2 key risks are endangering the global economy, IMF says

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  • World economic growth is set to remain firm this year and next, but remains vulnerable to payback from two key factors, according to a new International Monetary Fund report – Chinese private debt and a temporary US fiscal stimulus whose effects will fade.
  • “Some of the temporary fiscal support underpinning current growth will end,” the IMF said in its G20 staff report.
  • “The positive momentum expected for 2018 and 2019 will eventually slow, implying a challenging medium-term outlook for many countries,” the Fund predicted.

The world economy may get a temporary boost from a combination of US tax cuts and Chinese government spending to bolster state-owned enterprises, but payback is coming and longer-term growth prospects remain subdued, the International Monetary Fund said in a new report.

The Fund’s latest economic growth forecast, issued in January, was upgraded to 3.9% for 2018 and 2019 – and heralded the broadest synchronised global growth upsurge since 2010.”

However, in a reportprepared for this week’s G-20 meeting of finance ministers and central bank governors in Buenos Aires, IMF staffers sound a bit less sanguine about global growth prospects.

“Some of the temporary fiscal support underpinning current growth will end,” the IMF said.

The Fund singled out two worrisome trends in particular.

“China’s economic rebalancing to more sustainable growth will require fiscal policy to consolidate gradually, and the still-needed reduction of credit growth will subtract from private demand,” the report said.

“In the United States, some of the current boost in activity will be paid back later in the form of lower growth once the fiscal stimulus moves into reverse and the incentives from investment expensing expire.”

This will have implications for the rest of the world, particularly emerging markets. “The positive momentum expected for 2018 and 2019 will eventually slow, implying a challenging medium-term outlook for many countries.”

Part of the reason for eventual economic softness is the prospect of rising interest rates in the United States as the Federal Reserve looks to continue raising interest rates this year.

The report adds that “some cyclical forces will wane: market interest rates are rising and financial conditions are likely to tighten as monetary policy normalizes; the U.S. tax reform will subtract momentum when investment incentives expire; and China’s transition is expected to resume as credit growth and fiscal stimulus slow.”

IMF RisksInternational Monetary Fund

And that says nothing about the missed opportunities that resulted from the Great Recession of 2007-2009 and the subsequent banking crisis in Europe.

“GDP levels remain significantly below the hypothetical levels that might have been reached if the Great Recession and euro area debt crisis had not occurred and GDP had grown at its pre-crisis trend,” the IMF said.

G20 deviations from trendThe International Monetary Fund

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