IMF: Global economy has 'spring in its step' but protectionism fears loom

After six years of disappointing growth, the world economy is finally on the upswing and predicted to grow at a pace of 3.5 percent in 2017 and 3.6 percent in 2018, but this recovery is being put at risk by the “sword of protectionism,” according to the International Monetary Fund.  

Emerging economies are predicted to drive three-quarters of this global growth on the back of rising commodity prices, while advanced economies are seeing an increase in manufacturing, according to the latest World Economic Outlook, titled ‘Gaining Momentum?’ The report was released on Tuesday at the start of the World Bank-IMF Spring Meetings in Washington, D.C.  

IMF Economic Counsellor Maurice Obstfeld said the economic data showed “a significant pick up this year relative to last,” and said the trend began in the middle of 2016, after which “everything seems to be going in the right direction … fueling our confidence that this year and next year are going to be substantially better,” he said.

However, he warned that widespread protectionism within countries and a “competitive race to the bottom” in financial oversight, threatened global growth — “so the world economy may be gaining momentum, but we cannot be sure that we are out of the woods,” he said.

IMF Managing Director Christine Lagarde gave a similar warning during a speech delivered in Brussels last week, during which she described the global economy as having a “spring in its step,” but also being under threat from multiple risks.

“There are clear downside risks: political uncertainty, including in Europe; the sword of protectionism hanging over global trade; and tighter global financial conditions that could trigger disruptive capital outflows from emerging and developing economies,” she warned.

In particular, she warned against inward-looking policies to restrict global trade — which she described as causing a “self-inflicted wound” that would disrupt supply chains, hurt global output and inflate the prices of production materials and consumer goods.

The WEO is released twice a year and the data is aggregated based on projections from individual IMF country teams. The next forecast will be released in July.

The WEO forecast for the United States has been upgraded on the likelihood of fiscal easing and an increase in investor confidence after the November elections, the report said. Europe and Japan have also been upgraded due to a recovery in global manufacturing and trade. The figures for China and Russia have been marked up.

However, the growth forecasts have been downgraded for some countries, especially in Latin America, Africa and the Middle East, which is due to declining trade, cuts in oil production and other factors.

In Africa, income growth could fall slightly short of population growth, the report warns, and adverse weather and civil unrest threaten growth in some countries.

To ensure growth continues, Lagarde said country governments need to implement three types of economic policies — to support growth, with an emphasis on productivity; policies to promote more equitable sharing of the benefits of economic growth; and policies to promote cooperation across borders through a multilateral framework.

She made a case for the IMF’s role in fostering international cooperation, describing it as the fund’s “bread and butter” work.

“We continue to focus on customized support to our membership through policy advice, lending when needed, and capacity development. This is our ‘bread-and-butter’ work, which we are continuously upgrading to keep it relevant and member-focused,” she said.

Devex reporters Michael Igoe and Sophie Edwards will be on the ground at the World Bank Spring meetings April 18-22. Stay tuned to Devex for coverage and follow @Sophie_Ed1984 and @AlterIgoe.