Growth outlook for world economy remains strong

Oliver Mangan

Both the OECD and IMF recently revised down their growth forecasts for the world economy in 2018 and 2019.

The revisions are not major at around –0.2% in both years, and the world economy is still expected to record solid growth of 3.7% in 2018 and 2019, the same rate as in 2017.

However, they are the first downward adjustments to these forecasts in some time as growth has generally exceeded expectations in the past couple of years.

The revisions are broad based, encompassing both advanced and developing economies. Indeed, it now seems that global growth would have weakened this year but for the significant boost to activity in the US from the marked loosening of fiscal policy there.

It would appear that the pace of global activity has peaked. The IMF notes that the potential for further upside surprises has receded given the loss of growth momentum this year, tighter financial conditions, higher oil prices and increased uncertainty around global trade.

The OECD and IMF also note that the risks for the world economy have moved to the downside.

Growth in global trade slowed in the first half of 2018. Escalating trade tensions have had spillover effects on confidence, activity and financial markets.

Notably, it appears that the Chinese economy has lost some momentum this year.

Financial markets have become more risk averse and are experiencing much greater volatility in 2018 than in the previous couple of years.

Both the IMF and OECD continue to express concerns that the easy monetary conditions in place for much of this decade are adding to elevated asset prices and a build-up of debt, leaving financial markets vulnerable to sharp falls.

There are also concerns about the implications of the current policy mix in the US. The US economy could slow quite sharply once the fiscal stimulus fades and higher interest rates begin to impact on activity.

Despite all the concerns, though, the world economy is still expected to grow at a steady 3.7% in 2019. The IMF is projecting that this growth rate can be maintained in 2020.

Crucially, inflation is expected to stay subdued. This means that monetary policy can remain accommodative in most countries, and thus continue to be supportive of economic growth prospects.

Oliver Mangan is chief economist at AIB

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