Letter IEDI n. 885–Outlooks for the World Economy
By 2018, the global economy has stopped improving, according to the assessments of international organizations. The latest International Monetary Fund (IMF) Outlook, released in October, lowered the expected pace of world GDP growth to 3.7% this year. This means that 2018 should repeat the performance of 2017 and nothing more. Moreover, 2019 should not register any additional advance either, with growth steady at the same 3.7%. Previously, the Fund's projections had been pointing to a stronger performance in 2018-19 than in 2017.
Projections from other institutions, such as the World Bank and Unctad (United Nations Conference on Trade and Development), had already indicated the same trend, namely the lack of acceleration in world dynamism. The World Bank (June) and UNCTAD (September) scenarios predicted a 3.1% growth rate in 2018. The divergences between these projections and the IMF's result from the assumptions and models used, as well as the incorporation of more recent information on global economic activity and the review of the world economy's performance in 2017, previously estimated at 3.1%.
It should be noted, however, that despite the lack of acceleration for this and the next year, if the IMF projections prove to be correct, the triennium 2017-2019 will register the highest and most stable GDP growth after the global financial crisis and the great recession (2010-2011). Still, the world economy would remain much less dynamic than in the pre-crisis boom.
Three factors explain the IMF's expectation of a lesser dynamism in 2018-2019 in relation to its previous outlook. First, the increase in trade protectionism, which was inaugurated by the United States raising tariffs on several products, especially Chinese goods, and was intensified by the retaliation of their trading partners. This "trade war" tends to break the virtuous circle of recovery of fixed capital investment and imports seen in 2017. As a result, the IMF forecasts a continued slowdown in international trade, from 5.2% in 2017 to 4.2% in 2018 and 4.0% in 2019.
Second, the normalization of US monetary policy negatively affects capital flows to emerging economies, and implies increased risks for companies and advanced countries with record levels of indebtedness. Thirdly, the Fund cites the rise in oil prices, which puts pressure on importing countries' inflation and external accounts.
Besides being more modest, global expansion should also result from a different combination of regional performances in the 2018-2019 biennium, becoming less synchronized across countries. The worsening of the IMF's forecasts for global economic activity was due to lower projections for emerging economies, while the outlook for advanced economies remained unchanged.
In the case of the latter, the Fund’s October Outlook predicts for 2018 the same 2.4% rate it did in July, which is below the level expected in April (2.5%). Although the adjustment was only marginal, there was an increase in heterogeneity among the major economies, with the US accelerating, and Japan, the UK and the euro area slowing down, mainly as a result of the deceleration in world trade.
For emerging economies, the growth projection for 2018 fell from 4.9% in April and July to 4.7% in October, the same level registered in 2017. This is also expected to be the figure for 2019. Emerging and developing Asia will remain the main drivers of the pace of expansion of this group of economies, while emerging Europe will strongly decelerate, a drop only partially offset by the performance of the Commonwealth of Independent States (CIS).
Latin America and the Caribbean, in turn, will remain at the bottom of the group. Forecasts for this region suffered the biggest downward revisions in both July and October: from 2% in April to 1.6% in July and 1.2% in October. That is, 2018 will see practically the same rate of 2017 (1.3%). But in 2019 the region is expected to gain some pace: 2.2%. Brazil (as well as Mexico) is an important element in this succession of downward revisions, given that its expected GDP expansion for 2018 has been cut from 2.3% in April's outlook to only 1.4% in October's. By 2019, it is estimated that the country will grow 2.5%, a rate that is still low, but more satisfactory than in previous years.