The global economic recovery is picking up steam, but the rise of protectionist rhetoric and the threat of trade wars could erode those gains, the International Monetary Fund warned on Tuesday.
The fund’s semi-annual World Economic Outlook report revised global growth up to 3.5 percent for this year, one-tenth higher than the January forecast. It was a rare upward revision to the growth forecast—the first in two years—which has been consistently disappointing. For 2018, growth is expected to rise to 3.6 percent, and to 3.8 percent by 2022.
“The global economy seems to be gaining momentum—we could be at a turning point. But even as things look up, the post-World War II system of international economic relations is under severe strain,” IMF chief economist Maurice Obstfeld said.
The Washington-based IMF warns of the “significant downside risks” to the outlook, which have grown worse since January. Among them is “the turn toward protectionism, leading to trade warfare,” Obstfeld said in the foreword of the report. “Whether the current momentum will be sustained remains a question mark,” he said in a press conference.
Many of the concerns—including rolling back financial regulation, pulling away from the multilateral trading system and restricting immigration—are centerpieces of U.S. President Donald Trump’s policy program. But the issues also are visible in the bitter French election campaign, as well as in Britain’s planned exit from the European Union, and the surprise call for elections in June.
“Clearly there is rising concern about the uncertain outcome of the elections,” Obstfeld told reporters.
The anti-trade, anti-immigration attitude in advanced economies is to some degree understandable, given “the failure of growth gains in rich economies to substantially reach those in the lower parts of the income distribution in recent decades,” he said. However, Obstfeld warned that “capitulating to those pressures would result in a self-inflicted wound.” He said it would harm countries by pushing prices higher and eroding household income, and it would prompt retaliation, worsening the global economy.
Economies in the developing world continue to provide most of the impetus to global growth, led by China and India. In its report, IMF put China growth this year at 6.6 percent, up a tenth of a point from the January estimate, while the 2018 prediction was increased by two tenths to 6.2 percent.
The forecasts for India were unchanged at 7.2 percent this year and 7.7 percent next. But there were a couple of upside surprises among the advanced economies, including a half-point upward revision to the forecast for Britain this year, to two percent, despite fears of a negative impact of Brexit. And Japan’s growth is now seen at 1.2 percent—modest, but a full four-tenths higher than three months ago.
The estimate for U.S. growth was steady at 2.3 percent this year and 2.5 percent in 2018.
“Global economic activity is picking up speed, but the potential for disappointments remains high, and momentum is unlikely to be sustained in the absence of efforts by policymakers to implement the right set of policies and avoid missteps,” the report said.
The IMF said “hundreds of millions” of people have been lifted out of poverty through economic integration and technological progress, “helping to reduce global income inequality.” But Obstfeld said the benefits of growth and the burden of economic adjustments too often have been unequally shared. It will be up to the governments to “address these disparities head-on.”
The IMF recommends “well-targeted initiatives” to help workers adversely affected by free trade and other economic changes to “find jobs in expanding sectors” as well as “social safety nets to smooth the loss of income,” and improved education and training in the longer term. “Similarly, curbing immigration flows would hinder opportunities for skill specialization in advanced economies, limiting a positive force for productivity and income growth over the long term,” the report said.
The IMF report stressed that risks to the outlook “remain tilted to the downside,” meaning that while growth could turn out to be faster than expected there are more negative possibilities on the horizon. Among the worries are the possibility for a rising U.S. deficit and the dismantling of financial regulations erected after the 2008 global crisis, which “would raise the probability of costly financial crises in the future,” the IMF warned.
China’s “dangerous dependence on rapidly expanding credit” is another area of concern, as is weak demand in Europe, and a series of non-economic factors, including geopolitical risks and corruption.