This week, the International Monetary Fund (IMF) published an interim update to its World Economic Outlook publication. The IMF’s forecast for global GDP growth was unchanged from its April release, but the composition of growth at the country level has changed because of recent economic data developments and an updated analysis of future trends. The IMF forecast currently projects global growth to increase from 3.2% in 2016 to 3.5% in 2017 and to 3.6% in 2018. However, the organization perceives several risks to the medium-term outlook, including rising protectionism, faster-than-expected interest rate normalization actions by global central banks, and equity market corrections in an environment of rich market valuations and high policy uncertainty.
|IMF WOrld economic outlook- JUly 2017 Update|
|GDP Growth Forecast|
The Organization for Economic Co-operation and Development (OECD) released its Global Economic Outlook forecast in June, with a very similar overall projection for global growth. Like the updated IMF forecast, the OECD outlook shows real GDP growth for the world of 3.5% in 2017 and 3.6% in 2018. According to the OECD, potential risks to the forecast include global financial risks and vulnerabilities, high policy uncertainty, and continued weak wage growth.
Lower Projections for the United States
Following weak Q1 2017 GDP growth and in the face of political gridlock that makes near-term fiscal stimulus appear unlikely, the IMF lowered its GDP forecasts for the United States for 2017 and 2018 in its July update. In its April forecast, the organization projected 2.3% growth in 2017 and 2.5% growth in 2018; the growth forecasts for both years is now 2.1%. The OECD forecast calls for 2.1% growth in 2017 and 2.4% in 2018, but this forecast assumes a significant fiscal stimulus package. If this easing does not occur, the OECD indicates that the 2018 forecast would be closer to 2.0%.
The outlooks from both Oxford Economics and FactSet Economic Estimates are in line with the IMF and OECD outlooks. Oxford is projecting 2.2% growth in 2017 and 2.4% in 2018, while analysts surveyed by FactSet expect 2.2% growth in 2017 and 2.3% in 2018. That said, we may continue to see adjustments to the various 2018 forecasts as the prospects for fiscal stimulus change.
Things are Looking Up for the Eurozone
Meanwhile, things are looking better for the eurozone. The IMF is now predicting 1.9% GDP growth for the region in 2017, followed by 1.7% in 2018; this compares to 1.7% and 1.6%, respectively, in the April forecast. The upward forecast revision follows surprisingly strong first quarter data and evidence in recent data releases of stronger-than-expected domestic demand. The two largest countries in the eurozone (Germany and France) saw small upward revisions in their growth rates, but it was the next two biggest countries (Italy and Spain) that saw the most significant increases. Italy’s 2017 growth rate forecast increased from 0.8% to 1.3% while Spain’s 2017 forecast went from 2.6% to 3.1%.
The OECD is forecasting 1.8% growth for the eurozone in 2017 and 2018, but the organization also sees increasing risk from Brexit as a concern for the growth outlook in 2018. Oxford Economics has an even rosier outlook, forecasting 2.2% growth in 2017 and 1.8% in 2018, while the FactSet Economic Estimates consensus is calling for 1.9% growth in 2017, followed by 1.7% in 2018.
Inflation Expectations Rise Globally
The other key takeaway from the various forecasts is an expected increase in inflation globally. Over the last few months, we have seen significant upward revisions to CPI inflation forecasts from all sources. Between its October 2016 and April 2017 publications, the IMF raised its 2017 projection for consumer price inflation in advanced economies from 1.7% to 2.0%. On a country-by-country basis, the eurozone inflation forecast increased by 0.6 percentage points (from 1.1% to 1.7%), the U.S. forecast went from 2.3% to 2.7%, and Japan from 0.5% to 1.0%.
The OECD also bumped up its inflation numbers between the November 2016 and June 2017 forecasts. In November, the consumer price inflation forecast for the entire OECD in 2017 was 1.7%, but the most recent projections call for 2.3% inflation this year. The OECD’s eurozone inflation outlook went from 1.2% to 1.7% while the U.S. forecast increased from 1.9% to 2.5%. In contrast, the FactSet Economic Estimates consensus values for U.S. inflation were trending higher but have come back down in recent weeks in the face of weak June monthly data; the outlook is now little changed from a year ago, with inflation projected at 2.2% in both 2017 and 2018.
Trends to Watch
Both the IMF and the OECD highlight several threats to their forecasts, all of which are interconnected. The biggest risks relate to financial markets and uncertainty regarding fiscal and monetary policy. Faster-than-expected central bank tightening around the world has the potential to negatively impact global equity markets, which could dampen economic growth. This could be in the form of policy rate increases, as well as the unwinding of central bank balance sheets, i.e. reversing the quantitative easing policies implemented by the Federal Reserve, the Bank of England, the European Central Bank, and the Bank of Japan since the global financial crisis. If interest rates rise more rapidly than anticipated, we could see a dramatic global reaction in the markets.