Global Economy Reviews

23.10.2018 20:07 World Economy Review - September 2018

The International Monetary Fund (IMF), in its latest World Economic Outlook (WEO), fell into the same trap as so many other forecasters have: ignoring both the temporary nature of Trump`s tariff strategy and the incoming wave of repatriated funds that have been languishing overseas for years.

The chief apologist for the IMF, Maurice Obstfeld (on loan from the University of California, Berkeley, and a former member of President Obama`s Council of Economic Advisors), in a note accompanying the WEO, said that world growth has “plateaued”: “Last April, the world economy`s broad-based momentum led us to project a 3.9 percent growth rate for both this year and next. Considering developments since then, however, that number appears over-optimistic: rather than rising, growth has plateaued at 3.7 percent.”

Those “developments,” not surprisingly, have to do with Trump`s trade wars and his “unsustainable” economic policies: “Not only have some downside risks that the last WEO identified been realized, the likelihood of further negative shocks to our growth forecast has risen. In several key economies [including, of course, the United States], moreover, growth is being supported by policies that seem unsustainable over the long term.”

Obsfeld, the economic counselor and director of research at the IMF, added that the present roaring economy in the United States is only temporary: “Growth in the United States, buoyed by a procyclical fiscal package, continues at a robust pace and is driving US interest rates higher. But US growth will decline once parts of its fiscal stimulus go into reverse.”

Obsfeld appears to be oblivious to two essential facts: It`s the Federal Reserve that has decided in its wisdom that it`s time to remove the punch bowl from the party by continuing to raise interest rates; and those “parts of the fiscal stimulus” that are scheduled to disappear (unless Congress extends them) won`t be felt until 2025, seven years from now.

Surely Obsfeld knows that of the 52 temporary provisions added to Trump`s Tax Cuts and Jobs Act (TCJA), half of them won`t roll off until 2025, but his group is anticipating them much earlier. The IMF is forecasting that GDP growth in the United States in 2019 will decline to 2.5 percent.

The IMF did get part of its forecast right: China`s economy is faltering and, with the assistance of Trump`s tariffs both present and prospective, is likely to decline further. It projects China`s GDP growth to drop from 6.6 percent this year to 6.2 percent next year, its lowest since 1990.

Missing from his commentary is any mention of the strategy Trump is employing, but instead he assumes that the tariffs Trump is using to get China to come to the negotiating table will continue forever.

To his credit, deep into his commentary, Obsfeld gets it right: When China comes to terms acceptable to Trump, that “would be a significant upside to [our] forecast.”

That “significant upside” is going to take place even if China remains stubborn in coming to the table, thanks to the half a trillion dollars that have already been repatriated under Trump`s TCJA with another trillion likely to be returning to the United States over the next couple of years.

Those “high tariffs” will ultimately result in low tariffs, providing a stimulus to the world economy that Obsfeld cannot, or will not, foresee. And if Congress makes those “temporary” tax cuts permanent, then the IMF will be forced to adjust upwards significantly its future World Economic Outlook reports.

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19.09.2018 21:55 World Economy Review - August 2018

Britain`s economy will shrink if it leaves the European Union without a Brexit deal and it will suffer some damage whatever terms it agrees, the International Monetary Fund said, challenging the promises of some Brexit supporters.

The Fund predicted Britain`s economy would grow by about 1.5 percent a year in 2018 and 2019 - lagging behind Germany and France - if a broad Brexit agreement was struck.

“I`m a desperate optimist, and I very much hope and pray that there will be a deal between the European Union and the UK,” IMF Managing Director Christine Lagarde said.

But failure to get a deal would lead to a contraction, she said.

“Let me be clear, compared with today`s smooth single market, all the likely Brexit scenarios will have costs for the economy and to a lesser extent as well for the EU,” Lagarde said as the IMF presented its annual report on Britain`s economy.

“The larger the impediments to trade in the new relationship, the costlier it will be. This should be fairly obvious, but it seems that sometimes it is not.”

Britain is due to leave the EU in little more than six months` time but London and Brussels have yet to strike a deal to secure a transition period.

Prime Minister Theresa May has struggled to bridge a deep divide within her Conservative Party about how close a relationship Britain should have with the EU.

She is hoping to make progress toward a deal when she meets fellow EU leaders this week.

