will be front and centre. The US has threatened to slap tariffs on as much as $150bn worth of Chinese goods, while Beijing has vowed to retaliate in kind.

But the guardians of the global economy face challenges beyond trade, including the end of years of easy central-bank money and a world debt pile that has climbed to a record $164-trillion. Financial markets have been choppy this year, with US stocks down slightly after a strong performance in 2017.

Broad recovery

Globally, growth is being driven by a surge in business spending and a recovery in trade volumes, according to the IMF. In 2017, the expansion covered two-thirds of countries, accounting for three-quarters of global output, making it the broadest upswing since 2010 when the world was coming out of the financial crisis.

But there are signs the synchronised recovery may be becoming a little more uneven, at least in the short term, with the US charging ahead, fuelled by tax cuts and government spending.

The US economy will grow 2.9% in 2018, the IMF said, up 0.2 of a percentage point from the fund’s forecast in January. The US will expand at a 2.7% pace in 2019, also up 0.2 of a percentage point from three months ago.

The IMF’s revised US forecasts includes the benefits of the tax cuts passed in December, as well as a $1.3-trillion spending bill. However, the fund said growth would be lower than expected after 2022, due to the higher budget deficit and the expiry of fiscal stimulus.

Faster growth

The IMF also raised its forecast for the eurozone, predicting the currency zone will grow 2.4% in 2018, up 0.2 points from January. The fund left its forecast for eurozone growth next year unchanged, at 2%.

China will grow 6.6% in 2018 and 6.4% in 2019, the fund said. Both forecasts were unchanged from three months ago.

The world’s second-biggest economy will continue re-balancing away from investment and manufacturing toward consumption and services, the IMF said, warning that rising debt clouded the nation’s medium-term outlook.

The IMF also left its outlook for Japan flat, predicting that the nation would expand 1.2% in 2018 and 0.9% in 2019.

India will grow 7.4% in 2018 and 7.8% in 2019, both unchanged from January.

The fund cut its forecast for Canada to 2.1% in 2018, down 0.2 points from three months ago. The IMF also lowered its outlook for the Middle East and North Africa in 2018 by 0.2 points, to 3.2%.