The International Monetary Fund has released a July update to its April WEO forecast, amid increasingly uneven economic expansion and mounting risks to the outlook. The Fund considers that the balance of risks has shifted further to the downside, including in the short term—a noteworthy development for Asia-Pacific, where robust performance keeps the balance in the short term but where downside risks are expected to dominate in the medium term.

Need for fiscal buffers

Policies and reforms, the IMF recommends, should aim at sustaining activity, raising medium-term growth, and enhancing its inclusiveness. But with reduced slack and downside risks mounting, many countries need to rebuild fiscal buffers to create policy space for the next downturn and strengthen financial resilience to an environment of possibly higher market volatility.

In advanced economies like Australia, the pace should be calibrated to avoid sharp drags on growth, with appropriate measures to enhance economic inclusion. Procyclical fiscal stimulus should be avoided and rolled back (e.g., United States), while further steps should be taken by countries with fiscal space and excess external surpluses to boost domestic growth potential and address global imbalances (e.g., Germany).

The risks of non-inclusive growth

Maurice Obstfeld, Director of Research at the Fund, adds that ‘governments must also pay more attention to economic equity among citizens, and especially protecting the poorest. The widespread political malaise driving many current policy risks, including on the trade front, has roots in several countries’ experiences of non-inclusive growth and structural transformation, heightened by the financial crisis of 2007-09 and the difficulties that followed. It is urgent to address the underlying trends through equity- and growth-friendly policies, while assuring that macroeconomic tools are available to fight the next economic slowdown’.

(Source: WEO Update | IMF Blog)

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