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IMF Raises 2017 Global Growth Forecast But Cautions On Medium-Term Risks

The IMF has expressed optimism over the medium-term outlook for India.



Pedestrians pass in front of the New York Stock Exchange (NYSE) in New York, U.S. (Photographer: Michael Nagle/Bloomberg)
Pedestrians pass in front of the New York Stock Exchange (NYSE) in New York, U.S. (Photographer: Michael Nagle/Bloomberg)

Citing consistently 'good economic news' through 2016 and a brightening global outlook, the International Monetary Fund (IMF) raised its global growth forecast for 2017 a notch to 3.5 percent. In its World Economic Outlook report released on Tuesday, the IMF said it believes that an economic upswing, that has been awaited for long, is finally materialising. This led the agency to revise its forecast upwards from its earlier estimate of 3.4 percent.

The agency has kept its forecast for 2018 steady at 3.6 percent.

Despite optimism surrounding the global economic recovery, sluggish growth in certain advanced economies and commodity exporters could pose a challenge in the medium term, the report said.

While there is a chance growth will exceed expectations in the near-term, significant downside risks continue to cloud the medium-term outlook, and indeed may have intensified since our last forecast. 
IMF’s World Economic Outlook
IMF Raises 2017 Global Growth Forecast But Cautions On Medium-Term Risks

The Trade Outlook

Global trade in 2016 grew at 2.2 percent – its slowest in volume terms since 2009. However, the IMF expects a pick-up in trade in the 2017-18 period owing to a recovery in demand and capital spending.

The recovery in trade is underpinned by strong growth in China and India as well as in Russia and the Commonwealth of Independent States, said the IMF while adding that this is partly because contraction in imports has moderated compared to 2015.

The IMF projects global trade to grow at a rate of close to 4 percent in 2017-18 led by a gradual recovery in investment by commodity exporters.

Also Read: After Stellar Growth In March, Export Revival On Its Way For India?

The Threat Of Protectionism

While the near-term outlook for growth and trade has brightened, medium-term risks loom. One such risk is an increasing tendency towards protectionism.

Lower growth since the global financial crisis, structural labour market disruptions and slower growth of median incomes have prompted many advanced economies to adopt a 'look inwards' policy.

The IMF, in its report, said that it sees protectionism as one of the salient threats to global growth, saying that it could lead to trade warfare.

With persistent structural problems – such as low productivity growth and high income inequality - pressures for inward-looking policies are increasing in advanced economies. These threaten global economic integration and the cooperative global economic order that has served the world economy, especially emerging market and developing economies, well.
IMF World Economic Outlook 

Outlook For India

India's growth forecast for 2017 was trimmed to 7.2 percent from the initial estimate of 7.6 percent primarily due to the 'temporary negative consumption shock' induced by the Narendra Modi government's decision to withdraw currency notes of Rs 500 and Rs 1,000. The decision announced on November 8 led to a withdrawal in 86 percent of the country’s currency in circulation.

However, the report sounded optimistic on the country's medium-term prospects post the implementation of certain structural reforms.

India’s medium-term growth prospects are favorable, with growth forecast to rise to about 8 percent over the medium term due to the implementation of key reforms, loosening of supply-side bottlenecks, and appropriate fiscal and monetary policies. 
IMF’s World Economic Outlook

The report has highlighted easing supply bottlenecks, reforms in the agricultural sector, removal of ‘poorly targeted’ subsidies as some of the key priorities for the government.

In addition to this, the report emphasises the need for the government to 'boost financial stability' through complete recognition of the non-performing assets in the banking system and boost the capital buffers of Public Sector Banks.