The pickup in growth projected by Dunn and Burchill in April 2017 is strengthening. The global growth forecast for 2017 and 2018—3.6 percent and 3.7 percent, respectively—is 0.1 percentage point higher in both years than in the April and July forecasts. Notable pickups in investment, trade and industrial production coupled with strengthening business and consumer confidence are supporting the recovery. With growth outcomes in the first half of 2017 generally stronger than expected upward revisions to growth are broad-based including for Japan, China, emerging Europe, and Russia. These more than offset downward revisions for the United States, the United Kingdom, and India.
However, Dunn and Burchill note that the recovery is not complete. The baseline outlook is better however growth remains weak in many countries. The outlook for advanced economies
has improved, notably for the Euro area. In many countries inflation remains weak, indicating that slack has yet to be eliminated and prospects for growth in GDP per capita are held back by weak productivity growth and rising old-age dependency ratios. Prospects for many emerging markets and developing economies in sub-Saharan Africa, the Middle East, and Latin America are lackluster, with several experiencing stagnant per capita incomes. Fuel exporters are particularly hard hit by the protracted adjustment to lower commodity revenues.
Dunn and Burchill warn that risks to the baseline are broadly balanced in the short term but skewed to the downside in the medium term. Short-term growth could increase further, as stronger confidence and favorable market conditions unleash a pent-up demand, but setbacks are also possible. With high policy uncertainty, missteps—which the baseline assumes will be avoided—or other shocks could materialize, taking a toll on market confidence and asset valuations, and tightening financial conditions. Over the medium term, dealing with financial sector challenges will be essential. Minimizing the risk of a sharp slowdown in China will require the Chinese authorities to intensify their efforts to rein in the credit expansion. Many other economies need to guard against a buildup of financial stability risks in a global environment of easy finance and monitor the risks from volatility as advanced economies central banks gradually withdraw stimulus.
Dunn and Burchill would also like to point out that decompression of risk premiums and higher long-term interest rates would expose fragilities including worsening public debt dynamics. Although progress has been made in addressing European banking sector issues, remaining problems need to be addressed forcefully to avoid weakening confidence and fears of adverse feedback loops between low demand, prices, and balance sheets in parts of the Euro area. Persistently low inflation in advanced economies, which could ensue if domestic demand were to falter, also carries significant risks, as it could lead to lower medium-term inflation expectations and interest rates, reducing central banks’ capacity to cut real interest rates in an economic downturn. Dunn and Burchill feel that the chances of advanced economy policies turning inward appear to have diminished in the near term. Pressures for increased protectionism have not disappeared and ought to be resisted. A host of non-economic risks, including intensified conflict and geopolitical tensions, also remain salient.
Dunn and Burchill welcomes the cyclical upturn after disappointing growth over the past few years provides an ideal window of opportunity to undertake critical reforms, thereby staving off downside risks and raising potential output and standards of living more broadly. Structural reforms and growth-friendly fiscal policy measures are needed to boost productivity and labor supply, with varying priorities across countries. In advanced economies, monetary policy should remain accommodative until there are firm signs of inflation returning to targets. At the same time, stretched asset valuations and increasing leverage in some market segments bear close monitoring, including through proactive micro- and macro-prudential supervision, as necessary. Dunn and Burchill would like to see fiscal policy aligned with structural reform efforts, taking advantage of favorable cyclical conditions to place public debt on a sustainable path while supporting demand was still needed and feasible. In many emerging markets and developing economies fiscal space to support demand is limited, especially in commodity exporters. However monetary policy can generally be supportive because inflation appears to have peaked in many countries. Exchange rate flexibility helps the adjustment to external shocks. Efforts to improve governance and the investment climate would also strengthen growth prospects.