November 2018

The G20 economies continue to grow strongly for now, but risks are increasing and progress toward more balanced, sustainable, and inclusive growth is slow.

– The global expansion continues, with growth for 2018-19 projected to remain steady at a high level. However, there are signs of moderation, growth is more uneven, and risks have risen. Growth remains robust in the United States amid procyclical fiscal policy, but it has slowed in Europe and Japan, and some emerging economies are facing headwinds. Financial vulnerabilities and escalating trade tensions are beginning to leave a mark and can weigh on growth going forward.

– Prospects for medium-term growth are dim. Productivity growth remains sluggish in many countries, partly reflecting the period of weak investment after the crisis but also decreased labor supply and productivity due to aging—especially in advanced countries but also in emerging ones (e.g., China).

– Global imbalances persist, and financial vulnerabilities have increased. External imbalances are broadly unchanged, but they are increasingly concentrated in advanced economies and could be exacerbated by the policy mix in some countries. Debt levels are high and financial vulnerabilities have accumulated.

– Inclusive growth remains a challenge. Inequality—which has been high or rising in many countries—reflects inadequate access to economic opportunities through better education, healthcare and financial services, especially for poor women. The changing future of work could add further to the challenge of achieving inclusive growth.

Policies should focus on building buffers and enacting reforms for lasting and more widely shared growth. While policymakers have made some use of this period of stronger growth to “fix the roof,” current IMF recommendations (with OECD input on structural reforms) suggest that more needs to be done:

– Continue building buffers. Fiscal consolidation should be accelerated in some economies to ensure public debt sustainability (e.g., Italy, China, Brazil, South Africa), while procyclical fiscal policies should be avoided or rolled back (United States, Turkey). Advanced economies monetary normalization should proceed gradually in line with economic developments. Exchange rate flexibility should continue to play a critical role in emerging economies as advanced economies normalize.

– Address imbalances and reduce financial vulnerabilities. Imbalances would be reduced by fiscal consolidation in excess deficit countries (United Kingdom, United States), productive use of fiscal space in excess surplus countries (Germany, Korea), and the reduction of structural distortions (China). Lower debt levels would reduce domestic imbalances, amid prospects for increasing debt servicing burdens.

– Advance reforms. Advanced economies should prioritize reforms to raise productivity and boost labor supply (e.g., Germany, Japan, United States). For emerging economies, productivity-enhancing reforms are likewise key (e.g., Indonesia, South Africa,Turkey).

This approach would offer significant benefits over the medium term.

– Higher GDP. Simulations suggest that, while building buffers reduces growth over the short term, structural reforms will increase productivity and help lift the level of GDP by about 4 percent relative to the baseline over the longer term.

– Better balanced, lower vulnerabilities. Over the medium term, current account balances would fall in excess surplus advanced economies and rise in excess deficit advanced economies. Concurrently, debt ratios would drop in countries with limited fiscal space, bringing lower interest rates and higher investment. Amid the deterioration in underwriting standards and high corporate and bank leverage, monitoring these risks and those from cybersecurity and fintech will improve financial resilience.

– More inclusiveness. Depending on country circumstances, investment in human capital—for example, through education—and healthcare, coupled with appropriate redistributive fiscal measures can help ensure that these gains are widely shared.

Acting together remains critical. The global economy relies on an open and rules-based international trading system, whose modernization should continue. Collective efforts are required in other areas, including completion of financial regulatory reforms. Structural reforms offer significant positive spillovers over the longer term.

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Source: IMF