Trump bump definitely gone and the International Monetary Fund says the global economy will now depend on recovering euro economies (but not the sliding UK) and a rebound in China, which will drag higher the economies of the rest of the region, including Australia.
That Asia and especially China will rebound is good news for Australia and commodity exporters especially.
In its World Economic Outlook update released yesterday in Asia, the fund said that while global will be an unchanged (from June) 3.5% this year and 3.6% next year, the drivers would change quite a bit.
“While risks around the global growth forecast appear broadly balanced in the near term, they remain skewed to the downside over the medium term," the IMF said in its updated forecasts released in the Malaysian capital, Kuala Lumpur.
The IMF trimmed its forecasts for US growth to 2.1% for 2017 and 2018, down from earlier projections of 2.3% and 2.5%, respectively.
The Fund reversed previous assumptions that the Trump administration’s fiscal policy plans would boost US growth, largely because details of those plans have not materialised.
The downgrade for this year partly reflects weak first-quarter growth in the US, but the IMF said the biggest factor behind growth revisions, especially for 2018, “ Is the assumption that fiscal policy will be less expansionary than previously assumed, given the uncertainty about the timing and nature of U.S. fiscal policy changes,” said the IMF.
The downgrade is bad news for President Trump in another way – he has boasted repeatedly that his polices can get the US economy back to 3% growth – indeed its radical and discriminatory tax cut is based on 3% growth. The fund’s belief now suggests it seems any change in tax and spending and social welfare policy being minimal – and boosting the size of the Federal deficit.
But the US Congress and the President have to boost the federal debt ceiling ASAP and if there is a repeat of the partial shutdown as we saw a few years ago, growth could be knocked even lower next year. A lift in the ceiling has to come in the next couple of months and weak GDP growth will put extra pressure on to make the boost larger than planned.
The IMF added that market expectations of fiscal stimulus have also pulled back in the US as the Trump grand plan for $US1 trillion of infrastructure spending fades. That loss of confidence has helped push the value of the uS dollar down to 11 months lows – which should help exporters and US investors offshore if the fall is sustained.
Elsewhere, the forecast for UK growth was cut to 1.7% from 2.0% for 2017 because the impact of Brexit and the weaker pound. The forecast for 2018 has been left unchanged at 1.5%.
But growth projections for many euro-area countries were revised up for this year, including Germany, France, Italy and Spain – which is a rejoinder to the claims by Brexiteers that the UK economy would boom and outperform the EU.
The Fund said euro area growth is now expected to be slightly stronger in 2018 and pointed to “solid momentum.” It said the expected higher growth in the eurozone indicated “Stronger momentum in domestic demand than previously expected.”
It upgraded GDP projections for the single-currency area for 2017 to 1.9%, 0.2 percentage point higher than in April. For 2018, the IMF said euro-area growth would be slightly stronger at 1.7%, a 0.1-percentage-point change from just three months ago.
But Asia is where the growth will be solid, according to the fund. Japan will see growth of 1.3% this year up from 1.2% previously. but slow to 0.6% in 2018.
For China, the IMF said it now expected stronger growth of 6.7% this year, up 0.1 percentage point from the April forecast. China’s growth will still slow next year to 6.4%, but the IMF said that was up 0.2 percentage point from the April forecast because of expectations that Beijing will maintain high public investment.
