Group of Twenty IMF Note — Finance Ministers and Central Bank Governors’ Meetings

G-20 Surveillance Note

July 21-22, 2018

The Following executive summary is from a note by the Staff of the IMF prepared for the July 21-22, 2018 G-20 Finance Ministers and Central Bank Governors’ Meetings in Buenos Aires, Argentina.

Executive Summary

The global economy continues to grow at a solid pace—but growth has become less synchronized and the expansion is moderating in key geographic areas. Against a backdrop of escalating trade tensions, GDP growth fell short of the forecast in Europe and Japan, while the United States continued to expand at a relatively fast pace, reinforced by the expected expansionary turn of fiscal policy. The U.S. dollar strengthened as the Fed raised policy rates leading to portfolio outflows from emerging economies, especially those with relatively weaker fundamentals and facing political risk. In the euro area, the ECB has announced a path toward monetary normalization. Higher oil prices contributed to a rise in headline inflation in many countries.

The outlook remains for a gradual slowdown, especially in advanced economies. The July World Economic Outlook Update foresees global growth to remain at 3.9 percent in 2018-2019 before slowing toward lower medium-term rates. In advanced economies, this slowdown reflects the weakening of cyclical forces as output gaps close or turn positive and monetary policy therefore becomes less accommodative. If sustained, higher oil prices will dampen growth for oil importers. Emerging markets face headwinds from somewhat tighter financial conditions, and, in some cases, idiosyncratic challenges. In the medium term, structural factors—notably population aging, lagging total factor productivity, and overdue economic reforms—continue to hold back growth.

The balance of risks is now tilted to the downside in both the short and medium terms. Financial conditions in advanced economies remain accommodative, but could tighten suddenly following a change in risk sentiment or a reassessment of the speed of interest rate increases in the United States. In response, the reduction in capital inflows to emerging markets could intensify and broaden, also putting growth at risk in many advanced economies, where market valuations remain elevated and sovereign and private debt levels are high. The likelihood of escalating and sustained trade actions has risen, threatening a serious adverse impact on global growth while leaving unaddressed the underlying causes of persistent excess global imbalances. In Europe, tensions around Brexit persist and sovereign risks have reemerged in parts of the euro area. Geopolitical tensions and delays in addressing challenges of inequality and climate change could also impact the outlook.

Countries should build buffers against future risks, renew their commitments to international cooperation, and adopt policies that foster stronger and more inclusive growth.

• Tailor macroeconomic policies to the maturing cycle. A well-communicated, gradual monetary policy normalization should proceed where inflation is firmly approaching its target. Emerging economies should adjust to tightening global financial conditions with an appropriate mix of monetary, exchange rate, fiscal, and prudential policies. Fiscal policy should avoid pro-cyclical fiscal stimulus (e.g., in the United States) and ensure that public debt is on a sustainable path. Countries with both fiscal space and an excess external surplus should deploy public resources (e.g., in Germany) to raise potential output and catalyze private investment.
• Support international cooperation. An open, rules-based international trade system is vital for the efficient international allocation of production, the diffusion of technology, and, ultimately, for global growth. Cooperative approaches are essential also to address other global challenges, such as providing a sound financial regulatory architecture, international taxation, and climate change.
• Strengthen financial resilience. Proactive micro- and macro-prudential policies should address vulnerabilities owing to high leverage, excessive credit growth (e.g., in China), and stretched asset valuations in riskier markets. In some advanced and emerging economies, sound fiscal and debt management policies are essential to prevent public finances from becoming a source of financial instability.
• Act to raise long-term growth. By acting on undelivered reform needs, countries can attain higher incomes in the future. To make the most of the promise of new technologies, policymakers should close data gaps, facilitate technological change, smooth labor-market adjustment, and ensure that productivity gains are equally shared, while updating social safety nets and pension insurance systems.