International Monetary Fund. Western Hemisphere Dept.
Against the backdrop of lackluster global growth in 2016, the world economy is seeing underlying shifts in its economic and policy landscape. Since last October, the outlook for advanced economies for 2017–18 has improved, reflecting better growth prospects in the United States, Europe, and Japan—alongside some rebound in manufacturing and trade and likely U.S. fiscal stimulus. With the anticipated change in the U.S. policy mix, including faster monetary tightening and a stronger U.S. dollar, market sentiment in advanced economies has improved and equity markets have been buoyant. Domestic financial conditions initially tightened in emerging markets, where growth prospects have worsened slightly, but market conditions have since noticeably improved. On balance, global growth is expected to rise modestly in 2017 and 2018 but with widely dispersed risks around this baseline. Longer-term uncertainty surrounds the direction and extent of shifts in U.S. policies. Global vulnerabilities include a rising tide of economic nationalism in major advanced economies—marked by higher antipathy toward trade, immigration, and globalization.
With strong policy action to contain sovereign debt problems in the euro area, the recovery continues. But lingering uncertainties and market pressures make for moderate and unequal growth across advanced Europe. In the short term, in addition to dealing with weak banks and supportive monetary policy, this calls for credible fiscal consolidation, adjusted to country needs and designed to minimize the impact on growth. It will be just as important to address the governance issues revealed by the crisis. Better fiscal frameworks at the national and the EU levels will enhance the credibility of fiscal adjustment. And energizing and coordinating structural policies should help sustain and balance growth, supporting public finances in the longer term. Although the political economy of such reforms is complicated, they promise a much stronger Europe. Policymakers should seize the moment and act boldly.