- On 17 April the IMF estimated that the world economy grew 3.8% in 2017 and forecast 3.9% in 2018 and 2019.
- Risks lean to the downside: among them, trade tensions and a sharp tightening of financial conditions.
- With an already long cycle and rising rates, prepare scenarios and review reliance on cheap financing.
On 17 April 2018 the International Monetary Fund presented its World Economic Outlook, on the occasion of the spring meetings with the World Bank. The IMF calculates that the world economy grew 3.8% in 2017 and forecasts 3.9% in both 2018 and 2019, figures that match those of its January update.
Advanced economies would continue to grow above their potential this year and next, before slowing. Emerging market and developing economies, for their part, would accelerate before levelling off. It is a positive picture overall, but the report stresses that risks are now larger than a few months ago.
Broad growth, with nuances
Current growth is broad, because most economies are advancing at the same time, and it rests on a rebound in world trade and investment and on financial conditions that are still favourable. The impact of the US tax reform is another factor cited by the Fund as an additional short-term boost.
But the report itself underlines that this momentum is not indefinite. In the medium term, the expansion will moderate and some effects, such as that of US tax cuts, will fade. For a company, this means that a good demand environment should not be used as the basis for spending commitments that cannot be reversed. It is also worth remembering that the Fund’s forecasts are updated several times a year, and that changes in trade, interest rates or energy prices can alter them fairly quickly.
The risks
The IMF notes that risks lean to the downside, both in the short and medium term. Among them are trade tensions between major economies, which can hold back trade and investment, and the possibility of a sharp tightening of financial conditions if US inflation surprises on the upside and forces rates to rise faster than expected. The Fund brings together 189 countries and publishes its forecasts with a large team of economists; even so, it is not infallible, and its figures should be read as a reasonable scenario, not an assured outcome.
In an environment of high debt in many countries, a rapid rise in interest rates can strain those who need to refinance. And trade tensions mainly affect companies with international supply chains or a heavy dependence on a single export market. With high public and private debt in many countries, sensitivity to interest rates is greater than in earlier cycles, a factor analysts follow closely.
What to review
For the company, it is useful to prepare sales and cost scenarios with different assumptions for growth, tariffs and interest rates, and to test cash resilience in the adverse case. It is also worth knowing the exposure to concentrated markets or suppliers.
For families with savings, the reading is similar: a long expansion does not rule out episodes of volatility. Diversification and suitability to each person’s horizon and risk remain the basis of any planning. This information is general and is not an investment recommendation; consult your adviser. A practical suggestion is to separate the base scenario, used for the budget, from the alerts, used for monitoring: if a certain threshold is reached, for example in rates or demand, a previously defined plan is triggered.
IMF forecasts help orient you, not take the future for granted.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
