Why The IMF Predicts Global Growth In 2017

04/19/2017 05:26 pm ET Updated Apr 21, 2017

With continued instability in the Middle East, recent saber-rattling in the Koreas, and the Trump administration’s general behavior, it can hard to believe that things are looking up. But according to MarketWatch, the IMF declared this week that “the global economy is on course for its best performance in several years.” The IMF raised expectations of global growth in 2017 to 3.5 percent, which would be its highest in five years.

There are plenty of reasons to expect global growth thanks to looser fiscal policy, a reasonable oil price, and relative moderation from Trump. But the IMF did stress that this recovery remains fragile and could easily be stymied by many things, particularly by the growing popularity of protectionism worldwide and low productivity growth.

Could Trump help the Global Economy?

When Donald Trump was initially first elected president, stocks fell as investors initially panicked. Trump campaigned on a populist, America-First message which talked about increasing trade barriers and attacking China as a currency manipulator.

But just last week, the U.S. Treasury Department said that “no major trading partner is manipulating its currency for an unfair trade advantage”, and President Trump has been not nearly as loud about throwing up trade barriers as Candidate Trump. The fact that Steve Bannon, Trump’s extremist advisor who has explicitly called for destroying the administrative state, appears to be losing power within the White House is another positive sign.

U.S. stock prices have risen since that initial fall because the hope has been that Trump will cut taxes, spend on infrastructure, and not go on protectionist escapades. That scenario appears to be more likely, which is a positive sign for the U.S. and global economy.

There are also positive economic news outside of the U.S. Rising oil and commodity prices will help countries like Brazil which is coming out of a recession. The IMF raised its estimates of Chinese growth from 6.5 percent to 6.6 percent thanks to increased ease of credit, and also predicted high growth from India and much of Asia.

Growth for years has been restricted by austerity and tight money policies in response to economic chaos. Those policies appear to be coming to an end, which is good news for companies like Nuvest Management Services.

Protectionism and Productivity

But this does not mean all is well. The IMF explicitly warned against “a turn towards protectionism” which would hurt the economy, which followed up earlier comments along these lines. Trump’s commerce secretary Wilbur Ross fired back at the IMF by dismissing warnings of US protectionism as “rubbish”, but Trump’s election, Brexit, and the ongoing French elections show that nationalism and protectionism are far more popular than before.

Ross claimed that the United States is less protectionist than Japan, Europe, or China, and that America was protecting itself from protectionist policies from those countries. But that does not erase the fears that U.S. protectionist measures could spark a trade war. And while Trump has been more moderate, he could easily suddenly reverse course as he has done on other issues and start a trade war on a whim.

The IMF is also concerned about low productivity growth. Earlier this month, IMF head Christine Lagarde stated in a speech that productivity growth had slowed from 1 percent to 0.3 percent in the advanced countries and warned about how low productivity growth would hurt the global economy in the long run. Lagarde advocated spurring more innovation by cutting back on bureaucratic red tape and encouraging incentives for private research.

The global economy is still recovering from years of economic crisis and uncertainty, but the IMF appears to believe that things are starting to stabilize. In order to protect this growth, it is clear that instead of drastic actions like a trade war, governments worldwide need to prudently encourage innovation and moderation.

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