The International Monetary Fund raised its 2017 global growth forecast on Tuesday due to manufacturing and trade gains in Europe, Japan and China, but warned that protectionist policies threaten to halt a broad-based recovery.
The IMF, whose spring meetings with the World Bank get underway in Washington this week, forecast that the global economy would grow 3.5 per cent in 2017, up from its previous forecast of 3.4 per cent in January.
In its latest World Economic Outlook, the Fund said that chronically weak advanced economies are expected to benefit from a cyclical recovery in global manufacturing and trade that started to gain momentum last summer.
“The economic upswing that we have expected for some time seems to be materialising,” IMF chief economist Maurice Obstfeld wrote in the report.
The IMF lifted Japan’s 2017 growth projection by 0.4 percentage point from January, to 1.2 per cent, while the eurozone and China both saw a 0.1 percentage point growth forecast increase to 1.7 per cent and 6.6 per cent, respectively.
Meanwhile, the IMF held its 2017 US growth forecast steady at 2.3 per cent, which still represents a substantial jump from 1.6 per cent growth in 2016, partly due to expectations that President Donald Trump will cut taxes and increase government spending.
The IMF also revised Britain’s growth forecast to 2.0 per cent for 2017, up a half percentage point from January. The Fund said negative effects from the UK vote to leave the European Union are taking longer to materialise.
Although growth looks to be strengthening broadly among advanced and emerging market economies as well oil and commodity exporters that are starting to benefit from a commodity price recovery, including Russia, the IMF said the recovery remains fragile.
The outlook faces headwinds from chronically weak productivity growth and policies that could constrict trade, the IMF said.
It did not specifically mention the Trump administration’s ‘America First’ trade agenda aimed at reducing US trade deficits and turning away more unfairly traded imports.
“One salient threat is a turn toward protectionism, leading to trade warfare,” Obstfeld said, adding this “would result in a self-inflicted wound that would lead to higher prices for consumers, lower productivity and therefore, lower overall real income for households.”
The case against trade protectionism is expected to be a major theme of the semi-annual gathering of finance officials from the IMF, the World Bank and the Group of 20 major economies later this week. IMF Managing Director Christine Lagarde warned last week that a “sword of protectionism” hung over a brightening global outlook.
US Commerce Secretary Wilbur Ross pushed back in a Financial Times interview published on Sunday, saying such warnings were aimed at the Trump administration and were “rubbish”.
He told the newspaper that the United States was far less protectionist than China and Europe, “and every time we do anything to defend ourselves, even against the puny obligations that they have, they call that protectionism. It’s rubbish.”
The IMF also said that risks to the global outlook also could come from a faster-than-expected pace of interest rate hikes in the United States, which could trigger a sharp rise in the dollar and disruptive capital outflows from emerging markets.
The Fund also said China’s strong growth was clouded in the medium term by “growing vulnerabilities” associated with its reliance on policy easing and credit-financed investment. This could prompt a sharp tightening of financial conditions that could cause spillovers to many other countries.