G-20 Leaders Meet Tomorrow in Hamburg, Germany, as the global recovery remains on track, with some changes in its composition. While the U.S. economy went through a soft patch early in the year, many European and Asian countries saw GDP expand faster than expected, supported by a cyclical upturn in global manufacturing and trade. Emerging market financial conditions have remained broadly supportive of growth even as U.S. monetary policy has gradually tightened. At the same time, several emerging and advanced economies are still operating below capacity, and underlying core inflation is still low generally. All in all, the global outlook remains broadly similar to the April WEO, says the International Monetary Fund (IMF)).
This momentum comes, however, with rising vulnerabilities and continuing imbalances. China’s growth has been robust, but it is fueled in part by rapid credit and fiscal expansion that aggravates financial vulnerabilities—although measures are being taken to address the challenges. In some emerging markets, corporate leverage is high and bank balance sheets fragile. Weak productivity growth and uneven distributions of economic gains limit growth going forward, especially in advanced economies. At the same time, global current account excess imbalances persist, driving further divergence in countries’ net international investment positions.
According to the IMF, Weak productivity growth and uneven distributions of economic gains limit growth going forward, especially in advanced economies. The slow pace of economic reform and of private sector balance sheet repair continue to depress investment and productivity growth, reinforcing headwinds from longer-term trends such as aging populations, slowing innovation, and slow progress in raising female labor force participation. Combined with insufficient support for those who bear the burden of adjustment to technological change and global economic integration, these forces put a ceiling on future economic prospects as the current cyclical boost runs its course.
While short-term risks have become more balanced, downside risks still dominate in the medium term. The cyclical recovery could prove stronger and more durable than expected, but there is also negative risk, including from policy uncertainty in advanced economies, financial sector vulnerabilities, and a sudden sharp tightening in global financial conditions. A broad rollback of the strengthening of financial regulation and oversight achieved since the crisis could lead to lower capital and liquidity buffers or weakened supervisory stances, with negative repercussions for global financial stability. In the medium term, failure to lift potential growth and make it more inclusive could damage social cohesion, and—in a self-defeating feedback loop—make it even harder to find the political consensus for necessary reforms.
The IMF believes there is no time for standing still—policymakers will have to take tangible policy action to strengthen and sustain the recovery while ensuring that it is resilient, well-balanced, and more inclusive:
Strengthening the momentum. With countries at present facing divergent cyclical conditions, differing stances of monetary and fiscal policy are likely to remain appropriate. In advanced economies where demand is still lacking and inflation too low, monetary and (where feasible) fiscal support should continue; elsewhere monetary policy should normalize gradually, in line with economic developments, and fiscal policy should focus on supporting reforms aimed at expanding the economy’s supply potential. Emerging markets should continue to allow exchange rates to buffer shocks, wherever possible.
Making growth resilient and balanced. Efforts to accelerate private sector balance sheet repair and ensure sustainability of public debt are critical foundations for a resilient recovery. So are efforts from surplus and deficit countries alike to reduce excess current account imbalances.
Sustaining high and inclusive growth in the long term. This puts a priority on well-sequenced and tailored structural reforms to boost productivity and investment, measures to narrow gender participation gaps, and active support for those hurt by shifts in technology or trade.
Working together. To maximize the benefits of global integration, a strong and rules-based multilateral trade framework remains essential. It will be most effective if countries engage in a dialogue with a view to modernizing and adapting the framework dynamically to the changing needs of the global economy. International cooperation also plays a crucial role in strengthening the global financial system, coordinating support for low-income countries, and tackling climate change and other collective challenges.