British finance minister Philip Hammond, speaking alongside Lagarde, said the government had to heed the “clear warnings” from the IMF of a no-deal Brexit.

Hammond has been criticized by some Conservative Party lawmakers who say he wants to keep Britain too close to the EU.

Many Brexit supporters say Britain must distance itself from Brussels in order to strike its own trade deals with fast-growing economies around the world.

The IMF said those kind of deals would not offset the drag to the economy from leaving the EU.

Ruth Lea, an economist with Arbuthnot Banking Group and a Brexit advocate, accused the IMF of joining a new round of “Project Fear,” a term Brexit supporters use for pre-referendum warnings of the economic consequences of a Leave vote.

“Did they learn nothing from their loss of credibility after Project Fear Mark 1? In other words, stop making bold claims when you really don`t know what will happen,” Lea said on Twitter.

Britain`s economy - the world`s fifth-biggest - slowed after the 2016 referendum decision to leave the EU and it continues to be outpaced by most other rich nations.

However, stronger-than-expected data last week showed the economy had its fastest growth in nearly a year, helped by the World Cup and hot summer weather.

The IMF said there was a “daunting” range of issues still to be dealt with before Brexit.

Lagarde also said the IMF would lower its forecast for global economic growth when it updates its outlook in November.

“But I can say at this point, without disclosing any numbers, is that clouds on the horizon have not become lighter but darker,” she said.

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13.08.2018 15:59 World Economy Review - July 2018

A recent report by the International Monetary Fund (IMF) warned of uneven economic growth around the world and rising tensions in trade.

Xinhua spoke with noted Argentine economist Jorge Marchini, vice president of the Foundation for Latin American Integration (FILA), about the IMF`s latest "World Economic Outlook Update" released on July 16th.

"There is unevenness in the effects of growth. One (region) is the United States, which has growth and impetus, the other is Europe, which is in neutral. The Asiatic drive is important and in Latin America, (growth) is negative," said Marchini.

The IMF forecast global economic growth for this year and the next to register 3.9 percent, but not across the board, with gross domestic product (GDP) contracting in some regions and expanding in others.

For Latin America, the IMF downgraded its growth forecast from 2 percent to 1.6 percent, mainly due to sluggish growth in Brazil and Mexico, the region`s No. 1 and No. 2 economies, and the financial crisis gripping its third-biggest economy, Argentina.

High inflation, a volatile currency and a huge public deficit led Argentina`s government to recently apply for a 50-billion-U.S.-dollar loan from the IMF.

Marchini blamed uneven expansion on the current interrelated dynamics of trade, which leads to ripple effects.

"The world today opens pathways to economic growth for some countries, but at the same time that tends to cause an imbalance in the global economy," he said.

As an example, he noted the United States, whose economy shows signs of recovery, is increasingly applying protectionist measures that impact other economies, especially in nearby Latin America.

"There is an international climate with many unknowns and fears, which sparks protectionism in the global economy and successive tensions between the United States and China and Europe, with repercussions in Latin America," said the economist.

"It`s a complicated international scenario," said Marchini. "The change in U.S. interest rates (which rose to 2 percent) has also had a negative impact on Latin American countries, practically of which have a balance of payment deficit, meaning they spend more than they earn."

While in the past two years the global economy has shown signs of recovery following the 2008 world financial crisis, countries continue to suffer from the aftermath, especially those with high debt or very open and expansive monetary policies, he said.

Latin America`s downgraded growth forecast is a reflection of recent changes in the political landscape of its leading economies, said Marchini.

Argentina, for example, has shifted from the early optimism that marked the first two years of President Mauricio Macri`s term to greater "pessimism," following the devaluation of the national currency.

Mexico is in a kind of holding pattern. The renegotiation of the North American Free Trade Agreement (NAFTA) with the United States and Canada is dragging on. At the same time, the country elected its first left-of-center president, Andres Manuel Lopez Obrador, on July 1, but he doesn`t take office until Dec. 1.

"In Mexico, the renegotiation of NAFTA plus the political change have generated a measure of doubt regarding what could happen in terms of Mexico-U.S. ties," said Marchini.

"In Brazil, the picture is above all political, taking into account that the country is mired in a slow economy and also finds itself in an election period with many unknowns," added Marchini.

Brazilians go to the polls on Oct. 7 to elect a new president, but the field of candidates has yet to be determined.

