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Global Economic Upswing Creates a Window of Opportunity

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By Maurice Obstfeld October 10, 2017 Versions in عربي (Arabic), 文 (Chinese), Français (French), 語 (Japanese), Русский (Russian), and Español (Spanish)   The global recovery is continuing, and at a faster pace. The picture is very different from early last year, when the world economy faced faltering growth and financial market turbulence. We see an accelerating cyclical upswing boosting Europe, China, Japan, and the United States, as well as emerging Asia. The latest World Economic Outlook has therefore upgraded its global growth projections to 3.6 percent for this year and 3.7 percent for next—in both cases 0.1 percentage point above our previous forecasts, and well above 2016’s global growth rate of 3.2 percent, which was the lowest since the global financial crisis. For

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By Maurice Obstfeld

October 10, 2017

Versions in عربي (Arabic), (Chinese), Français (French),  (Japanese), Русский (Russian), and Español (Spanish)

 

The global recovery is continuing, and at a faster pace. The picture is very different from early last year, when the world economy faced faltering growth and financial market turbulence. We see an accelerating cyclical upswing boosting Europe, China, Japan, and the United States, as well as emerging Asia.

The latest World Economic Outlook has therefore upgraded its global growth projections to 3.6 percent for this year and 3.7 percent for next—in both cases 0.1 percentage point above our previous forecasts, and well above 2016’s global growth rate of 3.2 percent, which was the lowest since the global financial crisis.

For 2017, most of our upgrade owes to brighter prospects for the advanced economies, whereas for 2018’s positive revision, emerging market and developing economies play a relatively bigger role. Notably, we expect sub-Saharan Africa, where growth in per capita incomes has on average stalled for the past two years, to improve overall in 2018.

The current global acceleration is also notable because it is broad-based—more so than at any time since the start of this decade. This breadth offers a global environment of opportunity for ambitious policies that will support growth and raise economic resilience in the future. Policymakers should seize the moment: the recovery is still incomplete in important respects, and the window for action the current cyclical upswing offers will not be open forever.

Global recovery still incomplete

Why do we say that the recovery is incomplete? It is incomplete in three important ways.

First, the recovery is incomplete within countries. Even as output nears potential in advanced economies, nominal and real wage growth have remained low. This wage sluggishness follows many years during which median real incomes grew much more slowly than incomes at the top, or even stagnated. Drivers of growth including technological advances and trade have had uneven effects, lifting some up but leaving others behind in the face of structural transformation. The resulting higher income and wealth inequalities have helped fuel political disenchantment and skepticism about the gains from globalization, putting recovery at risk.

Second, the recovery is incomplete across countries. While most of the world is sharing in the current upswing, emerging market and low-income commodity exporters, especially energy exporters, continue to face challenges, as do several countries experiencing civil or political unrest, mostly in the Middle East, North and sub-Saharan Africa, and Latin America. Many small states have been struggling. About a quarter of all countries saw negative per capita income growth in 2016, and despite the current upswing, nearly a fifth of them are projected to do the same in 2017.

Finally, the recovery is incomplete over time. The cyclical upswing masks much more subdued longer-run trends of productivity and demographics, even correcting for the arithmetical effect of more slowly growing populations. For advanced economies, per capita output growth is now projected to average only 1.4 percent a year during 2017–22 compared with 2.2 percent a year during 1996–2005. Moreover, we project that fully 43 emerging market and developing economies will grow even less in per capita terms than the advanced economies over the coming five years. These economies are diverging rather than converging, going against the more benign trend of declining inequality between countries due to rapid growth in dynamic emerging markets such as China and India.

Window for action

These gaps in the recovery challenge policymakers to action—action that should take place now, while times are good. Success requires a three-pronged approach in the context of completing and refining the important financial stability reforms undertaken since the global crisis, without weakening them.    

Needed structural reforms differ across countries, but all have ample room for measures that raise economic resilience along with potential output. Our research has shown that structural reforms are easier to implement when the economy is strong.

For some countries that have returned close to full employment, the time has come to think about gradual fiscal consolidation to reduce swollen public debt levels and build buffers against the next recession. Higher infrastructure and educational spending, which are needed in some countries that do have fiscal space, can have the added benefit of boosting global demand just as consolidation measures elsewhere subtract from it. This multilateral fiscal policy mix can also help reduce excess global imbalances.

Critically important to growth that can be sustained and shared by all is investment in people at all life cycle stages, but especially the young. Better education, training, and retraining can both ease labor market adjustment to long-term economic transformation—from all sources, not only trade—and raise productivity. In the short term, the excessive youth unemployment that afflicts many countries urgently deserves attention. Investing in human capital should also help push labor’s income share upward, contrary to the broad trend of recent decades—but governments should also consider correcting distortions that may have reduced workers’ bargaining power excessively.

In sum, structural and fiscal policy together should promote economic conditions conducive to sustainable and more inclusive real wage growth.

The third policy prong, monetary policy, still has a key role to play. Earlier deflation threats in advanced economies have receded considerably, but inflation has remained puzzlingly low even as unemployment rates have come down. Clear central bank communication and the smooth execution of monetary policy normalization, where and when appropriate, remain crucial. Success will help prevent market turbulence and sudden tightening of financial conditions, which could disrupt the recovery with spillovers to emerging market and developing economies. Those economies, in turn, face diverse monetary policy challenges but should continue where possible to use exchange rate flexibility as a buffer against external shocks, paying due attention to implications for price stability. 

Numerous global problems require multilateral action. Priorities for mutually beneficial cooperation include strengthening the global trading system, further improving financial regulation, enhancing the global financial safety net, reducing international tax avoidance, and fighting famine and infectious diseases.  Also crucially important are to mitigate greenhouse gas emissions before they do more irreversible damage, and to help poorer countries—which are not themselves substantial emitters—adapt to climate change.

If the strength of the current upswing makes the moment ideal for domestic reforms, its breadth makes multilateral cooperation opportune. Policymakers should act while the window of opportunity is open.

Global Economic Upswing Creates a Window of Opportunity

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