By Moses K Gahigi
The International Monetary Fund (IMF) has warned global economies against basking in the current relative growth, but use this time to build policy buffers that will yield resilience and inclusiveness because the next downturn is much closer and will be more difficult to deal with.
The new world economic outlook has revised growth forecasts for 2018-19 to 3.9%, which is 0.2 per cent higher than last October global growth projections.
“This is very good news but political leaders and policy makers must stay mindful that the present economic momentum reflects a confluence of factors that are unlikely to last for long” said Maurice Obstfeld, the IMF economic counsellor at the World Economic Forum in Davos.
He said although the global financial crisis may seem firmly behind us, without prompt action to address structural growth impediments to enhance inclusiveness, the next plunge will come sooner than we know.
Obstfeld said every government should be asking itself three questions, how can we raise economic efficiencies and output levels on a long term? How can we support resilience and inclusiveness while reducing the likelihood that the current upswing ends in an abrupt slowdown or even in a new crisis and how can we be sure to have the policy tools we need to counter the next downturn?
He said the current upturn did not arise by chance, that it began to take hold in mid-2016 and this growth is owed much to accommodative macroeconomic policies, which supported market sentiment and hastened natural healing processes.
The principal sources of GDP acceleration so far have been in Europe and Asia, with improved performance also in the United States, Canada, and some large emerging markets, notably Brazil and Russia, both of which shrank in 2016.
Although significant growth has been observed in Europe, Asia, and North America, there is less good news in the Middle East and Sub-Saharan Africa; the latter area weighed down by the weakness of its larger economies, low growth driven in part by adverse weather and sometimes combined with civil strife factors which sparked significant outward migrations.
IMF indicated that trade is again growing faster than global output, driven in part by higher global investment and the fact that commodity prices have moved up, benefiting those countries that depend on commodity exports.
The body said monetary policy remains accommodative in the largest countries, explaining the current easy global financial conditions, noting that even though the United States Federal Reserve continues to raise interest rates gradually, it has been cautious, having wisely responded to the turbulence of early 2016 by postponing previously expected rate increases.
The recent U.S. tax legislation will significantly contribute to U.S. growth over the next few years, largely because of the temporary exceptional investment incentives that it offers, IMF noted that although this short-term growth boost will have positive, albeit short-lived output spill-overs for U.S. trade partners, it is also likely to widen the U.S. current account deficit, strengthen the dollar, and affect international investment flows.
Even as economies return to full employment, inflation pressures remain contained and nominal wage growth is subdued, financial conditions are sound with booming equity markets, low long-term government borrowing costs, compressed corporate spreads, and attractive borrowing terms for emerging market and developing economies.
But despite the bullish outlook, Obstfeld said there is no room for complacency instead governments should invest more in structural reforms, productive infrastructure and in people, that next recession may be closer than we think.
“Now is the time to build policy buffers to reinforce defences against financial instability, the next recession maybe closer than we think and the ammunition to combat it with is much more limited now than a decade ago, notably because public debts are also much higher now” he noted.