Other regional countries are also in flux, he said, including Colombia, where the government will be changing hands, and Venezuela, which continues to grapple with "serious (economic) difficulties."

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17.07.2018 20:32 World Economy Review - June 2018

America`s current strategy is not friendly, it is based on unilateralism, former French Prime Minister Jean-Pierre Raffarin said during a lecture at China Europe International Business School (CEIBS) in Shanghai.

Becoming embroiled in a trade war will not only negatively affect the world economy but also the living standards of ordinary people, he said of the United States-initiated trade dispute with China, during an interview with Xinhua on July 8.

China`s consistent efforts in opening up, deepening international collaboration despite the emergence of trade protectionism, unilateralism, and anti-globalization sentiments, are a reflection of Chinese wisdom, he added.

Raffarin, who has visited China many times since the 1970s, said he is impressed by the country`s rapid development, which he believes is a result of its reform and opening up.

"Every time I come to China, I can learn something new," he said, citing the country`s economic and social development, urbanization, and modernization along with the growing competitiveness of Chinese enterprises and poverty alleviation measures that have improved the lives of hundreds of millions of people.

China`s progress has also had global implications. In 2017, the country`s imports accounted for 10.2 percent of the world`s total imports of merchandise, while its exports made up 12.8 percent. This has made China a major trade partner of more than 120 countries and regions, according to data attributed to the WTO in a white paper issued in June under the title "China and the World Trade Organization."

China`s reform and opening-up drive is profound and concrete, and not only promotes the country`s development but also benefits the rest of the world, said Raffarin.

China`s relationship with the European Union is in focus this year as 2018 marks the 15th anniversary of the building of a comprehensive strategic partnership between both sides. China was the EU`s largest import trade partner and second-largest export target market in 2017, according to data from the EU`s statistical office Eurostat.

"Europe and China need to work together to safeguard multilateralism, this is what the world needs," Raffarin said.

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20.06.2018 20:03 World Economy Review - May 2018

The prospect of a trade war is threatening the global growth outlook, which otherwise is on course for a 40-year low in unemployment, the OECD said.

Global growth is set to nudge up from 3.8% this year to 3.9% in 2019, the Organisation for Economic Cooperation and Development forecast in its biannual Economic Outlook.

The Paris-based policy forum made up mainly of developed countries had in March penciled in an estimate of 3.9% for both years.

But it trimmed its outlook for 2018 due to a weak start to the year because of temporary factors like bad weather.

The OECD said budgetary easing had taken over from central bank stimulus as the main motor of global growth with three fourths of its member countries now estimated to be loosening purse-strings, led by massive US tax cuts.

Against that backdrop, the overall OECD unemployment rate was seen falling to 5% by the end of 2019, hitting the lowest level since 1980 and setting the stage for so-far elusive growth in workers` wages.

"In spite of all this good news, risks loom large for the global outlook. What are these risks? First and foremost, an escalation of trade tensions should be avoided," acting OECD chief economist Alvaro Pereira wrote in an introduction to the organization`s biannual Economic Outlook.

The warning comes as European governments brace for the expiration of temporary exemptions on new US steel and aluminium tariffs on June 1, which has outraged Washington`s closest allies.

Though the number of trade restrictions has crept higher over the last decade, further measures could create a significant drag on growth because the global economy is now more interconnected than ever before, the OECD said.

With tax cuts boosting US investment, the world`s biggest economy was forecast to grow 2.9% this year and 2.8% next year.

As a result the Federal Reserve was expected to keep gradually increasing its interest rates, bringing the Fed funds rate to 3.25% by the end of 2019.

The euro area economy was seen growing 2.2% this year and 2.1% in 2019 as the labour market and wages recover.

The European Central Bank was seen halting bond purchases this year and increasing its negative deposit rate in the second half of 2019.

Outside the euro area, the OECD marginally raised its outlook for Britain to 1.4% growth this year and 1.3% in 2019.

The Bank of England was expected to only gradually raise interest rates given the uncertainty over Brexit.

Japanese growth was seen at 1.2% both this and next year as growing labour shortages force companies to increase business investment and hire more workers.

Outside of the OECD, Chinese growth was expected to ease gradually from 6.7% this year to 6.4% in 2019 as infrastructure investment slows in the face of tighter lending conditions and tougher government project approvals.

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